Growing Financial Pressure on Small Businesses from Rising Health Insurance Premiums
The anticipated double-digit rise in premium rates is set to add financial pressure on small businesses offering employer-based health insurance, which currently covers approximately 165 million Americans. Rising healthcare costs exceeding inflation are challenging businesses, particularly smaller ones, that already face difficulties in financing employee benefits. Research indicates that as of the previous year, only 51% of firms with less than 25 employees provided insurance, while this was true for 97% of larger companies with over 200 employees.
An analysis by the Kaiser Family Foundation (KFF) reviewed early rate submissions from nearly 300 insurers across all states, focusing on small group coverage intended for companies with fewer than 50 employees. These insurers justify the need for premium hikes due to escalating medical expenses, with the costs for services and prescriptions rising as utilization increases.
Impact of Rising Medical Costs
Blue Cross and Blue Shield of Massachusetts, in its rate submission, highlighted that medical spending has accelerated faster than it has in over a decade, impacting both employer customers and covered members. The rising use of GLP-1 medications, initially for diabetes management but increasingly for weight management, is a significant cost driver. Some insurers have stopped offering coverage for anti-obesity treatments due to these costs, although spending remains high with more diabetes patients using these drugs.
No Surprises Act and Premium Adjustments
The No Surprises Act, passed in 2020, has also been cited by some insurers in rate filings, particularly in New York, as a reason for premium increases. This legislation aims to prevent unexpected billing for out-of-network services by facilitating negotiation between providers and insurers. However, the KFF noted that providers often succeed in these disputes, leading insurers to adjust premiums to cope with increased out-of-network reimbursement payouts.
New York insurers, Oxford Health Insurance and UnitedHealthcare Insurance Company, attributed a 0.8% rate increase to effects from the No Surprises Act. The parent company, UnitedHealthcare, recently reported higher-than-expected expenditures in its commercial segment, attributing part of these costs to the legislation.
Shifts in Small Business Insurance Models
The study suggests that higher premiums are prompting more small businesses to consider alternative insurance models or drop coverage entirely. While the small group market covered 17 million individuals in 2013, it has dwindled to 10 million by 2024. This decline indicates a shift towards self-funded or level-funded plans, which maintain a steady coverage ratio among small business employees. Level-funded options involve fixed monthly payments that could be reimbursed if claims are lower than expected, providing a potentially cost-effective solution for employers with a healthier workforce. However, these arrangements do not fully comply with the Affordable Care Act’s standards, potentially leading to increased premiums based on risk assessments of employee health profiles.
The future of small business insurance premiums could see further increases if the trend towards alternative coverage continues, eventually impacting companies with higher-risk employee populations, per KFF's findings. The proposed 14% median increase in small-group plan premiums next year aligns with similar hikes proposed in ACA marketplace plans, amid pressures from diminishing federal subsidies and rising healthcare expenditures.