Administrative costs

Small businesses cannot spread their higher administrative costs over a large number of workers. Many of the expenses of administering health insurance—fees to insurance brokers and underwriting costs—are fixed, while others are actually higher for small businesses. It takes insurers less effort to sell a single policy for 5,000 workers than 1,000 policies for 5 workers. Only 10 percent of a large business’ premiums go to administrative costs on average. But those costs account for 20 to 25 percent of a small employer’s premiums. Small businesses also do not have the market power to benefit from bulk purchasing or to negotiate for lower rates.