Rising healthcare costs are testing small businesses

America’s small businesses are the backbone of our economy. They create two-thirds of new jobs, power innovation, and anchor communities across the country. But that backbone is under real strain. Rising healthcare costs dominate the headlines, but what’s missing from the conversation is how deeply they impact the small businesses that keep our economy running.

At Gusto, we see this strain firsthand. Our latest Small Business Jobs Report showed hiring slowed in November as owners continue to navigate higher costs and uncertainty. Rising healthcare premiums aren’t the only challenge, but they’re making it that much harder to grow and hire with confidence.

Since 2022, small business health insurance costs have climbed 23% since 2022—far faster than inflation or wage growth. For the smallest employers, those with just two to five employees, the increase is even steeper: up 18%, reaching nearly $8,500 per worker. Looking ahead to 2026, premiums are projected to rise another 9.5%, the sharpest jump in 15 years.

Those numbers have real consequences. They show up in delayed hires, scaled-back hours, or founders skipping their own coverage to keep their team insured.

SMALL BUSINESSES ARE HOLDING THE LINE

Despite the pressure, small businesses are doing everything they can to support their people. More than one in five small employers still offer health insurance. This is a clear reflection of how much they value their teams.

That investment pays off. Gusto’s data shows that employees with health coverage are 25% less likely to quit in their first year, and businesses that offer it are 13% more likely to report no difficulty hiring. Healthcare isn’t just a benefit—it’s a competitive advantage and retention tool for these small businesses.

That said, it’s also becoming unsustainable. Every year, more small business owners are forced into impossible choices. They can keep offering coverage and absorb higher costs, drop it and risk losing the people who make their business work, or pass more of the expense on to employees, who may already be feeling stretched.

A HIDDEN HEADWIND FOR ENTREPRENEURS

Entrepreneurship in America is thriving. More people are starting businesses now than at any point in recent history. But rising healthcare costs are creating a new kind of barrier: They make it harder to start, grow, or hire.

For many would-be founders, leaving a traditional job means losing access to affordable coverage. That doesn’t always stop them, but it adds risk and limits what they can do once they start. Some stay solo longer than they want to. Others delay hiring. Some take on extra work to cover premiums.

In other words, healthcare isn’t necessarily halting entrepreneurship, but it’s most certainly holding it back. It’s keeping too many small business owners from growing to their full potential.

HOW SMALL BUSINESSES ARE ADAPTING

The good news is that small business owners are incredibly resourceful. They’re rethinking what benefits look like and finding creative ways to offer support.

Many are experimenting with level-funded plans, high-deductible options paired with Health Savings Accounts (HSAs), and Health Reimbursement Arrangements that let employees choose coverage that fits their needs. Others are expanding voluntary benefits like dental, vision, or mental health programs that provide real value without breaking the bank.

At Gusto, we help small employers find the right mix—because the best benefits strategy isn’t one-size-fits-all. Flexibility and innovation are key.

THE SOLUTION: FLEXIBILITY, POLICY, AND INNOVATION

Small businesses can’t solve this challenge on their own. The U.S. healthcare system was built around large employers, not the millions of small business owners and self-employed workers who drive today’s economy. It’s time to modernize that system so healthcare is portable, affordable, and built to support entrepreneurship.

Congress already has practical solutions within reach. Lawmakers can codify and strengthen Individual Coverage Health Reimbursement Arrangements, which give employers flexibility to help workers buy their own coverage. A temporary tax credit for small businesses offering these plans for the first time would make coverage more affordable and expand access quickly. Congress can also expand HSA eligibility to include Affordable Care Act Bronze and catastrophic plans, giving small employers and their teams the same tax advantages that large companies enjoy.

If we want small businesses to keep creating jobs, serving their communities, and fueling our economy, we need to make healthcare affordable for the people behind them.

Tomer London is cofounder and chief product officer of Gusto.

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