Small businesses across the United States are bracing for significant increases in health insurance premiums in 2027, with a recent analysis by the Kaiser Family Foundation (KFF) revealing that insurers are proposing median rate hikes of 14%. This comes as employer-based insurance, the bedrock of healthcare coverage for approximately 165 million working-age Americans, continues to face escalating costs, making it increasingly challenging for businesses, particularly smaller ones, to provide benefits. The KFF’s comprehensive review of preliminary rate filings across all 50 states and Washington, D.C., for nearly 300 insurers in the small group market—which caters to employers with fewer than 50 employees—underscores a growing crisis driven by rising medical expenses, the impact of high-cost prescription drugs like GLP-1s, and even the unintended consequences of consumer protection legislation like the No Surprises Act.
The KFF Analysis: A Troubling Outlook for 2027
The Kaiser Family Foundation, a non-profit organization dedicated to providing information on health issues, conducted an extensive analysis of preliminary rate filings for the upcoming 2027 plan year. Their findings indicate that most insurers are seeking premium increases ranging from 10% to 20%, with some even aiming higher. The median proposed increase of 14% for 2027 is a notable escalation compared to the 11% average increase insurers requested for 2026, signaling an accelerating trend of healthcare cost inflation. This surge in proposed rates is particularly alarming for small employers, who already grapple with greater difficulty in funding employee benefits compared to their larger counterparts. For context, in the previous year, only 51% of firms employing fewer than 25 workers offered health insurance, starkly contrasting with the 97% of companies with at least 200 employees that provided coverage. Should premiums continue their upward trajectory into double-digit figures, the proportion of small companies able to offer health benefits is projected to decline further, exacerbating challenges for both employers and employees.
Underlying Drivers of Premium Hikes: A Multifaceted Challenge
Insurers, in their communications with regulators, consistently point to a confluence of factors necessitating these substantial premium adjustments. The primary justification revolves around the escalating "underlying medical costs." Covering essential services such as hospitalizations, outpatient procedures, and the ever-expanding array of prescription drugs is becoming demonstrably more expensive. Simultaneously, insurers report an uptick in healthcare utilization by their members, meaning individuals are not only incurring higher costs per service but also accessing more services overall.
Blue Cross and Blue Shield of Massachusetts articulated this challenge clearly in its rate request, stating, "Costs for medical care and medications for our members have escalated rapidly and spending is now growing at the fastest rate in more than a decade. The surge in spending is putting a heavy burden on our employer customers and members who are struggling to keep up with rising costs." This sentiment is echoed across the industry, highlighting a systemic issue where healthcare spending is outpacing general inflation and straining company budgets.
The GLP-1 Factor: A Game Changer in Pharmaceutical Costs
A significant and frequently cited contributor to the rising costs, according to insurer filings, is the emergence and widespread adoption of GLP-1 (glucagon-like peptide-1) receptor agonists. These drugs, initially developed and traditionally used for managing Type 2 diabetes, have gained considerable traction and demand for their efficacy in weight loss. Beyond diabetes and obesity, ongoing research suggests their potential benefits for other conditions, further broadening their therapeutic applications and market reach.
The exorbitant price tags associated with GLP-1 medications are posing a substantial challenge to health plans. While some insurers have responded by discontinuing coverage for anti-obesity medications specifically to mitigate these costs, the KFF analysis indicates that overall spending on GLP-1s continues to rise. This is largely because a growing number of diabetes patients are being prescribed these drugs, even if their use for weight loss is restricted. The increasing prevalence of chronic conditions like diabetes and obesity, coupled with the high cost and increasing utilization of highly effective but expensive new drugs, creates a powerful upward pressure on pharmaceutical spending, which ultimately translates into higher premiums. The long-term implications of GLP-1s on healthcare budgets are still unfolding, but their immediate impact is undeniably a key factor in the current premium landscape.
The No Surprises Act: Unintended Consequences for Premiums
Adding another layer of complexity to the premium surge is the unexpected impact of the No Surprises Act (NSA). Enacted in 2020, this landmark consumer protection legislation was designed to shield patients from exorbitant surprise medical bills resulting from out-of-network services, particularly in emergency situations or when patients unknowingly receive care from out-of-network providers at in-network facilities. The law established a federal independent dispute resolution (IDR) process for insurers and providers to resolve billing disputes for such services.
However, the KFF analysis revealed that at least two small group insurers in New York specifically cited the NSA as a factor contributing to their proposed rate increases. Oxford Health Insurance of New York and UnitedHealthcare Insurance Company of New York, both subsidiaries of the insurance behemoth UnitedHealthcare, indicated that they added 0.8% to their rates for the upcoming year due to the NSA. Research suggests that providers are prevailing in a majority of these billing disputes through the IDR process, often winning payouts significantly above typical in-network rates. This effectively drives up the costs that insurers must bear, which they, in turn, are beginning to pass along to employers and members through higher premiums.
The impact of the NSA on insurer costs gained broader attention when UnitedHealthcare reported unexpectedly high spending in its commercial business last month, a performance that disappointed investors. Company executives explicitly attributed a portion of this increased spending to the NSA, highlighting how a well-intentioned consumer protection law can have unforeseen financial ramifications for the healthcare system, ultimately influencing premium structures. This scenario underscores the intricate web of regulations and market dynamics that shape healthcare costs in the U.S.
