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High health costs force small employers to up cost-sharing

As small businesses struggle to keep up with rising healthcare costs, many have increased cost-sharing for their workers in both single and family coverage.

Kelsey Waddill
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Published: 13 Dec 2024

Small employers with fewer than 50 workers have a harder time handling high healthcare costs than large employers and this is most evident in the differences in cost-sharing, according to a Commonwealth Fund issue brief.

"While total premiums have been rising for firms of all sizes, they were somewhat lower for small firms nationwide in 2023 and prior years. But small-firm employees are paying a larger share of the premium than large-firm employees and have larger average deductibles," the issue brief found.

Unlike large employers that have significant influence over health insurance costs and coverage, small businesses do not have much leverage and, as a result, end up shifting the cost to employees. Small businesses face a couple of unique challenges that impact their ability to provide affordable health insurance to their employees.

First, many small businesses do not have a dedicated HR department to handle their health plans. This handicaps them in negotiations with health insurance companies, which often have the advantage already as the bigger and better-resourced organization at the table. They have less opportunity to pool risk, compared to larger employers with many patient populations, according to the Center on Budget and Policy Priorities (CBPP). Lastly, as both Commonwealth Fund and CBPP noted, their administrative costs tend to be higher per employee compared to those of large employers.

Employee premium contributions are growing in small firms

The researchers assessed premium and deductible data from large and small organizations spanning from 2014 to 2023 using the Agency for Healthcare Research and Quality's Medical Expenditure Panel Survey results. In 2023 alone, 52.9% of more than 42,400 employer recipients responded.

First, the data showed that small companies' employees were less likely to be offered health plans at all. Less than half of all small firm employees had employer-sponsored health insurance options in 2023 (49.2%), compared to nearly all of the large employers' workers (97.6%).

Additionally, employees in small businesses had higher cost-sharing than employees in large companies. The combined employer and employee contributions to average annual family premiums were higher in large companies ($24,312) compared to small companies ($21,351). But, on average, employees at small firms paid $7,529 for their premium contributions compared to $6,796 for employees at large firms.

Deductibles were significantly higher for small business workers as well. On average, $5,074 from a small business employee's paycheck went toward annual family deductibles, compared to $3,547 for large business employees.

The actual family coverage contribution and deductible rates vary widely by state. For example, in Hawaii, small firm employees contribute, on average, 10.9% of the premium for their family coverage, while large firm employees cover 27.6% of the premium. However, in Arkansas, small business workers are responsible for 55.8% of their family coverage premium, while their large business counterparts cover 27.3%. In dollar amounts, Hawaii has the lowest average family coverage premium employee contribution amount at $2,232 and Massachusetts boasts the highest at $12,604.

"The state variability in the premium contributions that small-firm workers pay reflects variability in local insurance and health care markets, state insurance regulation, local labor markets, and type of industry," the researchers explained.

These rates continue a trend of health insurance costs slowly smothering small businesses, resulting in employees paying more for family health insurance starting in 2017.

However, the story is quite different for single coverage. Single coverage plans have consistently been less expensive for workers until 2021. And whereas small business employees cover a higher share of their premiums than large business workers in 31 states for family coverage, this is the case in 27 states and Washington, D.C., for single coverage.

Recommended policy solutions

Given the results of this investigation, the Commonwealth Fund researchers offered five remedies. First, employers should ensure that employees are aware of their Medicaid options, especially in states that adopted Medicaid expansion. Second, federal policymakers should develop more options for workers in states that have not adopted Medicaid expansion.

They suggested that Congress could tweak the eligibility requirements for subsidized Affordable Care Act marketplace coverage so that the threshold for employee contribution share is lower or the threshold for the actuarial value of a health plan is higher. Policymakers could establish enhanced marketplace premium tax credits as a permanent fixture of the Affordable Care Act marketplace, instead of a flexibility that relies on repeated extensions. Lastly, on the state level, state health insurance marketplace employer health plans could improve.

Overall, the high employee contribution requirements in many small businesses are spurred on by increasing healthcare spending. Employers will have to take action to manage the factors driving these healthcare costs. But policymakers can take action to offer more options for struggling small businesses and their employees to prevent access to coverage barriers.

Kelsey Waddill is a managing editor of Healthcare Payers and multimedia manager at Xtelligent Healthcare. She has covered health insurance news since 2019.

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