Providing quality health insurance for employees remains a major hurdle for most small business owners across the United States. While large corporations often leverage size to negotiate better rates, smaller companies face climbing premiums that strain budgets and ultimately hurt employees. Most small businesses pay a portion of health insurance, but they can’t absorb the full cost of the premiums, which means employees pay a percentage of the bill.

What’s worse is the rising cost of health insurance for small businesses could mean benefits are less accessible if costs continue to rise.

Here are some reasons for the continuing rise in health insurance costs for small businesses:

Inflation hurts cost of small business insurance

As prices throughout the healthcare industry rise, insurance premiums follow. From prescriptions to hospital stays, medical inflation usually exceeds general economic inflation. That has varied over the past two years, but is traditionally true. Chief among the problems is the increasing cost of labor. Staffing shortages have gripped most of the country since the Covid pandemic, and that is particularly true in the medical field. From there, it’s a trickle-down effect. Insurers must pay more to doctors and hospitals because doctors and hospitals must pay more to hire staff. Insurers then pass these increases down to their clients. And because small businesses have no negotiating power, the impact on them is exponentially more than larger companies.

High-cost claimants impact small business health insurance

In a small employee group, just one or two employees with major medical needs can drive up expenses for the entire plan. In this article, a survey said one of the top priorities of company managers is trying to find a way to manage high-cost claimants. However, all businesses – including small businesses – are prohibited from excluding workers based on health conditions. This means insurers end up covering more high-cost claimants within small businesses, which leads to ever-increasing premiums.

Reduced competition for small business health insurance

Consolidation in the insurance industry has reduced competition in many markets, and the consolidation has only ramped up over the past few years. Less competition generally means higher premiums, which was part of a study by the American Medical Association. In that study, the American College of Emergency Physicians said:

• 73 percent of the MSA-level markets were considered highly concentrated according to federal guidelines set by the Department of Justice (DOJ) and the Federal Trade Commission (FTC).
• 46 percent of MSA-level markets and fourteen states had one insurer with a share of 50 percent or more of the commercial health insurance market.
• 57 percent of markets became more concentrated in 2020 compared to their concentration level in 2014.

Because of this consolidation, small groups cannot easily shop multiple unaffiliated carriers to find lower rates. The lack of options works against affordability.