How much does health care cost a small business and its employees?
Short answer: a lot.
A typical employee’s individual policy ran almost $7,000 annually in 2018, and the average family premium exceeded $19,000, according to a year-end report from the Kaiser Foundation, a nonprofit organization focusing on national health issues. These costs represent an increase of as much as 5 percent from the prior year (twice that of inflation) and 20 percent since 2008.
It’s no surprise that small employers are struggling to cope. Many firms are asking their employees to pay more – whether through increased sharing of health-care premiums (employees, on average, contributed about 28 percent to their employer’s premium in 2018, up from 26 percent in 2008) or by paying higher deductibles.
The Kaiser report found that 85 percent of covered workers are required to pay an annual deductible for single coverage, and that these deductible amounts have increased by as much as 55 percent over the last five years. In order to keep employer premiums under control, companies have also been increasing the employees’ portion of co-payments for doctor and hospital visits.
Rising health-care costs are a big reason why only 47 percent of firms with three to nine workers offer health-care coverage. The Affordable Care Act requires companies with more than 50 full-time equivalent employees to offer affordable health care. But good companies – big and small -- understand that health care is a highly sought-after benefit and an important factor in hiring talented employees in this low-unemployment environment. The good news is that the options for small firms to offer competitive plans are improving.
Health savings accounts
For example, many firms are taking advantage of Health Savings Accounts, or HSAs. I liken them to a retirement plan … for health care. That’s because as long as a company’s HSA plan is coupled with a high-deductible health-care plan, both employers and employees can contribute as much as $3,500 (individual) and $7,000 (family) a year — pre-tax — to the plan and those amounts can be directed to investment accounts just like a 401(k) retirement plan (employees 55 or over can put away an additional $1,000).
However, and different from a retirement plan, employees can withdraw amounts every year to help pay for approved out-of-pocket medical expenses. Assuming they qualify, most small employers choose to offer HSAs over Flexible Spending Accounts because — among other factors — HSAs offer the ability to make higher contributions and to roll over any leftover amounts to the next year.
A growing number of small employers are dipping their toes into self-insurance. That’s because many business owners are realizing that, when they’re paying a typical group insurance premium, they’re paying for all their employees’ health-care expenses whether or not they’re using the benefits.
With a level funded or hybrid self-insurance plan, an employer pays for an employee’s out-of-pocket health costs up until an agreed-on maximum, and then a stop-loss insurance plan kicks in. Because the employer is taking some risk for these costs and only paying for those employees who need the benefit, their insurance rates, and overall expenditures, can be much lower.
But be careful. Employers who take the self-insurance route need to have a good handle on the demographics of their workforce and also employ a competent administrator who understands the complexities behind the funding levels calculated.
But this extra effort can result in significant annual health-care savings — significant enough that, according to the latest data analyzed by the Employee Benefit Research Institute, the number of employers with less than 100 employees who offered at least one self-insured plan increased from 14.2 percent in 2015 to 17.4 percent in 2016.
Association health plans
Finally, it may be possible to consider an Association Health Plan. These plans, which were finalized by the Department of Labor in 2018 and went into effect in January, ostensibly allow businesses to form associations, or buying groups, in order to purchase health-care coverage from insurance companies who can offer lower-priced plans with fewer essential benefits due to the size of their combined employee pool.
Unfortunately, the plans are hitting some roadblocks. While many states have embraced the new ruling as a way for employers to reduce their health-care costs and offer more options to their workers, other states — including Pennsylvania and New Jersey — have joined in a lawsuit that challenges the rule’s legality for overriding some of the 2010 Affordable Care Act’s requirements.
"Pennsylvania has strict rules," says Jim Pitts, a Philadelphia-based business development executive for risk management firm USI Insurance Services. Pitts says that firms wanting to form an association in this state are required to register as a Multiple Employer Welfare Association and must file annual reports. These requirements, he says "have been a concern with associations in the past."
Association Health Plans, however, may be a good option for freelancers or very small businesses that belong to a professional organization that offers the option nationally. My concern is that the ruling could not only suffer legal defeat but also be easily overturned if a new administration takes power in 2020.
Regardless, options are growing and innovative benefit consultants are coming up with even more strategies for small businesses to control their health-care costs.
For example, Ed MacConnell’s firm, Total Benefit Solutions which is located in Feasterville, Pa., offers a variety of choices to its clients, including plans that provide minimum essential require nets, fee-for service or indemnity plans where both employees and employers have more control over the health-care professionals they visit, and sharing ministry plans where health-care costs can be shared among individual members that have common ethical or religious beliefs.
“There are more choices than ever for small businesses to get a better grip on their benefit costs,” MacConnell says. “The right health-care plan can work for the right client when applied properly with the right advice.”