From the desks of Dan Mendelson and Stevie Baron:

Offering health benefits is an effective way a small business can recruit and retain talent, but health care costs are rising rapidly. Our research shows that employer health care premiums surged 33% for small businesses over a five-year period. The average deductible is also higher for small businesses versus their larger employers, meaning small businesses and their employees are paying more for health coverage.

As a result, too many small business leaders face tough trade-offs. From year to year, nearly one-third drop coverage while those who maintain coverage pass on costs to employees or customers or halt expansion or hiring. These trends are concerning, especially considering that 38 million people in the United States get health insurance through a small business employer.

Traditionally, small businesses have defaulted to purchasing small-group health coverage from a licensed insurance company – often because it’s what brokers bring to the table, but these products can be inflexible and expensive. Small-group insurers are projecting a 14% median premium increase for 2027. It’s clear that small businesses need more choices.

As the nation’s leading small business bank serving more than seven million small businesses nationwide, we see these challenges up close and are focused on helping small businesses navigate the health care system in the United States.

This is central to our American Dream Initiative, a multiyear effort aiming to expand opportunity for millions of Americans through targeted investments in local communities across the United States. The initiative also focuses on policy changes that help small businesses grow, hire and compete for talent – including opportunities to offer health benefits at a lower cost and with less complexity.

Policy changes can help address small business health care affordability

Given the highly regulated nature of the health care marketplace, policymakers have an important role to play when it comes to improving health care affordability for small businesses. It starts with stabilizing alternative health coverage options and strengthening small business buying power.

A new coverage approach through CHOICE

Custom Health Option and Individual Care Expense (CHOICE) arrangements, previously called Individual Coverage Health Reimbursement Arrangement (ICHRAs), are one strong potential alternative to small-group plans. These arrangements allow businesses to set a defined pre-tax contribution toward health benefits, and, in turn, employees can then use that contribution to help pay for coverage and select the health plan that best fits their needs.

However, these plans are not always well-understood by benefits decision-makers as an option for their employees. We partnered with the Employee Benefit Research Institute (EBRI) to survey 1,000 people who make benefits decisions to understand interest in CHOICE arrangements. Just under half of small businesses are aware of CHOICE arrangements today. But among those that don’t yet offer coverage, one in four say they would prefer a CHOICE arrangement over a traditional group plan. Small businesses also reported they are more likely to adopt a CHOICE arrangement if their broker recommends it.

These findings point to a clear takeaway: if we close the awareness gap and strengthen confidence in the market, more small businesses could use CHOICE arrangements. We see three policy changes that would support this shift:

1. Codify CHOICE in statute. CHOICE arrangements were created in 2020 by the first Trump administration through Federal regulations, but have not been formally codified into Federal statute. Congress could act, which would ensure the long-term availability of this coverage option.
2. Consider tax credits as a means to support adoption. Tax credits are a tool that some states, including Mississippi and Indiana, have used to incent small businesses to provide health coverage through CHOICE arrangements. In Indiana, CHOICE adoption grew 60% from 2025-2026 after tax credits were enacted.
3. Bolster state-based reinsurance programs. These programs can lower premiums by states absorbing a portion of insurers high-cost claims risk, helping to create more stable and affordable individual markets. This, in turn, can make CHOICE arrangements more appealing. The 17 states that use state-based reinsurance programs today reported premium savings from 3.75% to more than 41%.

Support access to other viable solutions

In markets where the individual market coverage options are expensive and/or lack adequate competition, CHOICE arrangements are not the right solution for every small business. Small businesses need more than one route to offer affordable coverage. We see three practical options that can also lower costs, simplify administration and provide better protection when health claims spike:

1. Self-funded Association Health Plans (AHPs) or Multiple Employer Welfare Arrangements (MEWAs) let small businesses band together to contribute to a single fund that pays health claims directly, instead of buying a traditional insurance policy. This gives small businesses access to a coverage model many larger employers deploy – without taking on the risk alone. Many states now require AHPs or MEWAs to maintain certain levels of financial reserves, while meeting routine reporting and audits to address any solvency concerns. Other states should follow so that small employers can access these self-funded models with regulatory protections in place.
2. Professional Employer Organizations (PEOs) support small businesses through a co-employment arrangement bundling human resources (HR) services, payroll and tax administration. This model allows all the employees of those small businesses partnering with a PEO to participate in one, single health plan, which can make it easier for businesses without dedicated HR staff to administer the plan and manage compliance. To promote transparency around pricing and value, policy changes can require clear standardized disclosures that separate the actual insurance premium from administrative costs and overhead. States could also clarify that a PEO health plan can be self-funded, provided the PEO satisfies financial reserve and solvency requirements.
3. Finally, stop-loss insurance can make self-funded and level-funded plans more feasible by protecting employers from unexpectedly large medical claims. This protection matters because high-cost, six-figure claims are becoming more common – which can be financially devastating for a small business. Policy changes on the state level can help reduce barriers that prevent smaller employers from accessing stop-loss coverage, such as exclusions based on employee count, while still maintaining safeguards that protect against high claims.

These are just a few examples of steps policymakers should take to address the structural challenges facing small businesses. Product innovation must also be a priority: today’s plan designs too often offer more of the same or only fix one part of the problem. If the market advances its use of technology and AI-powered tools, small businesses will be better positioned to offer coverage that is easier to administer and helps members find high-quality care earlier – reducing avoidable downstream costs like emergency room and urgent care use. Policymakers should support reforms that help small employers offer affordable coverage, as we seek to scale the next generation of better plan designs.

Related materials

• Small Business Health Care Hub: A resource for small businesses to evaluate their health coverage options.
• Morgan Health research: Small businesses are ready for better health insurance options and tools.