The Exodus from Fully-Insured Small Group Market and the Rise of Alternatives
The relentless rise in premiums is not merely a financial burden; it is actively reshaping the small group insurance market. The KFF analysis indicates that higher premiums are compelling more businesses to explore cheaper alternatives outside the traditional fully-insured small group market. This trend is leading to a significant exodus, which, paradoxically, further exacerbates costs for those employers who remain in the fully-insured pool.
Data illustrates this shift vividly: the number of people covered in the fully-insured small group market has declined dramatically, from 17 million in 2013 to just 10 million in 2024. Yet, crucially, the overall rate of health coverage among small business employees has remained relatively stable. This suggests that rather than dropping coverage entirely, many employers are migrating to different models, primarily self-funded or level-funded products.
Understanding Alternative Coverage Models: Self-Funded and Level-Funded Plans
Self-funded plans involve the employer directly paying for employees’ healthcare claims out of their own funds, rather than paying fixed premiums to an insurance company. While often coupled with administrative services from an insurer, the employer bears the direct financial risk for claims. This model has traditionally been more common among larger companies due to the financial risk involved.
Level-funded plans represent a hybrid approach, gaining increasing popularity among small businesses. In this model, employers pay a fixed, consistent amount each month for health coverage, similar to a premium. However, unlike fully-insured plans, a significant portion of this payment goes into an account to cover actual medical claims. If the actual medical spending of their employees turns out to be lower than anticipated, the employer can receive a rebate or refund of the surplus funds. Conversely, if claims exceed expectations, the employer is protected by a stop-loss insurance component, which kicks in after a certain threshold.
Level-funded arrangements are often touted as a less expensive option, particularly for small businesses with a relatively healthy employee population, as they can potentially save money if their claims are low and benefit from the fixed monthly cost predictability. However, these plans come with significant caveats. A critical distinction is that level-funded arrangements are generally not subject to all the benefit requirements and consumer protections of the Affordable Care Act (ACA), which fully-insured plans must adhere to. This regulatory difference allows insurers offering level-funded plans to engage in practices that are prohibited in the fully-insured market. For instance, insurers can "eyeball a population" – effectively assessing the health risk of a small business’s employee base – and adjust premiums or even decline to cover a group based on pre-existing medical conditions and other health factors.
The Erosion of the Risk Pool and Future Implications
The KFF researchers issued a stark warning regarding the implications of this shift: "Continued growth in the popularity of alternative coverage options for small businesses, like level-funded plans, has the potential to further erode the fully-insured small group risk pool and could contribute to future premium increases for small businesses, particularly those with sicker employees who may not qualify for or are priced out of a level-funded arrangement."
This phenomenon, known as "adverse selection" or "risk pool erosion," occurs when healthier, lower-cost individuals and groups leave the traditional insurance market for cheaper alternatives. What remains in the fully-insured pool is a disproportionately sicker, higher-cost population. With fewer healthy individuals to balance out the claims of the sick, the average cost per person in the fully-insured market rises, necessitating even higher premiums for those who remain. This creates a vicious cycle where rising costs drive out more healthy groups, further concentrating risk and driving up prices for the remaining participants, including small businesses with employees who have complex or chronic health conditions and cannot access or afford level-funded options.
Broader Context: Parallels with ACA Marketplaces and Economic Impact
The challenges facing the small group market are not entirely isolated. The KFF noted that the 14% median increase proposed for small businesses is strikingly similar to the rate hikes that insurers in the Affordable Care Act marketplaces are proposing for next year. While both segments grapple with rising medical spending, exchange insurers face an additional layer of risk pool turmoil due to the impending expiration of more generous federal subsidies. These enhanced subsidies, which made ACA plans significantly more affordable for millions, are set to lapse, potentially leading to a decrease in enrollment and a less stable risk pool for marketplace plans. The parallel rate increases underscore a systemic issue of healthcare cost inflation affecting various segments of the U.S. insurance market.
The broader economic implications of these rising healthcare costs are substantial. For small businesses, increased premiums translate directly into higher operating expenses, potentially forcing difficult decisions regarding employee compensation, hiring, or even business expansion. This burden can stifle economic growth, reduce competitiveness, and ultimately impact employees through higher out-of-pocket costs, stagnant wages, or a lack of access to comprehensive health benefits. For employees, the rising cost of employer-sponsored coverage often means higher deductibles, co-pays, and overall greater financial responsibility for their healthcare, regardless of their employer’s efforts.
As stakeholders – including employers, insurers, policymakers, and consumers – grapple with these escalating costs, the demand for innovative solutions and sustainable policies becomes increasingly urgent. The KFF’s latest analysis serves as a critical warning, highlighting the precarious position of small businesses and the broader employer-sponsored health insurance system in the face of relentless healthcare inflation and evolving market dynamics. The path forward will likely require a multi-pronged approach, addressing everything from pharmaceutical pricing and provider reimbursement models to regulatory frameworks and the very structure of health insurance offerings.
