For small and midsize businesses, offering competitive benefits has never been more important or more challenging.
Healthcare costs continue to climb, putting pressure on employers that want to provide quality coverage without putting an unsustainable strain on the bottom line. According to a recent survey conducted by Mercer, health benefit costs are expected to rise an average of 8.2% in 2027 – the biggest increase employers have seen since 2003. The news is even harsher for small businesses. According to KFF, “nearly 300 insurers offering small group coverage reported a median proposed premium increase of 14% for next year.”
And the pressure may not be easing anytime soon. Mercer noted that health benefit costs are expected to keep rising in 2027, marking the fifth straight year of elevated increases, and the largest increase of that five-year stretch. For context, costs were projected to rise 6.7% in 2026.
For SMBs, absorbing those increases year after year isn’t always realistic. But simply shifting more costs to employees isn’t necessarily the answer, either. Higher deductibles, premiums, and out-of-pocket expenses can make benefits less valuable to employees, and potentially less effective as a recruiting and retention tool.
What Can SMBs Do to Reduce the Cost of Employee Benefits?
We asked our own in-house expert, Alexandra Larraga, Senior Benefits Manager at Flex HR, for her take on cost-saving with benefits and she shared three strategies she encourages our clients to consider.
Explore an ICHRA
One of the biggest opportunities for some employers is rethinking the traditional group health insurance model altogether.
An Individual Coverage Health Reimbursement Arrangement (ICHRA) allows an employer to provide employees with a defined amount of tax-advantaged funds to purchase individual health insurance coverage. Rather than selecting one group plan for everyone, employees choose coverage that fits their individual needs, while the employer determines how much it is willing to contribute.
That can give SMBs greater control over their benefits budget, while still providing employee choice. Alexandra regularly advises clients and colleagues on the value of ICHRAs. “The employer controls the cost, and the employee picks the plan that actually fits their doctors, their family, and their prescriptions,” she says. “For SMBs that have been priced out of the group market or stuck with a renewal they can’t absorb, that trade is often a better deal for both sides.”
An ICHRA can be particularly attractive for businesses with employees in multiple states, a distributed workforce or a wide range of employee healthcare needs. CMS specifically notes that ICHRAs can give smaller employers greater flexibility and choice, including for workforces that may be difficult to serve through a traditional group plan.
The key advantage is budget predictability. Instead of being tied to the premium increase of a traditional group plan, an employer can establish its own contribution strategy.
It’s not the right solution for every company, and ICHRA rules, including employee eligibility, affordability requirements, and notice requirements, can be complex. But for the right SMB, an ICHRA can be an important tool for balancing employee choice with employer budget control.
Note: CMS and the SBA updated the name of ICHRA to CHOICE Arrangements in September of this year, so you may see these names used interchangeably.
Take a closer look at prescription drug costs
Prescription drugs are another area where employers should be asking questions, not simply accepting year-over-year increases. According to Alexandra, “Pharmacy is where I find savings fastest, because it’s where most employers have never looked closely.”
KFF’s most recent employer survey found that 36% of large employers said prescription drug prices contributed “a great deal” to higher health insurance premiums, while another 35% said they contributed “somewhat.” New prescription drugs were another significant contributor.
The growth of expensive specialty medications and increased utilization of certain drugs, including GLP-1 medications, has added another layer of complexity. Among large employers covering GLP-1 drugs for weight loss, many reported utilization that was higher than expected, and some reported a significant impact on prescription drug spending.
For SMBs, managing prescription costs doesn’t necessarily mean eliminating coverage or making medications harder for employees to access. Instead, employers should work with their benefits advisor to understand what is driving their pharmacy spend and whether their plan is designed efficiently.
That may include reviewing formulary design, generic utilization, specialty-drug management, mail-order options, prior authorization programs, and the performance of the pharmacy benefit manager (PBM).
The goal isn’t simply to spend less on prescriptions, but to ensure the dollars being spent are producing value for both the employer and the employee. When evaluating your pharmacy benefits during your next renewal, ask how rebates flow back to your plan and how specialty drugs are managed. According to Alexandra, “the answers often reveal six figures of opportunity.”
Help employees become advocates for their own healthcare
There is another cost-management strategy that doesn’t start with the insurance carrier. “The biggest untapped cost lever most employers have is the one sitting in their own workforce,” says Alexandra. “When employees understand in-network versus out, when to use telehealth instead of the ER, and how to ask about generics, they save themselves money and the plan money at the same time.”
Healthcare consumers often have more choices than they realize. Where they receive care, which provider they choose, whether they use an in-network facility, whether they compare prescription options and even where they have certain procedures performed can affect the cost of care.
Yet navigating the healthcare system can be confusing. That’s why employee education should be viewed as part of an overall benefits strategy, not just an annual open-enrollment exercise.
Employers can help employees understand how to use their benefits more effectively. This might include offering sessions throughout the year on how to compare providers, take advantage of preventive care, use telehealth when appropriate, and understand the difference between in-network and out-of-network care. It can also include strategically investing in technology, like wellness platforms, that offer employees personalized guidance, integrated tools, and real-time insights in one place, while also allowing employers to measure outcomes.
Employee education and advocacy matters because employees already face significant healthcare expenses. In 2025, workers covered by employer-sponsored insurance contributed an average of $6,850 toward family coverage, while more than one-third of covered workers were enrolled in plans with a single-coverage deductible of at least $2,000 (KFF).
The more employees understand their benefits, the better equipped they are to make informed decisions and potentially avoid unnecessary costs.
SMBs Have Options
Rising healthcare costs aren’t going away, and SMBs don’t have the purchasing power of the largest employers. But that doesn’t mean they are powerless.
The best approach is to look beyond the annual premium increase and ask bigger, strategic questions: Is our benefits structure still the right one? Are we managing prescription costs effectively? And are our employees equipped to make informed healthcare decisions?
For some businesses, an ICHRA may provide greater budget control. For others, a closer look at pharmacy spending may uncover opportunities. And for virtually every employer, better employee education can help people get more value from the benefits already being offered.
If you’re ready to engage in a strategic discussion to manage your benefits costs, contact Flex HR today. We’re ready to help you make meaningful changes.
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