Employee health insurance is a must for many workers. While health benefits are available through the health insurance marketplace or federal programs, the cost of private health insurance has risen, leaving many Americans without viable options outside of employer-provided coverage. This means that the insurance benefits an employer offers as part of its compensation management program, as well as how insurance costs are allocated to employees, can directly impact a company's ability to recruit and retain the right employees.
Below we provide data on the current state of health insurance costs in the U.S., including how to lower costs and what health insurance prices mean for employers in 2024.
How are the costs of employer-sponsored health insurance allocated?
Employees are attracted to companies that offer health insurance benefits, but they can opt out if the financial burden on the employee is too great.
"Employer health benefits are a critical part of attracting and retaining talent," says Michael Stahl, former executive vice president and chief marketing officer at HealthMarkets. "It's important to do it right."
Health insurance costs are usually allocated in two ways: premiums and out-of-pocket costs. Premiums are the amount a person (employer, employee, or a combination of the two) pays for insurance. Some business owners choose to cover their employees' insurance premiums in full, while others subsidize a portion of the premiums. Some make no contributions at all. In contrast, the cost of insurance is usually paid by the insured, that is, the employee.
Personal expenses of employees
Regardless of whether a business owner requires their employees to share responsibility for monthly insurance premiums, employees will almost always bear their own health care costs.
- A deductible is the amount paid for medical services before the insurer starts paying for them. Most deductibles are annual amounts. For example, an employee may have an annual deductible of $2,000, which means he or she must pay $2,000 of medical services out of pocket before the insurer will cover any amount.
- A co-payment, or copayment, is the amount employees pay directly to a health care provider at the time of service. Not all services or plans require a copayment.
- Coinsurance is the percentage of costs that employees pay after the deductible, and it applies only to covered services. For example, if a plan has a 20 percent coinsurance, the insurance company will pay 80 percent of each covered medical bill. The remaining 20 percent is paid by the employee.
How much does employee health insurance cost?
According to the Kaiser Family Foundation's (KFF) 25th Employer Health Benefits Study, in 2023, the average annual cost of employer-paid premiums for an employee will be $8,431 for single coverage and $23,968 for family coverage, up 7 percent from the previous year. On average, employees covered $1,401 (17 percent) of the premium for single coverage and $6,575 (29 percent) for family coverage.
At the same time, some employers seek to reduce their employees' health care costs by covering treatment or expanding the range of services offered. Such services may be considered fringe benefits:
- Mental health telehealth services
- Access to specialized medicines
- Concierge services
- Promotion of a healthy lifestyle in the workplace
- Access to centers of excellence
- Allowances for working spouses
How much does health insurance cost for employers?
Assuming employers absorb the price increases without increasing employee caseloads or taking other cost-saving measures, the average cost of health insurance for employers could be more than $15,000 per employee, Aon reports. That's an 8.5 percent increase from a year earlier and nearly double the 4.5 percent increase in employer health budgets between 2022 and 2023.
The exact cost depends on many factors, such as the state in which the business is located or whether the insurance plan is an HMO or PPO.
How can employers reduce health insurance costs?
Business owners can take the following steps to lower health insurance costs for themselves as an employer and for their employees.
1. Contact an insurance agent or broker.
"With so many different options, understanding and choosing the right health insurance plan can be confusing," says Stahl. "The key is to work with an agent who is unbiased and can show you all the options."
These options may include group health insurance co-pay plans, traditional group plans, plans in the ACA marketplace, or even peer-funded plans that provide a refund at the end of the year if employees have submitted few health insurance claims.
"By being able to research and compare offers from multiple companies, you can be sure you're getting the best benefit structure and the most favorable rates," says Stahl.
2. Encourage proactive healthcare.
According to Rudolf Berzins, president and senior risk advisor at Apex Benefit Group, it costs less to insure people who take active care of their health. Many insurance companies offer benefits to businesses that encourage their employees to participate in workplace exercise programs or regularly visit their primary care physician. Before choosing an insurance company, check to see if they offer discounts or rebates for active workplace health initiatives.
3. Shift cost allocation to employees.
To reduce small business insurance costs, employers can opt for health plans that shift most of the cost to employees. While these premiums may be tax deductible, such a plan means a smaller paycheck for the employee. Additionally, while this strategy can save business owners money, it can negatively impact their ability to recruit and retain employees.
4. Look for discounts on prescription drugs.
"Pharmacies and prescription coverage [have] a huge impact on overall insurance premiums," Berzins says.
In addition to saving on insurance costs by finding alternatives to generic drugs within the insurance plan, Berzins recommends finding out if the insured can receive direct discounts. "Contact the drug company directly to inquire about possible coupons or discounts," he says.
Bottom line Even with rising premiums, costs for employees may not increase significantly in 2024 if employers take on more of the financial burden and cover more services.How does employer-sponsored health insurance work?
Employers often subsidize the cost of the insurance plans they offer, making them much more affordable for their employees, who can usually sign up for an insurance plan through the company's human resources department. Employees typically have a limited choice of health insurance plans offered by the employer, depending on the health insurance plan chosen by the business owner. Companies may choose health maintenance organization (HMO) plans, preferred provider organization (PPO) plans, or both.
