Rising health care costs have become a major burden for small businesses.

Issue: For years, small-business owners have faced rapidly escalating health care coverage costs, which affects their employees, their business, and the economy.

Goals: To better understand employers’ perspectives on health care costs and to develop a targeted strategy for engaging and mobilizing to drive down costs and improve health outcomes.

Methods: Key informant interviews, focus groups, and a nationwide survey.

Key Findings: Despite a healthy economic period, rising health care costs represent a major burden for small-business owners. As a result, most are taking steps to cut costs and would look favorably on policy changes that would help curb the cost of providing health care coverage to employees. Their preferences are not ideological; policy prescriptions across the spectrum find favor. There is significant interest in banding together with other business owners to advocate for a different approach to health care.

Conclusion: The weight of health coverage and costs threatens the competitiveness of small businesses. There are many health policy solutions that would help small businesses.

Introduction

There are an estimated 30.7 million small businesses (defined as those with fewer than 500 employees) in the United States, employing approximately 60 million people.1 Small firms make up 99 percent of U.S. employers, and these businesses create 66 percent of new private-sector jobs.2 Small businesses, like their larger counterparts, have not been shielded from the increasing cost of health care. Without advantages such as a larger pool of insured employees, more bargaining power with health insurance companies, and the benefit of full-time human resources personnel, small-business owners are often left with little recourse and few options when a health insurance carrier hikes costs.

Small-business owners meet critical needs for communities, employing more than 47 percent of the private-sector workforce and accounting for about one-third of America’s export value.3 This importance requires policymakers to consider the needs and unique circumstances of small-business owners. Further, the American public trusts small business as an institution. Gallup found that 70 percent of Americans have high confidence in small business, compared to just 21 percent who feel similarly about larger businesses.4 As trusted local pillars, they have the ears of policymakers invested in small-business owners as a constituency.

We saw the power of small-business support during the passage of the Affordable Care Act (ACA), when business owners played a significant role in building critical support for several portions of the law, such as the small-business health care exchange. Throughout the debate, small-business owners were called upon to talk about their difficulties managing health care costs.

In the first half of 2019, we conducted three phases of research (key informant interviews, two focus groups, and a national survey of 500 small employers) to better understand small employers’ current thoughts and perspectives on rising health care costs and prices, their appetite for change, and any levers they may be willing to use.

Only small-business owners who offered health insurance to their employees and who had two or more employees were included in the focus groups and survey. In both focus groups, about a third of the participants reported having 26 or more employees. In the survey of small-business owners who provide health care to their employees, about a third of the respondents reported having 26 or more employees.

Key Findings

Small-business owners are doing well and are optimistic about the future.

Most small-business owners in the survey rated current economic conditions highly (76%) (data not shown). Their businesses are doing well — 85 percent described them as excellent or good. The larger the business, the more likely owners were to report good conditions and a positive outlook for the next year.

Health care cost is a major problem.

The survey reveals that health care costs are top of mind for small businesses. When asked to choose their top two challenges, they cited the cost of providing health coverage to employees and attracting new customers (Exhibit 1).

Not surprisingly, the cost of providing health coverage to employees looms larger the smaller the business, but this issue plagues businesses regardless of size (Exhibit 2).

The price tag on health insurance is a significant pain point for small employers. The problem extends to recruiting and retaining talent. To compete with larger employers, small employers are hard-pressed to offer benefits like health insurance, even as the benefit takes up a larger share of the bottom line.

Two-thirds of businesses (69%) said the problem has been getting worse. They reported that costs have increased over the last four years; one-third of this group reported annual increases of 10 percent or more. Businesses with fewer employees cited bigger increases than larger businesses. Employers cited prescription drugs and lack of choice of health care plans as pain points (Exhibit 3).

Focus group findings also revealed that many small-business owners make painful decisions around health care quickly, often because they lack choice or the time or resources to wade through the policy information. Without a human resources professional on staff, small-business owners then often have to take more time later to find an alternative when a health care plan becomes too costly.

Small-business owners have taken active steps to lower their own health care costs.

Over half of employers say they have made adjustments in the past four years to decrease the costs of providing health care, with many shifting the cost burden onto employees. Nearly half said they have increased deductibles or copayments for their employees, one-quarter required employees to pay higher premiums, and 16 percent either reduced or eliminated dependent coverage (Exhibit 4). In addition, 29 percent of small-business owners negotiated with their current carriers and slightly more than one-quarter changed carriers. One-third have considered discontinuing health care coverage for their employees.

Health care brokers have a large impact on the selection of health benefits.

When asked what resources they have used to make benefit selection decisions, including choosing plans, the most-used resource was health care brokers (69%). The next-most used resource was an internal human resource department (43%). Small-business owners view health care brokers as helpful (92%); more than half (51%) said health care brokers are very helpful (data not shown).