Why Your Small Business Might Be Over-Insuring—and What You Can Do About It

The Healthcare Crisis in Massachusetts

Small businesses in Massachusetts are grappling with a healthcare system in turmoil. Layoffs, carrier losses, soaring drug costs, and limited access to care are creating a perfect storm of challenges. For many, the burden of high health insurance costs is compounded by community rating—a system that often leads to over-insuring. This means businesses, especially those with healthy employees, are paying premiums that don’t reflect their actual risk, effectively subsidizing higher-cost groups.

The good news? There are alternative solutions, like level funding, that can help you regain control over your healthcare expenses and potentially save thousands of dollars annually. In this post, we’ll break down why community rating might be costing your business more than necessary, explore alternatives that could work better for you, and explain why now—amid Massachusetts’ healthcare mess—is the time to consider a change.

Understanding Community Rating and Its Impact

Community rating is a widely used method for setting health insurance premiums. Under this system, premiums are calculated based on the average healthcare costs of a large group, such as an entire state or community, rather than the specific risk profile of your business or employees. While this approach aims to ensure broad access to insurance, it can disadvantage small businesses with healthier workforces.

Here’s how it affects you:

• Over-insuring healthy employees: If your workforce is younger or healthier than the community average, you’re likely paying more than your actual healthcare usage justifies.
• No reward for low risk: Community rating doesn’t adjust premiums based on your business’s claims experience, so you don’t benefit financially from keeping your employees healthy.

For instance, a small business with 15 fit employees might pay the same premium as another with frequent medical claims, simply because they’re pooled together under community rating. This lack of customization can inflate your costs unnecessarily.

Alternatives to Traditional Insurance: Level Funding and Beyond

Fortunately, you don’t have to stick with a one-size-fits-all insurance model. Alternatives like level funding offer a smarter way to manage healthcare costs, especially for businesses with healthy populations and good claims histories.

What Is Level Funding?

Level funding is a hybrid approach that blends the predictability of traditional insurance with the cost-saving potential of self-insurance. Here’s how it works:

• You pay a fixed monthly amount that covers administrative fees, stop-loss insurance, and an estimate of expected claims.
• If your actual claims are lower than projected, surplus may be used to offset future premium increases.
• If claims exceed expectations, stop-loss insurance caps your liability, protecting your business from financial risk.

This model is ideal for small businesses with healthy employees, as it rewards low claims with tangible savings.

Other Options to Consider

• Health Savings Accounts (HSAs): Pairing HSAs with high-deductible plans can lower premiums while giving employees tax-advantaged funds for medical expenses.
• Joining Associations or Larger Groups: By pooling with other businesses, you can negotiate better rates and access more tailored coverage options.

These alternatives provide flexibility, cost control, and the chance to align your insurance costs with your actual needs—unlike the blanket approach of community rating.

The Potential Savings: What the Numbers Say

How much could your business save by switching to a solution like level funding? While exact figures depend on your employee population and claims history, the potential is significant—especially for small businesses with healthy workforces.

Industry estimates suggest:

• Small businesses with favorable claims experience can reduce healthcare costs by 15-25% through level funding or other self-insured models.
• In some cases, savings can reach 30%, according to reports from businesses that have made the switch.

For example, a business with 25 employees spending $250,000 annually on traditional insurance might save $37,500 to $62,500 per year with level funding, assuming lower-than-average claims. These savings can bolster your budget, enhance employee benefits, or fund other growth initiatives.

Why Now Is the Time to Consider Alternatives

Massachusetts’ healthcare landscape is a wake-up call for small businesses. Consider the current realities:

• Skyrocketing Costs: High drug prices and rising premiums are squeezing budgets.
• Carrier Instability: Losses and layoffs among insurers signal market volatility.
• Access Issues: Limited provider availability means employees may struggle to get timely care.

In this environment, over-insuring through community rating is a luxury few can afford. Alternatives like level funding offer a lifeline, allowing you to:

• Lower costs without sacrificing coverage quality.
• Adapt to your business’s unique needs.
• Stay competitive in a tough market.

So, ask yourself:

• Is your business over-insuring? Are you paying for risks you don’t have?
• Why stick with community rating? Could an alternative save you money?
• What’s stopping you from exploring options? With Massachusetts healthcare in disarray, can you afford to wait?

Take Charge of Your Healthcare Costs

Small businesses don’t have to be victims of rising healthcare costs or inflexible insurance systems. By moving away from community rating and embracing alternatives like level funding, you can stop over-insuring and start saving. In a state like Massachusetts—where layoffs, carrier losses, high drug costs, and access challenges are the norm—taking control of your healthcare strategy is more critical than ever.

At NARFA, we’re here to guide you through these options and find the solution that fits your business best. Ready to cut costs and optimize your coverage? Contact us today to learn how level funding and other alternatives can work for you.