Every year, small business owners are faced with the daunting task of evaluating health benefits for their employees. If they offer employee health insurance, they inevitably find out it has gone up in price and are weighing what to do. If they don’t offer health benefits, they wonder if they can even (or ever) afford them.
Shopping for health benefits is a universally disliked process (“excruciating” is the term we’ve heard some small business owners use.), Yet, it remains a crucial aspect to recruit and retain employees. What can small employers do? What do we expect in 2023 and beyond?
Unfortunately, the news for small business health insurance this year is more bad than good, with more potential challenges on the horizon. There is, however, a little-known group plan option called an ICHRA that’s starting to catch steam — a fixed benefit that lets owners have more control over their budget.
Let's delve into the details.
Some good news and (mostly) bad news
Employer-sponsored health insurance premiums increased just a bit in 2022 and 2023 after years of big price increases, sometimes in the double digits. According to the Society for Human Resource Management, healthcare insurance costs are expected to rise by about 5.6% per employee in 2023. The year before, premiums rose was just 4%. This news is good, considering that inflation hit a high of 8.5% in 2023.
Why can an increase be good news? Health insurance costs have been skyrocketing over the last two decades, well-surpassing salary and wage growth. To put into context, premium costs have climbed by nearly 50% since 2012, with the average family premiums jumping from $15,250 in 2012 to $22,460 in 2022. Sheesh is right. So a modest increase below inflation is, well, a bright sign.
Unfortunately, that’s where the good news ends.
Healthcare utilization is up, up, up, and that’s the same direction that health insurance premiums are expected to go in 2024. Some say by at least 7%. Some say more.
The burden on small employers
Small employers, in particular, bear the brunt of the burden when it comes to health benefits. On average, their monthly premiums are about 35% more than larger companies. Is it any wonder why many small businesses struggle to provide health benefits?
As of 2022, the majority of small employers with less than ten employees offered health benefits – putting the rest (i.e., the majority) at a disadvantage for hiring and retaining top talent. If that seems unfair, it really is.
There is a long history of why corporations have an advantage over small businesses. (Check out this article to dive into the nitty gritty details.) The crux of the matter comes down to risk and options. When you have more employees, you have a larger risk pool and, therefore, more options. (One employee with extraordinary health care costs won’t break the bank.)
We’re about to jump into a little bit of health insurance jargon here, so bear with me.
- Large employers often offer “self funded” plans, allowing them to design their own health insurance plan to reap the benefits.
- Small businesses often offer “fully insured” plans that offer almost no flexibility and no transparency into pricing year-over-year. (Hint: Premiums almost always go up.)
- More and more small businesses are resorting to “level funded” plans which generally offer better pricing than fully-insured as long as you pass the underwriting process with flying colors. These plans are intended for businesses with employees who do not (and will not) have health problems.
Prediction for 2024: (Un)surprising premium jump
Alluded to early in this report, while 2023 brought a welcome respite with stabler premium rates, this “calm” will likely be short-lived.
Inflation has taken longer to catch up on the medical/healthcare cost side, but we’re seeing signs that it’s here, with healthcare costs climbing even as inflation falls.
The impact will be premium hikes, and small businesses will likely feel the most pain. How much so? The ACA exchange saw a modest increase of around 3.4% from 2022-23, a bit lower than the employer-sponsored market at 5.6%.
A glimmer of hope: Newish ICHRA group plan evens ‘playing field’
With rising health insurance premiums seemingly inevitable, how can small business owners remain competitive without breaking their budget? Level-funded plans are a recent phenomenon that many business owners are trying. But the same issues that impacted SMBs before (with fully insured plans) will eventually plague small businesses again, especially the really small ones. (Check out The Death Spiral of Group Health Insurance.)
So, now what? Is there any hope? Enter ICHRA (aka Individual Coverage Health Reimbursement Arrangement), a complicated name for the easiest and most affordable group plan option. Give pre-tax money to employees and let them shop for a health plan they choose.
ICHRA is a hit among small businesses (the ones who know about it) because:
- Owners can better manage (and predict) their benefits costs by setting a fixed budget for health benefits. Control, at last!
ICHRA is a hit among their employees because:
- They can pick a health plan that suits their needs (rather than the one-size-fits-all company health plan.)
So why don’t small businesses know about ICHRA? It’s still relatively newish, available in 2020 due to recently passed tax legislation. Ah, but the secret is out; small businesses are turning to HRAs more than ever.
StretchDollar’s ICHRA is unique in that it is built specifically for smaller-sized small businesses. No complicated customizations or weird-tiered pricing. Instant health benefits that are actually affordable. Learn more about how it works.
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