Offering competitive health benefits is still one of the biggest challenges facing small businesses. According to the 2025 Employer Health Benefits Survey from KFF, 59% of small firms offer health benefits to some workers, compared to 97% of firms with 200 or more employees.
When a small business isn’t able to contribute to health coverage, it doesn’t just hurt the employees—it also causes long-term damage to the business itself. Small businesses often can’t match the salaries offered by larger firms and, without a strong benefits package, they have a hard time competing for talent. Productivity also suffers when employees struggle to access medical care for themselves and their families.
For most small businesses, affordability is the main barrier to benefits. Group health insurance is expensive, and costs have been rising for more than two decades. Research by Take Command shows the average annual premium for companies with fewer than 50 employees rose from $2,827 in 2000 to $7,974 in 2023—a cumulative increase of 182%.
With renewal rates set to climb even higher now, many small businesses will remain locked out of benefits or be forced to abandon health insurance. Employers are bracing for the biggest increase since 2010, with the health benefits cost per employee expected to rise 6.5% in 2026.
But small businesses don’t have to choose between costly group insurance and canceling their health benefits strategy. With a health reimbursement arrangement (HRA), small business owners can contribute to employee coverage on a budget they control.
Why health insurance is getting harder for small businesses
The rising cost of healthcare is changing the economics of employee health insurance for everyone involved. Increased healthcare expenses mean insurance companies have to pay out more for claims. To cover the extra expense and stay profitable, insurers are charging their customers higher premiums. While even large firms will struggle to absorb this year’s increase, small businesses have the least room to maneuver. Several political and economic factors are contributing to the current rising cost of healthcare in the U.S.
Inflation disrupts small business cash flows: as supplies and raw materials get more expensive, price-sensitive consumers cut back on spending. Business owners also see inflation reflected in their group health plan premiums. The prices of many drugs and medical services have risen over the last 12 months, and insurers are passing on those costs to their customers. High labor costs, driven by industry-wide shortages, are having a similar effect. Hospitals negotiate higher rates with insurance companies to offset additional labor costs, and insurers respond by raising premiums.
The expiration of enhanced premium tax credits will also have a major impact on U.S. healthcare. Millions of Americans could become uninsured if enhanced tax credits are not extended after 2025, and they’ll be unable to pay for emergency treatment as a result. Hospitals offset the cost of uncompensated care by raising rates for insurance companies, which inevitably increases their prices.
Market instability is an extra challenge for small businesses. As enrollment in small-group plans decreases and the risk pool shrinks, insurers have to spread the expected claims across fewer premiums, driving up the price per policy. Some insurers are leaving the small-group market altogether or reducing the number of plans they offer in order to focus on more lucrative markets. Small business owners have fewer group plans to choose from, and that means higher premiums.
How small businesses can benefit from an HRA
Many small businesses find themselves in an impossible position: unable to absorb premium hikes but reluctant to pass costs onto employees. Instead of abandoning employer-sponsored insurance, small business owners should consider an HRA.
HRAs allow small business owners to lock in their benefits spend even as healthcare costs continue to rise. Employers set a fixed allowance that employees use to choose and purchase health insurance on the individual market. Instead of insurance companies controlling renewal rates, business owners decide whether to increase the reimbursement limits each year. This budget stability allows small business owners to continue offering quality benefits and protect employee morale year after year.
While participation requirements are commonly a barrier for small businesses to provide benefits, HRAs don’t impose minimum participation. That means even the smallest businesses can provide affordable coverage to their employees.
Companies with fewer than 50 full-time employees can offer benefits with the qualified small employer HRA (QSEHRA). Affordable and scalable, QSEHRA allows small businesses to improve hiring and retention without risking financial stability. HRAs are also easy to manage, even for businesses without a dedicated HR team. Employees are in control of their own healthcare decisions and manage claims directly with carriers.
Small businesses shouldn’t give up on offering health benefits, but they do need to react to rising costs. By switching to an HRA, small business owners can make this their last painful renewal and finally gain control of their healthcare spend. Small businesses that are new to benefits can also find exactly what they need in a flexible, scalable HRA.
Jake Hooper is the CEO and co-founder of Take Command. He knows that rising health insurance costs mean many small businesses will either remain locked out of benefits or be forced to abandon health insurance.
Photo courtesy: Andrej Lišakov for Unsplash+