Total employer and employee costs
- Premiums are payments to a health insurance company that allow employees to have coverage. They must be paid at regular intervals, often monthly or quarterly. In most cost-sharing plans, both the employer and the employee pay a portion of the premiums, with the employer often paying the larger portion. This means that it is almost always cheaper to get health insurance through the employer.
- Health Savings Accounts, or HSAs, are tax-free savings accounts that can be used to cover future medical expenses. HSAs can be paired with certain high-deductible insurance plans. Employees don't have to spend all of their money in an HSA each year, as funds can be rolled over. Employees can contribute to an HSA on their own, and the employer can contribute as well.
- Flexible Spending Accounts, or FSAs, are pre-tax accounts designed to pay for non-covered medical expenses, including copayments and deductibles. FSA funds are set aside by the employer and the employee must use them by the end of the year. Unused funds are returned 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 have no clear legal right to demand employer coverage. However, the penalties that the Affordable Care Act (ACA) imposes on some employers who do not offer health insurance are so severe that employers are looking to provide health insurance to avoid these monetary consequences.
Under the ACA, any employer with 50 or more full-time employees (defined as employees working 30 or more hours per week) or an equivalent number of part-time employees must offer health insurance to 95 percent of its full-time employees. If the employer fails to meet this requirement, it will have to pay an annual IRS fee for each employee. In addition, an employer with 50 or more full-time employees that offers health insurance to one employee is required by law to do so for all "similarly situated" employees, that is, employees with similar positions, salaries, and job responsibilities.
For employers with 50 or more full-time employees to comply with the ACA, they must offer health insurance that meets the ACA's minimum coverage and affordability requirements. Employer-sponsored health insurance must also be available for the employee's dependents. Biological and adopted children under age 26 are considered dependents, while spouses, stepchildren, and stepchildren are not.
For your information , any company with 50 or more full-time employees must offer health insurance to at least 95 percent of its employees. If you fail to comply with the health insurance requirements under the ACA, you will be required to pay the IRS a fee per employee per year. If you comply with COBRA insurance requirements, you may also be required to continue to offer health insurance to employees who leave your company.
Can an employee opt out of employer health insurance?
In almost all situations, an employee can opt out of employer health insurance. Exceptions to this rule are when the employer fully covers employee health insurance premiums or when a labor or union agreement requires the employee to use the employer's coverage.
An employee may opt out of employer-provided health insurance during the open enrollment period. If an employee chooses to opt out of employer-provided health insurance, they will need to sign up for a plan on the health care marketplace during the national open enrollment period (usually November 1 through December 15 of each year). They may also be able to purchase plans directly from some insurers that do not participate in the marketplace.
Two common reasons workers reject employer-provided health insurance are high deductibles or a limited list of medical services. For workers who forgo employer-provided insurance in favor of marketplace insurance, premiums and plan options are determined in part by an individual's income.
Generally, if a worker's income is within 400 percent of the federal poverty line for his or her family size, he or she may be eligible for a tax credit that reduces health care costs by lowering premiums. Notably, the IRS has temporarily eliminated this requirement through 2025, thereby expanding eligibility for the tax credit to those who are otherwise eligible.
When they file their tax return next year, if their annual income exceeds the amount on their Marketplace application, they will have to pay the IRS the difference between the new tax credit amount and the previous year's amount. Conversely, if their income decreases, they will receive a refund.
Did you know. Instead of providing traditional health insurance at the employer's expense, some companies offer each employee an individual health insurance plan (Health Reimbursement Arrangement (HRA). Under an HRA, employees purchase individual health plans on the marketplace and the employer reimburses employees for monthly premiums and out-of-pocket expenses.
What changes to health insurance will happen in 2024?
Employer-paid health insurance rates have steadily increased in recent years, and this trend is expected to continue and intensify in 2024. Rate increases are likely to affect both employers and employees, so taking steps to save money can be especially beneficial for small business owners and their teams.
One of the factors contributing to this growth is the residual impact of inflation. Since contracts between insurers and health care providers are usually for several years, economic changes tend to have a lagging effect on the health care industry.
Other factors that determine the cost of health care (and thus insurance rates) include:
- More and more Americans are returning to pre-pandemic levels of access to health care, increasing the amount of services provided.
- An increase in the number of chronic and more costly conditions, as well as delays in the delivery of health services, result in the need for longer, more frequent and more complex treatment.
- Increased use of specialty drugs, including those for diabetes and weight loss, which is driving up the cost of these medications.
While deductibles continue to rise, employers and employees have more options for sharing costs, explains Berzins. The increase in options means that business owners can offer their employees more plans than in previous years. In many cases, this has resulted in lower costs for employers.
Meanwhile, employees can reduce their costs by choosing different levels of coverage under a group health plan, Berzins says.
For employees who don't have as many medical expenses, there's a definite upside. "These changes will help stabilize insurance premiums," says Berzins.
What is the minimum employer contribution for health insurance?
There is no national rule specifying a minimum employer contribution to health insurance. Many state legislatures have passed regulations that require employers to contribute at least 50 percent of the cost of employee health insurance. In 2023, according to KFF, employers contributed an average of 83 percent of premiums for individual coverage and 71 percent for family coverage.
The ideal premium percentage for your business depends on your industry, the size of your company, and the types of health insurance you offer. Research the premium rates in your geographic area and for your type of business and compare them to what you can provide while remaining cost-effective.