Small Businesses → Big Healthcare Opportunity
This blog post is adapted from an independent study I advised this past semester with my MBA student, Jill Damaris (CBS ‘24).
When Jill and I began exploring healthcare topics for her independent study, we connected over our families working at small businesses. We shared similar takeaways on the healthcare experience for these individuals, and that this demographic is often overlooked and underserved. We wanted to hone in on this topic over the course of the semester and capture firsthand experiences from small business owners and their employees to paint a more complete picture of this market and ultimately identify opportunities for innovation.
In this article, we’ll cover Jill’s findings from this research, including background on employee-sponsored health benefits in the US and why it is the most common type of insurance, why covering healthcare is challenging for small business owners, and potential opportunities we’re excited about to more adequately serve this unique market.
Why small businesses matter
Small businesses are really anything but small in the US, making up 99.9% of companies. Protecting and supporting this demographic’s healthcare needs is critical for a prosperous, growing economy.
Job creation
Small businesses play a significant role in job creation in the US. Over the last 25 years, small businesses have created two out of every three jobs added to the US economy, which accounts for 12.9 million net new jobs. Additionally, small businesses have rebounded since the challenges of job losses during the pandemic, recovering ~60% of lost jobs since the first two quarters of 2020.
Middle class financial security
Small businesses help support the middle class by creating opportunities for ownership and employment. In the past four decades, 60% of new businesses have been created by the middle class. These middle class owners have autonomy over hiring employees and supporting local communities that benefit from new business creation.
Economic prosperity for marginalized populations
Small businesses in the US are an important economic engine. In terms of addressing gender inequality, small businesses are more likely to be owned by females (~36% have one or more female owner(s)), compared to Fortune 500 companies (10.4% of Fortune 500 companies have a female CEO). Small businesses are also an important part of the economy for immigrants, with 21.7% of small businesses owned by immigrants, which in turn employ ~8 million immigrants in the US. The ethos surrounding owning a small business as a personal goal and means to economic mobility is notable, as well. According to research by the Pew Research Center, 36% of Black Americans say owning a small business is important to their personal definition of financial success, and an additional 22% say it is essential.
Playing such an integral role in the US economy, it's clear that small businesses warrant our attention in healthcare. But providing that vital support is easier said than done. The current healthcare landscape creates unique challenges for this sector, stemming directly from the way insurance is structured in the US.
Why is healthcare coverage tied to employment?
Healthcare in the US is wrought with numerous challenges and idiosyncrasies that are nonexistent in peer nations. One of these US-specific policies is that healthcare coverage is inextricably tied to your employment status.
Healthcare in the US used to be entirely unregulated. The onset of scientific discovery in bacteriology and anesthesiology in the early 1900s shifted hospitals from a public entity to house the sick to a place for high quality care and treatment. At the same time, medicine was becoming a more highly regarded profession with stricter standards and qualifications required to practice. As care became safer and higher quality, both the demand and the associated cost of care began to rise.
In this unregulated system, there were several efforts from various private organizations, including the American Medical Association (AMA) and the Committee on the Costs of Medical Care (CCMC), towards nationalizing health coverage to support individuals and families in covering medical expenses. It wasn’t until World War II, however, that a federal policy on health insurance took hold. In 1943, the War Labor Board ruled that employer contributions to health insurance and pensions did not count as wages. Since wage controls were introduced a year prior, employers used health insurance benefits as a way to compete in the labor market.
Another important policy that came a little over a decade later was when the Internal Revenue Code declared that health benefits were tax deductible as a business expense and therefore were excluded from employees’ taxable income.
With these two policies in place, employer-sponsored health benefits quickly became the norm. By 1958, approximately 75% of the 123 million Americans with private health insurance coverage received this coverage from their employer.
Consequences of an employer-based health insurance model
More Americans are covered by employer-sponsored health insurance than any other type of insurance. But it’s not without its flaws, especially for low-income individuals:
Disrupted coverage for the unemployed: A more obvious flaw in this system is that jobless individuals are excluded. While there are other ways to seek coverage depending on age (Medicare) and income (Medicaid or marketplace plans), relying on an employer-based benefits system can cause disruption in coverage in between jobs.
Lack of continuity in coverage: According to the Bureau of Labor Statistics, individuals hold ~12.7 jobs in their lifetime, each with its own unique health plan. This can mean different coverage and a new network of providers anytime someone gets a new job. This also means that health plans are incentivized to promote short-term health, but have little incentive to invest in longer-term preventive health interventions for which they will not reap the benefit.
