Handling SMB benefits costs spike: A Q&A with David Feinberg

For most small businesses, labor is their largest expense. And second to salary, benefits are the largest chunk of that expense. With health insurance rates growing at 10+% for the last several years, at 2-3x the rate of inflation, this is not sustainable. That means that any small businesses offering health insurance to their employees are facing this hyperinflationary cost. To offset it, they either have to shoulder the cost themselves, reduce the quality of the benefit packages, or pass the increases along to their employees or customers.

Despite financial pressures, nearly 60% of small businesses say they feel confident adapting. What's driving this resilience, and what are successful businesses doing differently?

By definition, small businesses must be resilient. Despite the fact that 45.9% of private sector employment is driven by businesses with fewer than 500 employees, the benefits systems and policies in place are designed primarily to support larger employers. That is why we built Justworks from the ground up exclusively for small businesses. In a world built for big business, our mission is to help small businesses grow with confidence, because confidence is the essence of how they operate. As it relates to health insurance specifically, successful business owners are doing a few things. 1) They are taking a multi-year approach, 2) they recognize that the most expensive insurance is not necessarily best, 3) they are limiting choices, 4) they are investing in education for their employees, 5) they are open to alternatives/optionality (eg: Individual Coverage Health Reimbursement Arrangements, also known as ICHRA).

What's fundamentally broken about how the industry communicates upcoming changes to small businesses?

I think small businesses lack a full explanation of how changes in the wider healthcare industry will impact them. Health insurance, especially when it’s for a small number of employees, feels personal, and there’s a gap in understanding how changes in the industry will impact individual pricing. For example, we’re seeing that the growing demand for weight loss management drugs (GLP-1s) is contributing to increased prescription drug spending, which can increase premiums. That’s a macro trend that changes micro costs, but small businesses might not have visibility into how that affects their expenses, especially if none of their employees are prescribed these specialty medications. While Justworks can’t provide a silver bullet, we aspire to provide them with education and access to health insurance with an experience that’s built on transparency and optionality.

With premiums expected to rise at least 7%, what specific tradeoffs are you seeing business owners make between affordability, access, and plan complexity?

Business owners who are looking to offset or reduce costs might be changing the way they typically approach benefits. For example, they might reduce the amount of plans offered to their employees, removing ones with a higher employer cost. Or, they might look outside traditional benefit offerings and explore market alternatives, like ICHRA.

How can PEOs like Justworks help small businesses adjust to rising costs?

Working with a PEO like Justworks offers small businesses access to a wider variety of benefits, with products and plans that are typically only available to large companies, at better rates than they can access on their own. On average, a small business that uses a PEO will spend $450 less per employee on administrative costs, and see a 37% average health benefits-related cost saving per employee.

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There's a lot of buzz around ICHRAs, level-funded options, and ACA marketplace strategies as solutions. From your perspective, working with thousands of small businesses, what's actually delivering results versus what's just industry hype?

Inflationary pressures are forcing companies to take a closer look at anything that could be a potential solution, and there’s definitely growing buzz around these options. Realistically though, it’s still too early to tell if they’ve actually started to deliver results.

In my experience, it takes a sophisticated buyer to really understand how these plans will impact a company and a long-term strategy to truly determine if they’re right for your small business. Each plan also has tradeoffs and risks you need to consider. With something like level-funded options for example, a company may see lower costs in the short term, but opens itself up to risk from shock claims. And even though the ACA marketplace has been around for over ten years, the results vary widely by geography.

IHCRA is the thing I’m most interested in. While it’s still too early to tell, I think the move towards a model based on defined contributions instead of defined benefits has the most potential to change the market. We saw something similar with this with retirement plans, when companies moved from pension plans to 401k contributions.

Renewal season is approaching fast. What three questions should every small business owner be asking their broker or insurance provider right now to avoid getting blindsided?

1. Start thinking through options BEFORE they get renewals. Understand what they are so they can move quickly
2. Understand what renewals a carrier may have been issuing.  A good broker should have an idea of what to expect based on recent carrier behavior.  Insurance carriers can move into or out of a market.  Know what your specific carrier is doing at a broader scale so you know what to expect.
3. Benchmark on plan design and availability.  The most expensive insurance is not necessarily the best. What are other employers like you offering? What do your employees actually need?
4. Consider looking into a PEO, which can aggregate your employees with those at thousands of other small businesses to gain access to large-group plans that can—in some cases—result in cost savings while also maintaining quality of coverage.