Small-business owners want action on healthcare costs

Our healthcare system, together with its high costs and its accessibility issues, is one of the longest-running topics of conversation among policymakers. It’s also a particularly hot-button topic among small-business owners.

In fact, according to recent Gusto research, owners of small businesses who currently offer health insurance as an employee benefit see rising healthcare costs as their No. 1 policy concern. For small-business owners who don’t offer health insurance the issue is their No. 2 concern, after increased tax rates. Two out of three small-business owners have made it clear that they want the next presidential administration to address employer premiums. Otherwise, providing health insurance may become unattainable for them.

This is an urgent issue given the critical role small businesses play in our economy. Small businesses make up 99% of all U.S. businesses, so their ability to offer affordable health benefits impacts American workers’ access to healthcare.

I speak with small-business owners across the nation on a regular basis, and many small organizations currently lack the resources of larger corporations to provide comprehensive health benefits. This leaves many employees underinsured or without any coverage.

Additional Gusto research shows that offering healthcare coverage makes it easier for small businesses to attract and retain talent—making this vital to their success.

There are specific actions policymakers can take, starting with making reforms to Health Reimbursement Arrangements (HRAs), expanding access to level-funded plans, and improving the Affordable Care Act’s Small Business Health Options Program (SHOP) tax credit.

HRA reform

HRAs, including ICHRAs and QSERAs, were designed as a flexible way for small businesses to help employees access health insurance by providing funds that employees can use to purchase plans on the individual market. While the system is valuable, there are major flaws.

For instance, if an employee is offered an HRA, they may lose an equivalent amount from their tax credits on the individual exchange. Depending on how much the employer offers, the employee can potentially lose all tax credits for their whole family. This is a loss for both the employee and the employer. The contributing funds may not relieve employees of any cost burden, potentially costing them more money, and thus, are not always seen as an attractive employee benefit.

Employers are also less likely to offer HRAs if some of their employees receive government subsidies. This leaves the other employees who don’t receive government subsidies with no HRA option.

To address this, any funding a small business offers through an HRA should have no impact on the employee’s individual tax credit. The money should be completely additive. This would meaningfully decrease what employees pay for coverage as well as help businesses attract and retain talent.

While this change wouldn’t put small and midsize business’s health insurance offerings on par with their larger counterparts, it’s an important first step to free up funds for them to contribute to employees’ premiums.

Expand access to level-funded plans

Level-funded health plans allow small businesses to pay a set monthly amount to cover medical claims, administration, and stop-loss insurance. Premiums are based on the risk levels of the groups that businesses are providing coverage for.

In response to rising prices, level-funded plans have gained traction as an affordable alternative to fully insured plans in recent years. The percentage of small employers with level-funded health plans increased from 13% in 2020 to around 40% in 2023. At Gusto, our customers have the potential to save 10% to 15% on health insurance premiums with a level-funded plan, without compromising the quality or level of coverage

However, state-level regulations are currently limiting much-needed access to level-funded plans. Some states, like New York, prohibit insurers from selling stop-loss insurance to small employers who do not have enough employees. Others, like California, set a high minimum stop loss, which makes level-funded plans expensive for employers since the carriers pass that cost to them.

To support small businesses, state policies should encourage rather than restrict access to attractive level-funded options. States like Colorado, where employers with a minimum of two employees can participate in level-funded plans, are a great example. In addition to lowering minimum stop losses, increasing the number of carriers for level-funded plans will make it a more competitive and attractive market.

It’s important to note that while level-funded plans are a great option for some small organizations, policymakers also need to offer other affordable options for small companies with employees in higher-risk groups.

Improve the ACA’s SHOP tax credit

The ACA’s SHOP tax credit gives businesses with fewer than 25 employees enrolled in a SHOP plan a tax credit worth up to 50% of their premium costs (up to 35% for tax-exempt/nonprofit employers).

It’s intended to make healthcare affordable, but it never gained traction due to difficult processes and restrictions. Currently, more than half the states don’t have SHOP exchange plans. The tax credits are available for only two years to a very small group of employers.

The SHOP tax credit qualification criteria needs adjusting so that more companies can benefit from it. The credit should apply to any employer not subject to the employer mandate in a calendar year.

Businesses that meet the qualification criteria should receive the tax credit, regardless of where they purchase health insurance, so long as coverage meets ACA requirements. This would include essential health benefits and meet minimum essential coverage standards. It would also avoid limiting the tax credits to only small businesses that purchase through SHOP, reducing costs of premiums for businesses enrolled in Small Group Health Insurance.

Having only two years to take advantage of the SHOP tax credit is also not sufficient. Eliminating the time limit would encourage more participation.

For small businesses, health insurance is more than a benefit—it’s a way to support their workforce, retain talent, and strengthen their position in a competitive market. However, current healthcare policies leave them with limited, costly, and complicated options. Policymakers need to listen to small businesses and act now to increase affordable health insurance coverage.

Tomer London is cofounder and chief product officer of Gusto.