Why Small and Mid-Sized Employers Pay the Highest Margins

Описание: In this eye-opening episode, healthcare strategist Tom Quigley explains why small and mid-sized employers often pay significantly higher margins than large corporations — and why it doesn’t have to be that way.

For decades, business owners have been told that rising healthcare costs are simply unavoidable. But according to Tom, that belief is driven by emotion, outdated purchasing strategies, and commission-based sales models that reward higher premiums — not lower costs.

This episode breaks down the structural realities behind healthcare pricing and shows business owners how to level the playing field.

Key Discussion Points
1️⃣ Why Small and Mid-Sized Employers Pay More Per Employee
Many business owners assume large corporations pay more for healthcare because they offer richer benefits.

The truth?

Large corporations are using tax laws and structural plan designs that smaller businesses can legally use as well — but typically don’t.

The biggest gap is knowledge and implementation.

Large companies:

Use Section 105 tax law structures

Self-fund more efficiently

Design plans strategically

Small businesses:

Remain fully insured

Accept renewal increases without transparency

Rely on commission-based brokers

The result? Higher margins and inflated premiums for smaller employers.

2️⃣ The Power of Section 105 (The Same Law the “Big Boys” Use)
Tom explains that Fortune 500 companies use Section 105 medical expense reimbursement plans to structure benefits more efficiently.

Small and mid-sized employers can use the exact same tax code — but most are either:

Not using it at all

Using inefficient structures like ICHRAs

Or relying on traditional fully insured models

Section 105 allows employers to:

Lower premium costs

Reimburse employees tax-free

Provide better benefits at a lower net expense

It’s not a loophole. It’s federal tax law.

3️⃣ Fully Insured Plans and Pricing Power
Traditional fully insured plans with major carriers:

Set rates at the state level

Pool small businesses together

Provide minimal claims transparency

Offer limited strategic flexibility

Mid-sized employers lose pricing power because:

They don’t receive meaningful data

Renewal increases are based on opaque loss ratios

Stop-loss retention math is often misrepresented

Tom explains how catastrophic claims (like premature birth cases) are often used to justify rate increases — even though reinsurance and retention limits already cap exposure.

4️⃣ The Claims Transparency Problem
One of the most critical issues discussed is lack of claims transparency.

Insurance carriers:

Control the data

Don’t provide full reporting

Use gross claim numbers without adjusting for stop-loss retention

Don’t disclose pharmacy rebates and backend profit margins

Example:
A $1 million claim with a $100,000 retention should not be used as a full $1 million loss in renewal calculations.

Yet it often is.

This creates artificially inflated loss ratios that justify premium increases.

5️⃣ Commission Structures & Administrative Overrides
Another margin driver:

Commissions and volume bonuses.

Brokers often earn:

Per-head commissions

Percentage-of-premium commissions

Volume-based bonuses

Overrides tied to premium growth

There is no financial incentive to reduce premiums.

The system rewards higher costs.

6️⃣ Are Small Businesses Subsidizing Large Employers?
No.

Small groups are pooled within their own market segments under state insurance regulations.

However, small employers are:

Subject to premium taxes

Limited by state insurance department rules

Restricted from using certain structural strategies

When employers shift to ERISA-based Section 105 structures, oversight shifts to federal Department of Labor rules — bypassing many state-imposed inefficiencies.

7️⃣ Structural Changes That Cut Costs in Half
Tom outlines a simple strategic framework:

Step 1:
Request the lowest-cost, highest-deductible plan from your current carrier — same network.

Step 2:
Implement a Medical Expense Reimbursement Plan (Section 105) to cover deductibles and gaps tax-free.

Step 3:
Allow employees to voluntarily shift to:

Spousal coverage

Medicare

Medicaid

ACA-compliant individual plans (with or without subsidies)

Military or parent coverage

Employer contributes a defined amount toward these alternatives.

Step 4 (Optional):
Add a second group plan to create competition and flexibility.

The result?
Lower premiums.
Better benefits.
Reduced margin exposure.
No increased risk.

Who Should Listen
Small business owners

CFOs and controllers

HR directors

Mid-sized employers facing 10–20% renewal increases

Anyone frustrated with “you should be happy with 6%” conversations

Core Takeaway
Small and mid-sized employers aren’t paying more because they’re higher risk.

They’re paying more because they’re buying incorrectly.