Health insurance costs take a bigger bite from some employees’ paychecks — here's why

For employees of small businesses, health benefits cost more and cover less than they do for employees of large companies, according to a new report released Tuesday.

“Small-firm employees are paying more for their health insurance coverage but getting less financial protection in return,” according to the report, produced by The Commonwealth Fund.

Wisconsin is right in line with the national trend. In 2023, insurance premiums for family coverage cost Wisconsin small business employees just over $1,300 more each year compared with the cost for employees of large businesses, according to the report.

Wisconsin small business employees also absorbed higher health costs up front, paying nearly $1,400 more a year on their health insurance deductibles in 2023 than their big business counterparts.

Those are close to the national average, with a smaller disparity than some states have. According to the report, small-firm employees in some states pay as much as $10,000 more toward their annual health insurance premiums than their large-firm counterparts.

Most large employers provide health coverage, and smaller employers competing with them for workers are motivated to provide coverage as well, but find it a lot more difficult, the report finds.

“Small firm employers have generally been in a tough place because they have so much less leverage than a large firm,” Sara Collins, a coauthor of the report, told the Wisconsin Examiner in an interview. “They have higher administrative costs per employee, and it’s a much more onerous benefit to provide.”

Because of those challenges, the Affordable Care Act (ACA), enacted in 2010, includes requirements for businesses with 50 or more employees to provide health coverage, but exempts smaller employers.

“While all firms face growing premiums, small employers may have less capacity to absorb these rising costs and may pass on greater portions of these costs to their employees,” the report states. “Half of participating small-business owners in a 2024 survey reported raising employee contributions in response to rising health care costs.”

Wonderstate Coffee owner TJ Semanchin. (Photo courtesy of Main Street Alliance)

For TJ Semanchin, who owns Wonderstate Coffee, the report’s analysis rings true.

Wonderstate operates a coffee roastery in Viroqua, Wisconsin, as well as three cafes: in Viroqua, Bayfield and Madison. The roastery employs about 30 people, and the three cafés about 20 people each.

“Our current health system is a major competitive disadvantage for small business,” said Semanchin.

He would like to see a universal, single-payer health care plan. But since that’s not the current reality, “We want to be providing as best we can for our staff as a responsible employer, and we’re also competing for talent.”

The roastery and the cafés are structured as separate corporations and have different health plans.

On the café side, Wonderstate offers a supplemental policy for employees who don’t have health insurance or whose insurance has a high deductible; the policy covers needs such as emergency room visits and a telehealth service.

The business encourages employees to sign up for comprehensive coverage at Healthcare.gov under the Affordable Care Act, where they’re likely to qualify for enhanced tax-credit subsidies that have lowered the premium costs for people whose incomes qualify.

On the roastery side of the business, Wonderstate recently made a major switch after facing the prospect of an 18% increase in premium costs for employees.

“That is on top of years of double-digit increases,” Semanchin said. “That’s not sustainable at all.”

In response, Wonderstate switched to a level-funded plan for roastery division employees — similar to a self-funded plan, in which an employer covers health care costs directly from its revenues.

Wonderstate will pay a fixed amount each month from which the company managing the plan will pay for medical care as it’s needed. There’s company-wide catastrophic coverage if health care costs exceed the budget for the year.

Nationwide, according to the Commonwealth Fund report, about 40% of small-firm employees with health benefits are covered by self-funded or level-funded plans. Those plans are exempt from state insurance regulations and from protections provided by the Affordable Care Act, which prevents insurers from denying coverage or increasing premiums based on a person’s health history.

Semanchin said the provider reviewed the staff medical history before approving the business for the plan. Wonderstate pays 80% of the premium for individual coverage and 50% of the family coverage premium.

“It’s allowed us to hold costs [down] for the first time in many years,” Semanchin said of the new plan. “If our staff has a bad year for medical bills, we might get kicked off” in future years.

That is not unusual, and the result can have “a very destabilizing effect on the small group market,” Collins said. “The markets function a lot better when everybody plays by the same rules.”

The report lists a number of policy options to help bolster the ability of small employers to provide health coverage for employees.

States that have expanded Medicaid under the ACA to cover people with incomes up to 138% of the federal poverty guideline could require employers to inform workers who would qualify for Medicaid about the option — which has low or no premiums and limited cost-sharing requirements — if it would be more affordable than the employer’s plan.

For states that haven’t expanded Medicaid — including Wisconsin — the report suggests that Congress could create a federal fallback plan covering the same group of people expansion would cover. “This would enable lower-income people with unaffordable employer plans to enroll in Medicaid in those states,” the report states.

Another option the report suggests would be to make enhanced subsidies for low-income purchasers of insurance at Healthcare.gov permanent. The subsidies are now scheduled to end next year. The report also suggests making it easier for workers at small firms with unaffordable or low-quality health plans to become eligible for the subsidies.

Extending the subsidies is already shaping up to be a significant subject of debate in Congress next year. “People are going to see really big increases in their premiums if they aren’t extended,” Collins said. “That will be a real cost shock to families,” leading more people to return to the ranks of the uninsured.

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