Hinders job mobility: Having health benefits tied to employment can inhibit job mobility, some estimates say by at least 25%. Employees that are dissatisfied with their current roles or wish to seek new opportunities may be reluctant to leave a job that has health benefits, particularly if their partner does not receive health benefits from their employer.
Tax subsidies benefit higher income workers more: Perhaps the most significant consequence is the impact of tax subsidies on low-income workers. Workers with higher income benefit the most from tax subsidies because they are in a higher tax bracket.
A recent longitudinal study found that workers in the 95th percentile of income spent 3.9% of their compensation on healthcare premiums, compared to workers that earn in the 20th percentile of income, who spent 28.5% of their compensation on healthcare premiums.
This study also suggests that racial disparities in income inequality permeate employer-sponsored benefits. In 2019, as a percentage of total compensation, Black (19.2%), Hispanic (19.8%), and Asian (18.5%) workers contributed a higher proportion to healthcare coverage than White (13.8%) workers.
While not perfect in addressing the consequences of an employer-based health benefits system, the Affordable Care Act (ACA) was instrumental in re-shaping some of the employer-sponsored benefits we see today as well as increasing the number of people insured in the US by reforming the market for health insurance. One of these reforms included requiring companies that employ 50 or more employees to offer healthcare benefits. Since the ACA went into effect in January 2014, the rate of uninsured has dropped to ~10% or below.
Additionally, the ACA created the marketplace for health insurance, which extended coverage of essential health services to millions of Americans that were previously uninsured. States that opt out of offering marketplace plans are still required to offer plans on the federal exchange. Adults and families that do not receive coverage from their employer can ‘shop’ for coverage and choose the tier of plan that works best for them. Many states offer subsidies in the form of tax credits to help pay the premiums for these plans, depending on income status.
Despite progress, a gap that remains is health insurance for employees who work at companies with less than 50 people.
Healthcare access and affordability remains a challenge for small businesses
Approximately 57.1 million adults in the US work at a business with fewer than 50 employees, and less than a third offer health benefits. This means millions of adult workers in the US are left with no health coverage by their employer. In order to investigate this topic in more detail, we conducted numerous interviews with small business owners (of restaurants, bodegas, and more) to understand some of the challenges they face in offering health benefits to their employees.
A clear theme that came through was that they want to offer health benefits to their employees but can’t afford to do so. Many of these small business owners even deemed it a priority when opening their business. They see the benefits in offering health insurance – a healthier workforce, higher retention, and a stronger talent pool. However, the costs and administrative burden are enormous for small businesses that may be operating in a low margin industry.
Employees at small firms are not only getting less access to health coverage from their employer, but also getting less affordable, lower quality coverage.
Employees at small firms are not only getting less access to health coverage from their employer, but also getting less affordable, lower quality coverage. According to KFF’s 2023 Employee Health Benefits Annual Survey, covered employees at small businesses pay higher premiums and higher deductibles than employees at large firms:
Average premium for employees at small businesses is $8,722, which is 5% higher than the premiums at large firms.
Average deductible for employees at small businesses is $2,434, which is 65% higher than the deductibles at large firms.
Additionally, small business owners aren’t inherently incentivized to offer health insurance to their employees, as they would most likely have to reduce employee wages in order to offer health insurance coverage as part of the compensation package.
There are a number of options that exist today for small businesses to offer health coverage to their employees:
Group Health Plans: Small business owners can offer group plans to employees that most closely mirror what large employers offer their employees. Small business owners typically work with a broker or a PEO to select and administer these benefits to their employees. Additionally, small business owners have the opportunity to offer health coverage through the Small Business Health Options Program (SHOP), which acts as an exchange market for small businesses with less than 50 (in some states, 100) employees. This path is beneficial to small business owners as they may qualify for a tax credit through this program.
Individual Coverage Health Reimbursement Arrangement (ICHRA) / Qualified Small Employer Health Reimbursement Arrangement (QSEHRA): Both ICHRA and QSEHRA are a form of Health Reimbursement Arrangements (HRAs) that allow employers who do not offer health insurance to reimburse employees for their healthcare expenses, including insurance premiums employees pay. Any size employer can offer an ICHRA to employees, whereas QSEHRAs are limited to small businesses with fewer than 50 full-time employees.
Health Savings Account: Small business owners can pair high-deductible plans with a health savings account (HSA), where they can contribute pre-tax dollars for healthcare expenses, including insurance premiums.
Yet even with these options, less than a third of small businesses offer some form of health coverage. There's a clear need for creative new solutions that bridge the gap between traditional insurance models and the unique needs of small businesses, ensuring access to quality, affordable healthcare for both owners and their employees. It may look like more affordable health insurance, or something entirely new.
