Employee health insurance benefits are a must-have for many workers. Nearly 50% of Americans receive health insurance benefits through an employer, according to eHealth and the Kaiser Family Foundation (KFF). While people without employer-sponsored insurance have the option to find health benefits through health insurance marketplaces or federal programs, the cost of private health insurance has gone up, leaving many Americans without viable options. This means that the insurance benefits an employer offers as part of their compensation management program and how the costs of that insurance are shared with the employee, directly impact a business’s ability to hire and retain the right people.
Below, we’ve broken down the current state of health insurance costs in the U.S., including how to keep expenditures down and what health insurance prices in 2023 mean for employers.
Employees are attracted to companies that provide health insurance benefits, but they may be turned off if the financial burden on the worker is too high.
“Employer health benefits are such a crucial part of attracting and retaining talent,” said Michael Stahl, former executive vice president and chief marketing officer at HealthMarkets. “It is essential to get it right.”
Health insurance costs are generally shared in two ways: premiums and out-of-pocket fees. Premiums are the amount a person (either the employer, employee or a combination) pays for coverage. Some business owners choose to fully cover premiums for their employees, while others subsidize a portion. Some don’t contribute at all. In contrast, out-of-pocket fees are typically paid by the person insured; i.e., the employee.
Out-of-pocket employee costs
Whether a business owner requires their employees to share responsibility for an insurance’s monthly premiums, employees will almost always still have out-of-pocket expenses for their healthcare.
- The deductible is the amount paid for healthcare services before the insurer begins paying. Most deductibles are yearly amounts. For example, an employee may have a $2,000 annual deductible, which means they must pay out of pocket for $2,000 of medical services before the insurer covers any amount.
- A copayment, or copay, is the amount employees pay directly to a healthcare provider at the time of service. Not all services or plans require copays.
- Coinsurance is the percentage of costs that employees are still responsible for after their deductible, and it applies only to services covered by insurance. For example, if a plan has 20% coinsurance, the insurance company will pay 80% of each covered medical bill. The employee is responsible for the other 20%.
How much does health insurance cost for employees?
According to HR consultancy Willis Towers Watson’s Best Practices in Health Care Survey, as reported by SHRM, the average annual premium cost for an employee in 2021 for employer-sponsored health coverage was $3,331, up from $3,269 in 2020. Another survey from Mercer projected premiums will increase by 4.4% in 2022. However, the data indicates many employers aren’t raising their employees’ share of the cost; it’s expected workers will continue to contribute 22% of their health plan premium’s cost, unchanged from 2021.
At the same time, some employers are looking to decrease their employees’ healthcare expenses by covering treatments or expanding what they offer. These services could be considered fringe benefits:
- Telehealth behavioral mental health services
- Specialty drug access
- Concierge services
- Health and wellness promotions within the workplace
- Access to centers of excellence
- Working spouses surcharges
Even as insurance premiums rise, costs won’t necessarily increase for employees in 2023 if employers take on more of the financial burden and cover more services.
How does employer health insurance work?
Through employer health insurance, employees can receive substantial discounts on their health insurance premiums. Employers often subsidize the cost of the insurance plans they offer, making them significantly more affordable to their employees, who can usually sign up for the insurance plan through the company’s HR department. Typically, employees have a limited range of employer health insurance plans, depending on the health insurance program chosen by the business owner. Companies can opt to provide health maintenance organization (HMO) plans, preferred provider organization (PPO) plans or both.
Shared employer and employee costs
- Premiums are payments to the health insurer that allow employees to have coverage. They are due at regular intervals, often monthly or quarterly. Under most cost-sharing plans, employers and employees both pay a portion of the premium, with employers often paying the larger share. This means it is almost always cheaper to get health insurance through an employer.
- Health savings accounts, or HSAs, are tax-free savings accounts that can be used for future medical expenses. An HSA can be paired with certain high-deductible insurance plans. Employees do not need to spend all of the money in their HSA every year, as the funds can be rolled over. Employees may contribute to an HSA on their own, or an employer may also contribute. See our HSA guide for employers to learn more.
- Flexible spending accounts, or FSAs, are pre-tax accounts designated for healthcare costs not covered by insurance, including copays and deductibles. FSA funds are set aside by the employer, and the employee must use them by the end of the year. Funds that are not used are sent back to the employer.
When must an employer offer health insurance?
Technically, an employer is never required to offer PPO or HMO health insurance, and employees are not granted the explicit legal right to demand insurance from employers. However, the fines that the Affordable Care Act (ACA) imposes on certain employers who don’t offer health insurance are so severe that employers tend to provide health insurance to avoid these monetary consequences.
According to the ACA, any employer with 50 or more full-time employees (defined as employees who work 30 or more hours per week), or an equivalent number of part-time employees, must offer health insurance to 95% of their full-time employees. Should an employer fail to meet this stipulation, they must pay a fee per employee per year to the IRS. Additionally, an employer of 50 or more full-time employees who provides health insurance to one employee is legally obligated to do so for all “similarly situated” employees – meaning employees with similar titles, salaries and job duties.
For employers with 50 or more full-time employees to comply with the ACA, they must offer health insurance that meets ACA-established minimum coverage and affordability requirements. Employer-sponsored health coverage must also be available to the employee’s dependents. Biological and adopted children under the age of 26 qualify as dependents, but spouses, stepchildren and foster children generally do not.
