The real cost of smaller companies cutting back on health benefits
While not legally mandated at a federal level, health insurance is generally considered to be an essential employee benefit in the U.S. As a result, employer-sponsored health insurance remains the cornerstone of American healthcare. However, for those working for smaller businesses, particularly businesses with less than 50 employees, access to healthcare is becoming increasingly precarious....
While not legally mandated at a federal level, health insurance is generally considered to be an essential employee benefit in the U.S.
As a result, employer-sponsored health insurance remains the cornerstone of American healthcare.
However, for those working for smaller businesses, particularly businesses with less than 50 employees, access to healthcare is becoming increasingly precarious.
For starters, smaller businesses aren’t subject to the same requirements under the Affordable Care Act as larger corporations, leaving coverage largely voluntary and heavily dependent on financial viability.
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Additionally, rising financial strain is forcing all companies to reconsider cost-cutting measures, particularly within the retail, hospitality, and personal services industries.
Many small employers have had to reduce contributions, shift costs onto workers or drop coverage altogether.
While this is incredibly destabilising for employees, particularly those with existing health issues or dependants who also rely on the same policy for cover, it is also making it increasingly difficult for smaller businesses to attract and retain talent.
Rising costs
Healthcare costs are projected to continue rising, with national healthcare spending expected to reach 19.6% of GDP by 2031 compared to 18.3% in 2021.
According to the same research conducted by JPMorgan Chase, between 2018 and 2023, health insurance premiums showed varied trends across industries.
Premiums for businesses at the higher end of the income scale generally rose, especially in sectors with higher profit margins like real estate.
In contrast, industries with lower profit margins, such as retail and restaurants, experienced mixed changes—with some businesses seeing premiums increase and others decrease, particularly at the lower end.
These trends highlight that small businesses face very different insurance burdens based on profitability and access to tax credits.
And unlike large corporations, small businesses lack the bargaining power to negotiate lower premiums or leverage scale, leaving them exposed to market fluctuations and pricing volatility.
Temporary relief measures introduced during the COVID-19 pandemic, such as the American Rescue Plan Act, helped ease some of the pressure.
However, many of these supports are set to expire by the end of 2025, raising fresh concerns about an affordability cliff for millions of workers.
Additionally, tax credits can reduce financial strain on smaller businesses, which enables them to maintain health insurance coverage without disproportionately impacting operating expenses.
But even for businesses that manage to maintain health insurance policies, consistency remains a major challenge. Unpredictable premium increases and administrative hurdles have led to frequent coverage disruptions.
These interruptions can erode employee trust, reduce workforce stability, and impose hidden costs on businesses already operating under tight margins.
Future outlook
As these pressures mount, there is growing concern among economists and policymakers about the broader implications for entrepreneurship.
Health insurance insecurity can deter would-be entrepreneurs from starting new ventures, stifling innovation and economic growth.
For existing small businesses, the inability to offer stable health benefits risks increasing turnover, lowering employee morale and creating recruitment challenges, especially when competing against larger firms with robust benefits packages.
Professional Employer Organizations (PEOs) present one solution. By pooling small businesses together they may be able to negotiate with healthcare providers and offer more affordable benefits packages.
However, it’s clear that a policy rethink is urgently needed to protect health coverage among small businesses.
Proposals under consideration include extending premium support programmes beyond 2025, offering targeted subsidies to the most vulnerable sectors, and simplifying the process for small businesses to band together when purchasing coverage.
Other suggestions include reworking tax incentives to better reflect the realities faced by small employers, many of whom operate within razor-thin profit margins.
Ultimately, the future of small business health insurance will depend on the ability of policymakers, insurers, and business leaders to create solutions that are both affordable and sustainable.
In the meantime, small businesses must continue to navigate the uncertain landscape as best they can.
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