If you run a small business, you know the cost of almost everything has gone up this year. So it’s no surprise that providing health care benefits will also become more expensive. And yes, health care costs are also rising — and likely higher than they have been in years past — due to supply chain shortages, a tight labor market, and other inflationary pressures. That’s according to two recent studies by Willis Towers Watson and Mercer, a large human resources firm.
The Willis Towers Watson survey of employers found that most expect their premiums to increase by 6 per cent, with more than seven in 10 expecting a significant increase over the next three years. A similar study by Mercer forecasts an average growth of 5.6% in 2023. So what can small business owners do to control these costs?
Of course, you can always choose to have your employees pay more for health insurance, or change your plan to one with a higher deductible and fewer benefits to lower your costs. But taking these steps could risk losing good talent, given the prevalence of health insurance and today’s competitive labor market. The good news is that you have other potential options.
One option is to self-insure, or self-fund your health plan. Companies that fund self-funded health plans do not buy health plans from insurance companies, but pay directly for their employees’ health care. Most people hire third-party administrators to manage plans and process claims. In the past, self-insurance was most common among companies large enough to take risks, but the approach is increasingly appealing to small businesses looking to save money while offering health benefits.
A horizontal funding scheme is a form of self-funding that may be particularly attractive to small businesses. Under these plans, employers pay employees a certain amount of medical expenses—perhaps several thousand dollars per person per year. After that, the group insurance plan came into operation.
“A level-funded plan is like quasi self-funding,” said Noah Glassman, president of benefits consulting firm Philadelphia Life & Health. “If you have a young and healthy population, even a more healthy one with a good health history. Large groups, this could be a good option.”
Employers may need more administrative work, but employees won’t see a difference, and because startups often hire young people, these types of programs are becoming more popular, Glassman said. “Over the past two years, I’ve moved more small groups to horizontally funded programs,” he said.
Gregory Grimm, vice president of employee benefits firm Exude, Inc., has also seen a significant increase in self-insurance options for small business clients in central cities over the past few years.
“We have groups of 40 or 50 employees who are self-funding in a safe environment [without fear of incurring catastrophic liabilities] There are usually hundreds of employees now,” he said.
Another strategy I’d like to recommend to my clients is to consider paying a larger share of employee health insurance — or even increasing their home insurance contributions — rather than just giving employees a raise. As an accountant, I like that I can save a lot of tax because health insurance premiums are generally not taxable for employees (and deductible for companies). Employers don’t have to pay federal and state payroll taxes on health care contributions, as if they were just a raise. In the end, employees are still seeing higher net salaries, and business owners are saving money.
Health reimbursement arrangements, or HRAs, have also grown in popularity over the past few years. An HRA is a health benefits account to which employers contribute and employees pay for eligible health expenses, such as doctor visits, prescription drugs, and, in some cases, individual health insurance plans. Most of the clients I have who offer HRAs offer similar amounts to what they would pay under a group plan. But for them, it’s a relief not to have to negotiate new health insurance premiums each year or participate in the employee’s health history.
“For very small businesses, this can be a good strategy,” said Robert DeNinno, principal at Precision Benefits Group in Philadelphia. “Especially if your employees can take advantage of federal subsidies in healthcare exchanges.”
If you choose an insurance plan with a high deductible, a health savings account (HSA) is a great way to help employees manage their share of costs. These plans are like a 401(k) for your health care expenses. Through 2023, employees can deposit up to $3,850 ($7,750 for households) before taxes for out-of-pocket expenses such as office visit co-pays, prescription drugs and a long list of other eligible health expenses such as reading glasses, Acupuncture and certain over-the-counter medications. (See the full list of eligible HSA fees here.) The advantage of these plans—besides the low setup cost—is that employees don’t lose any unused amounts at the end of the year. Also, if they decide to leave their current employer, the remaining balance will stay with them.
“We tell our clients to maximize their HSA, even before you contribute to a 401(k),” DeNinno said. “For many employees who don’t have control over their health insurance premiums, this gives them the opportunity to have more control over out-of-pocket costs and therefore better control over overall costs.”
Finally, you might save some money by comparing and negotiating premiums with major carriers like Blue Cross and Aetna. Unfortunately, most benefits experts I know admit that any savings are likely to be negligible, as carriers often offer very similar rates. However, given the company’s demographics and carrier interest, there may be some advantages to doing so, so long as discussions begin well ahead of the planned update date. Green recommends surveying employees early on to see which benefits are important and which might be excluded. Glassman encourages his clients to look forward.
“The most important thing is to get an early and early look at the next 12 months from a hiring perspective,” Glassman said. “Unfortunately, for many of my small business clients, healthcare decisions are pushed to the last minute and then the status quo. They say, you know what, I don’t really like dealing with this, but it works, let’s We go on. At the same time, they’ve been hit by this growth.”