Any company with 50 or more full-time employees must offer health insurance to at least 95% of its staff. If you fail to meet these requirements, you’ll have to pay a fee to the IRS per employee, per year. With COBRA insurance compliance, you may also be required to continue offering health insurance benefits to employees who have left your company.
Can an employee opt out of an employer’s health insurance?
In almost all situations, an employee can opt out of an employer’s health insurance. The exceptions to this rule are if the employer entirely covers employees’ health insurance premiums or if an employment or union agreement requires an employee to use the employer’s insurance.
An employee can opt out of their employer’s health insurance during the company’s open enrollment period. Should an employee choose to forgo their employer’s health insurance, they’ll need to sign up for a healthcare marketplace plan during the national open enrollment period (usually Nov. 1 through Dec. 15 each year). They can also purchase insurance plans directly from certain non-marketplace insurers.
Two common reasons why workers opt out of an employer’s health insurance offering are that the plans have a high deductible or there is a limited range of medical services covered. For workers who decline employer-sponsored insurance in favor of marketplace insurance, the premiums and plan options are determined in part by the individual’s income.
If the employee’s income is within 400% of the federal poverty line for their family size, they may be eligible for a tax credit that reduces healthcare costs by lessening premiums. Upon filing next year’s tax return, if their annual income exceeds the amount they listed on their marketplace application, they will need to pay the IRS the difference between their new tax credit amount and the previous year’s. Conversely, if income decreases, they will get a refund.
How can employers keep health insurance costs down?
Business owners can follow these steps to lower health insurance costs for themselves as an employer and for their employees.
1. Shop around with an insurance agent or broker.
“With so many different options, understanding and ultimately choosing the right health insurance plan can be confusing,” Stahl said. “The key is to work with an agent who is unbiased and can show you all the options.”
These options may include group health-sharing plans, traditional group plans, ACA marketplace plans or even level-funded plans, which provide rebates at the end of the year if employees have made few health insurance claims.
“By having the opportunity to learn and compare from multiple carriers, you can be sure you are getting the best benefits structure with the best rates available,” Stahl said.
2. Encourage proactive healthcare.
According to Rudolf Berzins, president and senior risk advisor of Apex Benefit Group, it costs less to insure people who are proactive about their health. Many insurance companies offer incentives for businesses that encourage their employees to participate in workplace exercise programs or schedule regular visits with their primary care providers. Before selecting an insurance provider, check if any of them will provide discounts or rebates for proactive health initiatives in the workplace.
3. Shift cost-sharing to employees.
To reduce small business insurance costs, employers can choose health plans that shift more of the costs onto employees. While these contributions can be tax-advantaged, this type of plan means a smaller paycheck for the employee. Furthermore, although this strategy can save money for business owners, it may hurt their ability to recruit and retain employees. [Related article: How Much Workers’ Comp Insurance Do You Need?]
4. Look for prescription drug discounts.
“Pharmacy and prescription coverage [have] a tremendous impact on overall insurance premiums,” Berzins said.
In addition to saving money on insurance costs by seeking generic drug alternatives within an insurance plan, Berzins recommends investigating whether the insured can get direct discounts. “Contact the pharmaceutical company directly for possible coupons or discounts.”
Check out our roundup of the best health insurance and employee benefit providers to find insurers for healthcare, dental and vision.
What health insurance changes are there in 2023?
Two years after the start of the COVID-19 pandemic, analysts for Moody’s fear that the pandemic’s effects on the health insurance system will linger as the market searches for stability. These concerns relate to the increase in drug costs, especially specialty drugs that carry a heavy price tag.
Last year, the pandemic’s economic effects meant earnings decreased while testing costs and treatment expenses increased. While some insurance companies stepped up to the plate during the height of the health crisis and covered in-patient treatments for COVID-19, many of those benefits are leveling out as health providers find better ways to treat the virus. According to the Kaiser Family Foundation, insurer filings are expected to return to pre-pandemic levels in 2023, and the organization does not believe the pandemic will continue to affect employer costs for insurance premiums.
Aside from the COVID-19 pandemic’s effect on health insurance costs, certain financial impacts will depend on the specific plans a business chooses. However, some trends and legal changes are more systematic. These will affect employees and employers everywhere, regardless of what insurer they use or plan they select.
“Deductibles are continuing to increase, and there are more cost-sharing options between employers and employees,” Berzins said.
This increase in options means business owners can make more plans available to their employees than in prior years, and, in many cases, it has lowered the costs for employers. Meanwhile, employees can reduce their expenses by choosing different tiers of insurance within their group health plan, said Berzins.
There is a definite upside for employees who don’t have many medical expenses, Berzins said: “These changes will help stabilize premiums.”
How much does health insurance cost for employers?
According to Kaiser Family Foundation research, in 2021, the average annual employer healthcare insurance cost was $7,739 for single coverage, up 4% from the previous year, and $22,221 for family coverage, also up 4% from 2020. Survey data also showed that 58% of small firms offered their employees coverage while 99% of large firms offered coverage, averaging a total of 59% of all companies offering their employees some sort of health coverage. Exact costs depend on a variety of factors, such as the state where the business is located or whether the insurance plan is an HMO or PPO.
What is the minimum employer contribution for health insurance?
There is no national rule governing the minimum employer contribution for health insurance. Many state legislatures have passed regulations that require employers to contribute at least 50% of employee health insurance costs, but in 2021, the Kaiser Family Foundation found that the average employer contributed 83% of the premium for individual coverage and 73% for family plans.
Sean Peek and Katharine Paljug contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.
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