How to Protect Your Business Against Sky-High Employee Healthcare Costs

Why Healthcare Costs Are Rising So Rapidly

According to the PwC report, tThe anticipated 8% cost increase in 2025 is the highest in more than a decade.

Experts say that these outsized premium increases aren’t just the result of general inflation that affects all sectors, but also big increases in the sophistication and cost of prescription drugs, and increased consumption of mental/behavioral health services. And according to a recent Aon forecast, group health insurance costs could rise even further, nearing 9%.

Here are some of the major factors driving the price increases:

Top Small Business Strategies to Reduce Employee Healthcare Costs

Facing these cost hikes, small businesses must get creative and think strategically. Here are several cost-saving measures to consider.

1. Offer a Health Savings Account Benefit Along With A High Deductible Health Plan(HDHP) 

HDHPs are becoming increasingly popular as a way to cut premium costs. These plans feature lower premiums but higher deductibles, making them an attractive option for employers looking to reduce their healthcare costs.

Key Benefits:

According to research from KFF, employers who offer HDHPs often experience significant savings compared to traditional PPO or HMO plans. Additionally, employees appreciate the flexibility of an HSA, which they can use to cover out-of-pocket expenses.

Actionable Tip: Encourage employees to contribute to their HSAs and educate them on the tax advantages. Offering employer HSA contributions can also incentivize participation and improve employee satisfaction.

Learn More: Health Savings Accounts

2. Implement a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

QSEHRAs are a special form of health reimbursement arrangement (HRA) that allows small businesses with fewer than 50 employees to reimburse workers for healthcare expenses, including premiums for individual market plans.

Unlike traditional group health plans, QSEHRAs let employers define the amount they are willing to contribute without the financial burden of directly managing a group plan.

Key Benefits:

Employers using QSEHRAs avoid the high costs and administrative complexity of group health plans. Instead, they set a monthly reimbursement cap, giving employees more autonomy in selecting coverage that works best for them.

3. Consider an Individual Coverage Health Reimbursement Arrangement (ICHRA)

Similar to QSEHRAs, ICHRAs allow employers of any size to reimburse employees for individual health insurance plans. Unlike QSEHRAs, there are no contribution limits with ICHRAs, offering more flexibility to tailor the arrangement based on your workforce’s needs.

Key Benefits:

By leveraging an ICHRA, businesses can avoid skyrocketing premiums while offering employees more freedom in plan selection.

Learn More: Why Smart Employers Are Dropping Group Health for an ICHRA + Health Sharing Strategy

4. Introduce a Direct Primary Care (DPC) Membership Employee Benefit

DPC offers an innovative alternative to traditional insurance-based healthcare. Employers pay a flat monthly fee to cover primary care services for their employees. DPC practices do not bill insurance, reducing administrative costs and allowing doctors to focus on patient care.

Key Benefits:

DPC memberships can help reduce overall healthcare expenses by keeping employees healthier through more proactive care. This model also helps avoid the high cost of emergency room visits and hospitalizations by offering convenient access to preventive care.

5. Encourage the Use of Telemedicine Services

Telemedicine allows employees to access healthcare services remotely, providing a convenient and cost-effective alternative to in-person visits. Many insurance plans now include telemedicine options, and these virtual visits can be much more affordable than traditional office appointments.

Key Benefits:

Telemedicine can be particularly effective in managing routine or minor health issues, helping to keep overall healthcare costs down.

6. Explore Health Sharing Plans

For small businesses looking for alternatives to traditional health insurance, health sharing plans offer a unique option. While not insurance, these plans pool resources from members to cover healthcare costs.

These innovative plans can provide valuable protection against the potentially devastating costs of medicare––and yet are available at just a fraction of the monthly cost of offering a full-fledged group health benefit.

However, people with pre-existing conditions should use caution when signing up for health sharing plans. Unlike traditional health insurance products, health sharing plans don’t typically share costs fully for new members with pre-existing conditions. Instead, they typically impose a waiting period before these costs are fully shareable.

Key Benefits:

While health sharing plans aren’t a one-size-fits-all solution, they can be an appealing option for certain employers and employees, particularly those who value medical freedom and transparency.

Learn More: How Much Money Can Health Sharing Save?

7. Implement Cost Control Measures for Prescription Drugs

Prescription drug costs are a major driver of healthcare inflation. Employers can reduce these costs by encouraging the use of generic drugs, offering mail-order pharmacy options, or partnering with pharmacy benefit managers (PBMs) to negotiate better prices.

Key Benefits:

Employees may not always be aware of cheaper alternatives to brand-name drugs. Educating employees about their options can help control these costs without sacrificing care quality.

8. Implement a Section 125 Cafeteria Plan for Additional Tax Efficiency

One of the most underutilized but highly effective strategies for small businesses to reduce healthcare costs and improve tax efficiency is the implementation of a Section 125 cafeteria plan.

This IRS-approved plan allows employees to pay for certain benefits, such as health insurance premiums, out-of-pocket medical expenses, and dependent care, with pre-tax dollars. By reducing taxable income, both employees and employers benefit from significant tax savings.

Key Benefits for Employers:

How Section 125 Plans Work

Cafeteria plans are highly customizable, allowing you to offer a variety of pre-tax benefits such as:

Potential Employer Savings

For every dollar that employees divert into their cafeteria plans, employers save on their share of payroll taxes. According to estimates from the National Association of Professional Employer Organizations (NAPEO), employers can save up to 7.65% on payroll taxes for each dollar contributed pre-tax. Here’s an example:

This may not seem like a huge number, but for a business with a larger workforce or higher employee contributions, the savings can quickly add up. Over time, the payroll tax savings from a Section 125 plan can make a substantial difference to a small business’s bottom line.

Enhanced Employee Benefits at No Additional Cost

A Section 125 plan not only benefits your business, but it also provides valuable tax savings for your employees.

Since their contributions are made pre-tax, employees will enjoy a lower tax bill and more take-home pay without costing the business additional funds. This can improve overall job satisfaction and reduce turnover, both of which can lead to further savings in recruitment and training costs.