Rising health insurance costs force Bay Area small businesses into tough choices

Soaring health insurance premiums are forcing some small business owners to make difficult decisions about employee coverage, staffing and their future.

At The Booksmith in San Francisco's Haight-Ashbury neighborhood, employees are celebrating the independent bookstore's 50th year in business. But co-owner Christin Evans said one of the store's biggest challenges is not selling books; it's keeping up with the rising cost of health insurance.

"We've seen increases of 8% or more in some cases, but this year it was particularly bad," Evans said.

The store's health insurance costs are expected to jump 17% next year. Evans said the increase could force her to cut employee hours or find savings elsewhere.

"That challenges our business model," she said. "We have to figure out ways to cut corners in other areas."

A new survey by consulting firm PwC found health insurers expect the cost of medical services and prescription drugs to climb 9% in 2027, the largest increase in 15 years.

Glenn Melnick, a professor of health care finance at the University of Southern California, said rising health care spending affects more than insurance premiums. It impacts workers' wages, particularly for low- and middle-income earners.

"Rising health care spending slows down wage growth, particularly for middle- and low-wage workers," Melnick said.

Melnick believes millions of California workers have not received a meaningful inflation-adjusted raise during the past five years because employers are directing more money toward health insurance premiums. As benefit costs rise, he said, businesses have less flexibility to increase wages.

He said the higher costs are being fueled by several factors, including a new tax used to fund Medi-Cal, expensive cancer and obesity medications, and consolidation among large hospital systems. As hospital systems grow and face less competition, they can gain greater leverage when negotiating prices with insurers.

"The ability of health plans to control prices has gone down," Melnick said. "Now the hospitals realize, 'we're driving the bus now.' The leverage has now shifted much more in favor of the providers, and that's allowing them to get higher price increases."

Controlling those costs has become increasingly difficult, Melnick said, even with government intervention. 

"For the last 25 years, health care has been the single most reliable source of economic growth," Melnick said. "And so, it's hard for policymakers to say, 'Okay, we're going to slow down that engine.'"

For small business owners such as Evans, the increases are becoming harder to absorb.

"Every little dollar counts," Evans said. "It really makes a difference when we see sustained increases year over year."

Evans is determined to keep the lights and fans running and The Booksmith's doors open, but she said the financial pressure is only getting worse.

Melnick recommends that consumers begin preparing for higher out-of-pocket expenses by establishing separate health care savings accounts when possible. He also argues that state policies, including limits on spending growth by health care providers, may offer one of the best ways to slow rising costs.