Opportunities for innovators
The traditional health insurance model in the US puts small businesses that employ fewer than 50 employees at a disadvantage. It is challenging to roll-out as a small business owner, the plans are too expensive, and the decision to offer coverage plays a significant role in employee compensation. At the same time, workers in the US that do not get health coverage from their employer are often left paying more to access healthcare.
Where there is a gap in the market lies an opportunity for innovation. Based on research and numerous interviews with small business owners and employees, there are some clear directives on where innovation would be best poised for adoption.
One such directive that became clear from conversations with small business owners was that many have a willingness to pay (on average, $100-$200 per employee per month) for a low-overhead health benefit that would serve as a perk to employees and meet their healthcare needs. The question then becomes – what healthcare benefit is most worthwhile for small business owners to spend their limited budget on?
Direct primary care (DPC)
Direct primary care is an increasingly popular care delivery model. DPC works on a direct pay model, typically a monthly subscription, and is not covered by insurance. In return, patients get access to primary care services, which can include clinic visits, telehealth visits, and more. DPC has been adopted by some large employers today – primarily as an employee benefit. This model could be applicable to small business owners, too. Digital health could support this model by forging opportunities between small businesses and DPC practices, managing payment and operations in the partnership, and encouraging employees to navigate and utilize DPC to reap maximum benefit from the offering.
Small business employee benefit
There are 100s of employee health benefit companies that primarily service large employers (think Maven, Spring Health, etc.). There is an opportunity to take this approach to small businesses, by developing a curated benefit that fits the needs of employees at small businesses. These needs vary depending on the small business and by the industry the business operates in, which serves as an opportunity for digital health companies to develop a unique small business employee benefit.
Take restaurants, for example, who employ ~16 people on average and have an ~80% annual attrition rate. Developing a health benefit perk that is catered to addressing this attrition challenge, which can be a costly one (studies estimate it can cost businesses about six to nine months of an individual’s salary to recruit and hire a replacement), could help restaurant owners deliver a health benefit that not only improves employee health and well-being, but also addresses their bottom line.
Shared savings pool for catastrophic coverage
A more simplistic model that can provide benefits to employees at small businesses is pooling savings towards urgent care or catastrophic events that may occur for individual employees. Employers can contribute what they are comfortable paying per employee towards the pool, as well as provide employees with the opportunity to contribute towards the shared savings should they wish to. While this model is not geared towards prevention or a holistic approach to care, it does provide some peace of mind for employees should any unforeseen circumstances or catastrophic health events occur. There are opportunities for digital health companies to manage the pooled savings from employers and employees, allocate funds effectively towards healthcare needs and demonstrate/ validate ROI of pooled funding.
ICHRA
As noted above, ICHRA is a more recent option that offers flexibility for employers in their healthcare benefits. ICHRA is particularly exciting for small business owners as it provides the opportunity for owners to set a fixed budget for employees so that the cost is predictable year over year, while also providing more traditional coverage that employees seek from their employer.
An opportunity for digital health companies with regard to ICHRA is managing the operations of the flow of dollars for an ICHRA account, supporting employees in selecting a marketplace plan based on their needs and tracking/ prompting the utilization of benefits to improve employee health and well-being.
The opportunities listed above are not necessarily mutually exclusive and could be developed in combination as a holistic health benefits package that small business owners would be excited to offer to their employees. A takeaway from several conversations with small business owners and employees in the space is that it is important to understand the individual needs of a small business, as they can vary depending on the industry, number of employees and goals of the owner. Solutions should fit these needs and solve for competing issues of affordability for the small business owner and tangible benefits to the business and its employees.
Closing thoughts
The traditional employer-sponsored model is clearly failing small businesses and their workers. The challenges highlighted in this research serve as an example of how securing basic, affordable health coverage is out of reach for an entire sector of the US economy – small businesses. There is a sizable opportunity for innovation that could increase healthcare coverage and affordability for millions of Americans, while improving outcomes and quality of life via offering healthcare benefits that service this population.
The key is understanding the unique needs of these businesses and their employees. Affordability isn't enough – the benefits need to demonstrate value to both the small business owner's bottom line and the wellbeing of their team. Companies that can crack this code won't just transform the healthcare space, they'll unlock a healthier, more productive workforce for a vital sector of the US economy.
Jill is continuing to explore this topic - if you’re a small business owner or working in healthcare and excited about serving small businesses - reach out to Jill here.