Health Insurance Woes: Small Firms Grapple with Soaring Costs

The Small Business Health Options Program (SHOP), designed to aid small businesses in offering health insurance to their employees, is no longer functioning as effectively as before. Evidence of this can be seen in Massachusetts, where in 2021, there was a notable decrease in employer-sponsored insurance enrollment, especially among small businesses with fewer than 50 employees. Between 2020 and 2021, the State experienced a 4.3% decline in health plans provided by small business groups, which make up a tenth of the market.

The explanation for this situation is straightforward: the expenses associated with providing health insurance to employees are rapidly increasing, often experiencing double-digit percentage growth, while coverage diminishes each year.

What’s even more surprising is the growing trend of employers transitioning from Preferred Provider Organization (PPO) plans to Health Maintenance Organization (HMO) plans. There are major differences between the two schemes. PPO plans allow small business employees to access healthcare services from doctors outside their network and visit specialists without referrals. On the other hand, HMOs restrict members from seeking care within their designated network, and visiting doctors outside this network results in uncovered costs. While HMOs are less expensive, they also offer less flexibility. Nevertheless, due to escalating costs, small businesses are increasingly opting for HMOs over PPOs.

As the U.S. faces a potential recession driven by factors such as the failure of three regional banks, the ongoing Ukraine invasion, and other issues, employers are seeking ways to reduce expenses. Both small and large businesses are downsizing their workforce to minimize salary costs. During this time, escalating health insurance premiums pose an additional challenge for employers with shrinking profits. If this trend persists, small businesses may require employees to contribute more towards their insurance premiums. This outcome would result in the public having less disposable income, leading to decreased demand in the economy and potentially accelerating the onset of a recession.

In the future, businesses are likely to transfer more of the insurance premium costs onto their employees. Employers have already begun exploring insurance plans with higher deductibles and contributing to Health Savings Accounts. These actions indicate a shift towards consumer-driven health plans. Certain businesses have ceased providing insurance and instead directly fund their employees’ healthcare claims by allocating a dedicated budget. This approach has become increasingly popular among firms with younger and healthier workforces. Though increasing premiums are a concern, a more pressing issue is the shrinking number of doctors included in insurance networks over time. 

A 2022 study by the Kaiser Family Foundation revealed shortcomings in employer-provided insurance. The research showed that family premiums, on average, have increased more rapidly for workers in small firms compared to those in larger firms. For example, small firm premiums grew by 26%, while large firm premiums increased by 17%. The family premium for small firms rose from $17,615 in 2017 to $22,186 in 2022, whereas for large firms, it went up from $19,235 in 2017 to $22,564 in 2022.

The majority of insured employees contribute to their insurance premiums. According to Kaiser’s report, on average, workers paid 17% of the premium for individual coverage and 28% for family coverage in 2022. Insured employees at smaller companies contribute 36% percent of the family coverage premium compared to 26% by those at larger firms. Consequently, the average contribution for insured workers in smaller companies at $7,556 is greater than that of their counterparts in larger firms who pay $5,580. The above two statistics show that smaller firms are in deeper trouble when it comes to insurance premiums.