How Much Does Health Insurance Cost an Employer? A Brief Pricing Guide

You already know the benefits of offering a group health plan, but if you’re here, you are understandably worried about health insurance costs. While health insurance is the most sought-after benefit among workers, it is also the most expensive. But do you know the factors driving up the costs? Here, we’ll explain them.

In this article, we’ll share what you can expect to pay for health insurance, the top contributors to employee health insurance costs, and potential ways to save. After reading this, you’ll understand what your health insurance cost for employees will likely be so you can decide if offering a group plan will fit your needs and budget.

Do employers have to pay employee health insurance costs?

To answer this question, it’s important to first understand that you may not have to pay any health insurance costs at all. That’s because not every company is required to offer health insurance. If you have less than 50 full-time equivalent employees, you don’t need to offer it – but you may want to voluntarily. If you have 50 or more employees, however, you’ll either need to provide health insurance or pay an Affordable Care Act (ACA) tax penalty. In addition, there may be other situations that require you to offer health insurance like a union agreement.

For the purposes of this article, let’s assume that you have decided to offer health insurance to your employees. In that case, in the majority of states, carriers will require you to cover 50% of the premium cost for employees. This requirement, however, only applies to premiums for the employee, not their covered dependents. For other tiers of coverage, such as employee and spouse, employee and children, or family, the insurers want employers to pay 33%.

Many employers even choose to contribute more than this amount. One reason for this, especially in companies with lower-wage workers, is that large employers covered by the ACA must offer affordable coverage or be penalized. For 2023, the affordability threshold is 9.12% of an employee’s household income.

How much does health insurance cost per employee? 

Health insurance costs vary widely but the average annual premiums for employer-sponsored coverage in 2022 were $7,911 for single coverage and $22,463 for family coverage. When you take into account the average contributions by workers, which were $1,327 for single coverage and $6,106 for family, that brings the average employer health insurance cost to $6,584 and $16,357 respectively. 

The actual amount you’ll pay is based on a number of different factors, which we’ll cover next. 

What factors impact health insurance?

While the costs we just described are averages, there are many factors that go into calculating your company’s actual premium costs. The 9 biggest components of your premium are:

• Age: The average age of your group is probably the most significant factor impacting your premiums. Generally speaking, the base rate is based on a 21-year-old, with rates going higher for those who are older. However, these increased rates can’t exceed a 3:1 ratio. That means the rate for a 64-year-old can’t be more than three times that of a 21-year-old.
  
• State Mandates: Insurance in some states costs more because of state laws that require employer-sponsored insurance to include certain coverage. For example, many states mandate fertility and reproductive health benefits.
• Group Size: The total number of people in your group – which includes covered family members – can impact your business’ health insurance cost. For example, the larger your group, the lower your rate will likely be because your health risk is distributed among more people, which can offset the costs of those with a disproportionately higher number of claims.
• Healthcare Inflation Factor: This component of your premium is based on the cost of healthcare services used by all members. The number of total claims and how costly they are will determine adjustments to your premium each year, meaning, medical issues that lead to frequent or costly visits may drive it up. 
• Location: In some places, the cost of obtaining healthcare – meaning, the cost of a physician visit or procedure – is simply more expensive so premiums will be higher.
• Insurer’s Administrative Costs: Each year, your premium may be modified based on what it costs the insurance carrier to administer coverage under the plan, operate the company, and set aside reserves.
• Changes in the Law: Sometimes, federal or state law will dictate changes in coverage or rating rules that will affect your premiums.
• Industry: Your insurance carrier may assign a different risk based on the type of work your employees perform. For example, office workers face lower risks than those who work in a factory so a company with a lot of office workers will cost less than a company with a lot of factory workers.
• Plan Design: The type of insurance coverage you decide to offer can impact your costs. For example, richer coverage with lower out-of-pocket costs will be pricier. Managed care options are typically the cheapest. 

How can I lower my employer health insurance cost?

If you’re like most employers, rising employee health insurance costs are a big concern. You may be wondering if there’s anything you can do to help control your expenses. Fortunately, there are some strategies that can lead to lower costs:

• Encourage those 65 and older to enroll in Medicare. By having qualified workers secure Medicare coverage, it will lower the average age of your group. 
• Increase deductibles. Shifting more costs to employees by raising deductibles can lower the employer portion of health insurance by increasing employee health insurance costs. 
• Choose managed care. Premiums for Health Maintenance Organizations (HMOs) usually cost less than for a PPO.
• Limit coverage to employees. While coverage for children up to age 26 is required, spousal coverage is not. Some companies are cutting premium costs by no longer covering employees’ spouses or imposing a surcharge for spouses who could obtain coverage through their own employer.
• Offer wellness programs. Healthy workers have fewer claims so promote workplace exercise and other opportunities like gym discounts. Encourage wellness participation with rebates for proactive health initiatives.
• Ask your broker to negotiate. For large groups, insurance rates are negotiable so make your broker work for you by advocating for a better rate. This is especially true if you haven’t negotiated in the past and have been with the same provider for a while.  
• Consider alternative plan designs. Think about options like a high-deductible plan coupled with an HSA, HRA, or limited network plan to save money. You can even customize your plan to bring rates down such as raising co-payments for costly services like emergency room visits.
• Provide upgrade options. You may want to offer a base health insurance plan and then give workers the option to buy-up to a richer plan at their own expense.
• Self-insure. Depending on the health of your group, meaning, if you have below normal claims activity, you may look to self-insuring. With this option, your rates are underwritten based on the health of your employees rather than other factors that weigh in with traditional health plan options.

By combining some of these strategies, you could see a double-digit reduction in your premium costs.

Boost Your Benefits By Selecting The Right Health Insurance Coverage

Now that you understand the different factors that affect employer-sponsored health insurance cost, you’ll want to start by doing your research to find coverage that best fits your company’s needs. For example, a higher deductible plan may be best if you have young employees while a PPO would be good for employees with college students who are out of state.

With multiple carriers and product options, you may want to work with a broker to build an affordable program that provides the right coverage for you and your employees. If you decide to go this route, learn more about what you should consider when choosing a health insurance broker.

Editor's Note: This blog was originally published in November of 2020 and was updated in July of 2023 for accuracy and comprehensiveness.