Compelling opportunity providing healthcare benefits to small businesses

With the small and medium-size business (SMB) market underserved by traditional healthcare solutions, the market’s health benefits landscape is primed for innovative solutions that balance cost, flexibility and administrative simplicity.

Absorbing the costs of health insurance and navigating regulatory complexities, compliance requirements, and confusing plan options are challenging for SMBs.

As a result, many small businesses either forgo providing health benefits or offer less-comprehensive plans, which can hinder their ability to attract and retain talent.

We review the state of healthcare benefits in the U.S. SMB market and trends driving demand for employee access to affordable benefits. We also discuss how technology can help companies adopt optimal, cost-effective solutions, and we profile several innovative SMB health benefits platforms.

The SMB market in the United States is a dynamic and vital component of the national economy, characterized by its diversity and significant economic contribution. In June, the U.S. Small Business Administration’s Office of Advocacy reported there were 36.2 million small businesses in the United States, which accounted for almost 46% of private sector employment. A substantial portion of these businesses have fewer than 10 employees, highlighting the prevalence of very small enterprises.

The economic impact of SMBs is substantial, with these businesses generating over $16.2 trillion in annual revenue according to a Pew Research Center analysis of 2021 Census Bureau data. Despite their critical role, SMBs often face unique challenges, particularly in areas such as access to capital, regulatory compliance, and healthcare benefits. Providing competitive health benefits is a notable pain point, especially for businesses with fewer than 50 employees, which often struggle with higher costs and limited options compared to larger firms. Additionally, employers with fewer than 50 employees are exempt from the employer mandate of the Affordable Care Act (ACA), so they are not required to provide health insurance to their workers.

Given these factors, the SMB segment is highly underserved. Nevertheless, many of these small employers would like to provide health benefits to their workers if they could do so affordably, as health benefits make them more competitive in attracting employees and promote employee satisfaction and retention. This represents a significant market opportunity for innovative solutions that offer cost-effective and comprehensive health benefits.

The SMB market can be divided into subcategories based on employee count:

Micro-enterprises: Micro-enterprises are typically defined as businesses with fewer than 10 employees. These businesses accounted for about 80% of all businesses with up to 499 employees, according to the Pew analysis of 2021 Census Bureau data. These businesses often operate with minimal staff and resources and include independent contractors, freelancers, sole proprietorships and small retail shops. Micro-enterprises face challenges, such as limited access to capital, difficulty scaling operations, and a lack of bargaining power when negotiating benefits. Health benefits for micro-enterprises are particularly challenging, as high premiums and administrative burdens can be prohibitive.

Small businesses: Small businesses with 10 to 49 employees were about 16% of all business with up to 499 employees, according to the Pew analysis. These small businesses often have more established infrastructures than micro-enterprises but still face significant challenges in providing competitive employee benefits. They struggle with high healthcare costs, limited economies of scale and navigating complex regulatory environments. While they may have more resources than micro-enterprises, they still require very cost-effective and efficient solutions to manage employee benefits.

Medium-size businesses: Medium-size businesses with 50 to 499 employees were less than 4% of all businesses with up to 499 employees, according to the Pew analysis. At this size, businesses often start to benefit from economies of scale and can invest more in human resources and administrative functions. These businesses are often more financially stable and can offer more comprehensive benefits packages compared to smaller companies. However, they still face significant challenges, particularly in competing effectively with larger firms to attract and retain talent. Medium-sized businesses are better positioned to consider self-funding health plans or hybrid models, although they must carefully manage the associated risks and administrative complexities.