Small-Group Health Insurance May Be Reaching a Breaking Point

The traditional fully insured small-group health insurance market has been steadily losing enrollment. Small-group enrollment has declined from roughly 17 million people in 2013 to approximately 10 million in 2024—a drop of around 41%.

That matters because insurance ultimately depends on the quality and size of the risk pool.

As healthier small employers discover alternatives to traditional fully insured coverage, many are leaving. Some are moving to **level-funded health plans**. Others are moving toward **self-funded health plans**, particularly as they grow. Some employers are exploring **ICHRA strategies**, moving employees into the individual insurance market. And some small businesses are simply deciding that traditional employer-sponsored health insurance has become too expensive to continue offering.

That creates a potentially dangerous cycle.

If healthier groups leave the fully insured small-group market, the remaining population becomes more expensive on average. Carriers then need higher premiums to support that risk. Higher premiums make alternatives more attractive to the healthier groups that remain. More of those groups leave, and the cycle repeats.

This isn't theoretical. Insurers themselves are pointing to deteriorating risk pools and declining enrollment as contributing factors in their 2027 filings.

At some point, we have to ask whether we are looking at another difficult renewal year—or the beginning of a structural change in the small-group health insurance market.

None of this means the increases are simply the result of employers leaving the market.

Healthcare itself continues to get more expensive.

Insurers filing for 2027 are citing higher hospital costs, physician expenses, prescription drug spending, specialty medications and increased healthcare utilization. The median assumption for underlying medical cost growth in the filings analyzed by KFF is approximately **10.8%**.

That should concern employers regardless of how their health plan is funded.

Moving from fully insured to level funded doesn't magically make hospital prices lower. Self-funding doesn't make GLP-1s, specialty medications or cancer treatments cheaper. ICHRA doesn't eliminate healthcare inflation.

What alternative funding does change is **how employers experience, finance and potentially manage those costs**.

And that distinction is becoming increasingly important.

One of the biggest developments in employee benefits over the past several years has been the expansion of level-funded health plans into smaller employer groups.

Level funding gives employers some of the characteristics of self-funding while maintaining a predictable monthly payment structure. The employer typically pays a level monthly amount covering expected claims, administrative expenses and stop-loss insurance. Depending on the arrangement, favorable claims experience may produce some form of surplus or refund.

More importantly, level-funded underwriting can often recognize the actual health characteristics of a group in ways that ACA small-group adjusted community rating does not.

That creates an obvious incentive.

A relatively healthy 30-, 40- or 75-employee company may look at its fully insured renewal and then receive a significantly more attractive level-funded proposal.

What do we expect that employer to do?

Many are leaving.

The problem for the traditional market is that the groups most likely to qualify for attractive level-funded pricing are frequently the very groups the fully insured risk pool would prefer to keep.

This is one reason I believe the growth of level funding deserves considerably more attention when discussing the future of small-group health insurance.

The **Individual Coverage Health Reimbursement Arrangement, or ICHRA**, gives employers another option that didn't meaningfully exist a decade ago.

Instead of purchasing a traditional group health plan, an employer can establish a defined contribution and allow eligible employees to purchase individual health insurance.

ICHRA isn't appropriate for every employer. Individual market pricing, network availability, employee demographics, geographic distribution and subsidy interactions all matter.

But the strategic significance of ICHRA is enormous.

As traditional small-group premiums continue climbing, I expect more employers and advisors to at least run the numbers.

This is where I think the benefits industry needs to change.

A small employer receiving a 14%, 18% or 25% increase shouldn't simply be shown three deductible options and asked which one hurts the least.

That isn't strategy.

Every meaningful renewal should increasingly involve a broader evaluation of the employer's options.

Can the group qualify for level funding?

Does self-funding make sense?

Could an ICHRA work for this workforce?

Would changing employer contribution strategy improve affordability?

Are there association, captive or alternative risk arrangements worth considering?

Could pharmacy, navigation, virtual care or other cost-management strategies materially affect the economics?

Employers should not have to wait until their health plan becomes financially unsustainable before having these conversations.

The other problem with double-digit increases is compounding.

A business paying $500,000 annually for health insurance doesn't just have a $70,000 problem when premiums increase 14%.

If that trend continues, the numbers get ugly quickly.

Repeated 14% increases would push $500,000 of annual healthcare spending to roughly $741,000 after three years.

That is nearly a quarter-million dollars of additional annual expense.

For a small or midsize company, that money matters.

It could represent additional employees. New equipment. Wage increases. Capital investment. Expansion. Profitability.

Healthcare isn't just an HR expense anymore.

It is a P&L issue.

I don't believe traditional small-group insurance is going to disappear.

For many employers, fully insured coverage will continue to be the right solution. It provides predictability, simplicity and risk transfer that many small organizations value.

But I do believe its role is changing.

The market is increasingly separating between employers willing to accept traditional community-rated insurance and employers willing to take a more active role in how healthcare is financed and purchased.

The 2027 rate filings may accelerate that separation.

If premiums continue increasing while healthier employers continue migrating toward alternative funding arrangements, the traditional small-group market could face increasing pressure on its remaining risk pool.

That is the part of this story employers, advisors, carriers and policymakers should be watching.

Sometimes the answer will still be fully insured.

Sometimes it will be level funded.

Sometimes it may be self-funded.

Sometimes ICHRA may make more sense.

But automatically renewing the same structure because that is what the company has always done is becoming increasingly difficult to defend.

A median requested **14% small-group premium increase for 2027** should get employers' attention.

The declining enrollment behind those increases should get even more.

Because if healthier employers continue finding ways out of the traditional small-group market, we may eventually reach a point where the question isn't whether small-group insurance is getting too expensive.

The question will be whether the traditional small-group model, in its current form, can remain sustainable at all.

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