What Small Businesses Can Do.
As we approach 2024, small business owners are likely wondering what to expect when it comes to their employee health insurance costs after a rather expensive year. According to recent data, employers paid 7% more on average for their employer-sponsored health plans in 2023 than the year before. The jump represents the largest price increase for employer health plans in almost a decade. That's bad news for business owners and their employers.
What's the reason for the increase? And what can small business owners do? Let's dig in.
Inflation is a laggard for health insurance.
The sticker shock felt by employers (and employees) is partly due to Inflation — delayed inflation. While hospitals and other healthcare providers have seen prices rise over the past couple of years, those increases weren't yet reflected in health insurance plans until this year. The reason is mostly due to contractual arrangements with providers that are often negotiated every few years. Hence, the reason insurers are just getting hit now (and passing on those increases.)
But is inflation the only culprit? Not quite. Let's delve a bit deeper.
Add costly medicines and chronic disease, too.
The cost of pharmaceutical medicines and medical care is also soaring. The advancements in medical technology, while lifesaving, aren't exactly budget-friendly. The latest medications and innovative treatments often come with heavy price tags that ultimately get passed down to the insurance carriers and then, of course, to the businesses and employees footing the bill for premiums. How so? Check out this chart.
Insurance companies are getting price pressure from rising prices of new drugs and existing drugs. It's a double-whammy of expensiveness.
And don't forget about the chronic conditions - diabetes, heart disease, obesity - they're more prevalent than ever. While we're getting better at diagnosing conditions like diabetes, we haven't changed the incidence.
The only good news is that we're diagnosing disease more often. Unfortunately, prevalence grows, and the price curve keeps climbing.The increase in these conditions requires more medical services (they call it healthcare utilization) which, again, drives up the overall cost of insurance.
Health insurance premiums jump
The average cost for a family health insurance plan offered through an employer rose 7% to $23,968 − the highest rate increase in a decade, according the leading health policy organization, Kaiser Family Foundation (KFF). When compared to last year, when premiums increased by just 1%, the jump is a tough one to swallow (for employers and employees), already suffering inflation in most other areas.
All employers passed some of the cost increases to employees, said the KFF survey.
Now what? New solution for small businesses.
There is a lot of bleak news regarding employee health insurance costs, but there is a new option that can help. For many years, small business owner have had only two choices, a small group plan that seems more unaffordable than ever or forego employee health benefits altogether (not recommended if retaining and recruiting employees is a goal.)
Introducing: Fixed, pre-tax benefit (ICHRA)
One of the best health insurance options for smaller-sized small businesses is a newer option with a very long name and hard to say acronym: Individual Coverage Health Reimbursement Arrangement (ICHRA pronounced ICK-ruh). Instead of traditional group health insurance, ICHRA allows employers to provide pre-tax money to employees for their individual health insurance premiums. It's like a potluck party - guests bring dishes according to their preferences, making it more affordable and catering to everyone's tastes. This fixed benefit solution is a relatively new option made possible in 2020 by IRS legislation. Learn more here and here.
Advantages of ICHRA for small businesses:
- Financial Flexibility and Stability: ICHRAs allow businesses to set their own budget. So, instead of being tied to the costs of a group plan and unpredictable climbing costs, small business owners can decide how much they contribute towards employees' health insurance.
- Employee Choice: Employees are not limited to a single group plan, which is typically what happens for smaller-size companies. Instead, they choose a health insurance plan that best meets their needs.
- No Participation Requirements: Most employer-sponsored health plans require at least 60% of employees to enroll. With an ICHRA, employees can enroll or waive as desired, and it doesn't change the plan.
- Hassle-Free Enrollment: Business owners are relieved of the awkward role of coming between employees and their doctors.
A secret few know: marketplace plans are often more affordable than small group plans.
In more than 20 major cities, small group plans cost more than individual plans and sometimes by double digits. To illustrate this point, let's take a closer look at one specific metropolitan area, such as Charlotte, North Carolina, where the disparity between small group and individual plans is very apparent.
The lowest-cost group health plan is $100 more per month per individual than a similar individual health plan.
With a fixed, pre-tax benefit, employers and employees can pay less and have more choice. It's why more and more small businesses are choosing this newish type of health benefit.