The bedrock of American healthcare coverage, employer-sponsored insurance, is confronting a significant and escalating crisis. With approximately 165 million working-age adults relying on this system, businesses are finding it increasingly difficult to shoulder the burgeoning costs associated with providing health benefits. This burden is exacerbated by healthcare expenses that are outstripping inflation, rapidly consuming company budgets and forcing a reevaluation of how coverage is structured and financed.
The challenges are particularly acute for small employers, who have historically struggled with the financial demands of offering comprehensive benefits. Data from the Kaiser Family Foundation (KFF) reveals a stark disparity: in the past year, only 51% of firms employing fewer than 25 individuals provided health insurance, a figure that stands in sharp contrast to the 97% of companies with 200 or more employees that offered coverage. This trend suggests a widening gap in access to employer-provided health plans based on company size, with smaller enterprises disproportionately affected.
Insurers Seek Substantial Premium Hikes Amidst Rising Medical Expenses
The situation is poised to worsen for small businesses if anticipated premium increases materialize into double-digit hikes next year. A comprehensive analysis of preliminary rate filings by KFF, encompassing nearly 300 insurers offering small group coverage across all 50 states and Washington, D.C., indicates a widespread demand for significant premium adjustments. These filings, which cover employers with fewer than 50 employees, reveal that a majority of insurers are requesting rate increases ranging from 10% to 20%, with some proposals aiming even higher.
Insurers attribute these substantial requests to the escalating costs of underlying medical services and pharmaceuticals. They argue that expenses for hospitalizations, prescription drugs, and other essential healthcare interventions are on an upward trajectory, compounded by an increase in the utilization of these services by plan members.
"Costs for medical care and medications for our members have escalated rapidly and spending is now growing at the fastest rate in more than a decade," stated Blue Cross and Blue Shield of Massachusetts in their rate request. "The surge in spending is putting a heavy burden on our employer customers and members who are struggling to keep up with rising costs."
The Impact of GLP-1 Drugs and the No Surprises Act on Premiums
A notable driver of these increased costs, as identified in the rate filings, is the growing demand and expense associated with Glucagon-Like Peptide-1 (GLP-1) receptor agonists. While initially developed and widely used for diabetes management, these drugs have seen a dramatic surge in popularity for weight loss purposes and are showing promise in treating other conditions. The high price tags associated with these medications are forcing some insurers to reconsider or discontinue coverage for anti-obesity treatments. However, even with these adjustments, overall spending on GLP-1s continues to climb as more individuals with diabetes utilize them.
Beyond the direct impact of pharmaceutical costs, the No Surprises Act (NSA), enacted in 2020, is also beginning to exert pressure on premiums. This landmark consumer protection legislation aims to shield patients from unexpected medical bills by establishing a framework for resolving disputes between insurers and out-of-network providers regarding reimbursement for out-of-network services. However, research and analyses of the NSA’s implementation suggest that providers are frequently prevailing in these billing disputes. This trend has led to payouts that often exceed contracted in-network rates, consequently driving up healthcare costs for insurers.
In New York, for instance, Oxford Health Insurance and UnitedHealthcare Insurance Company of New York cited the NSA as a contributing factor to their proposed 0.8% rate increase for the upcoming year. Both entities are subsidiaries of the insurance giant UnitedHealthcare, whose executives recently attributed unexpectedly high spending in their commercial business, in part, to the NSA. This development underscores how legislative efforts to protect consumers can have downstream financial implications that are ultimately borne by employers and their employees.
Shifting Market Dynamics: Erosion of the Fully-Insured Small Group Market
The escalating premium costs are prompting a significant shift in how small businesses approach health coverage. Many are exploring and transitioning to more cost-effective alternatives to the traditional fully-insured small group market. This exodus of employers and their employees from the fully-insured pool has a cascading effect, potentially increasing costs for those who remain.
Data from KFF indicates a substantial decline in the number of individuals enrolled in the fully-insured small group market, dropping from 17 million in 2013 to 10 million in 2024. Concurrently, coverage rates among small business employees have remained relatively stable. This suggests that a considerable number of employers have opted for self-funded or level-funded plans rather than abandoning coverage altogether.
Level-Funded Plans: A Double-Edged Sword for Small Businesses
Level-funded plans offer a seemingly attractive option for small businesses. Under these arrangements, employers pay a fixed monthly premium for health coverage. A key feature is the potential for refunds if the actual medical claims incurred by employees are lower than projected. This model is often more economical for small businesses with healthier workforces.
However, level-funded plans come with significant caveats. Critically, they are generally not subject to the same stringent benefit mandates as plans regulated under the Affordable Care Act (ACA). This regulatory distinction allows insurers offering level-funded plans to underwrite based on the health status of the employee population. Consequently, insurers can adjust premiums upwards or even decline coverage for groups with pre-existing medical conditions or other perceived health risks.
"Continued growth in the popularity of alternative coverage options for small businesses, like level-funded plans, has the potential to further erode the fully-insured small group risk pool and could contribute to future premium increases for small businesses, particularly those with sicker employees who may not qualify for or are priced out of a level-funded arrangement," KFF researchers cautioned in their analysis. This dynamic creates a potential adverse selection problem, where healthier individuals and groups are drawn to alternative plans, leaving behind a sicker, more expensive risk pool in the fully-insured market.
Broader Implications for the Healthcare Ecosystem
The median proposed rate increase of 14% for 2026 among small group insurers is notably higher than the 11% that insurers requested for 2026. This aligns with the rate hikes being proposed for plans within the Affordable Care Act marketplaces for the upcoming year, signaling a systemic issue across different segments of the health insurance market.
In addition to rising medical and pharmaceutical expenditures, insurers operating within the ACA marketplaces are also contending with the expiration of enhanced federal subsidies. These subsidies, designed to make coverage more affordable for individuals and families, have played a crucial role in stabilizing the marketplace. Their cessation introduces an additional layer of financial strain, potentially leading to increased premiums and reduced affordability for a significant portion of the population.
The interconnectedness of these factors – rising medical costs, the impact of new drug classes, legislative changes, and the migration of risk from traditional insurance pools – paints a complex picture for the future of employer-sponsored health insurance. As businesses grapple with these escalating expenses, the accessibility and affordability of healthcare coverage for millions of Americans hang in the balance. The continued viability of employer-sponsored insurance as the dominant form of coverage will depend on innovative solutions and policy interventions to address these multifaceted challenges.
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