- Healthcare cost increase is highest in years. With healthcare expenses rising, businesses are taking on more costs.
- Consider the burden on employees. A significant number of American workers already struggle to pay health costs, prompting employers to seek solutions other than passing cost increases to workers.
- Partnership is key. Collaboration between benefits departments and CFOs could lead to new innovations and help avoid budget surprises.
Employers are facing a higher spike in healthcare costs than they’ve seen in years. Health benefit costs increased 5.2% in 2023, with another large increase expected in 2024, according to Mercer.
As companies are setting their 2025 budgets — and creating their next five-year plans — now is the time for total rewards professionals and finance departments to put their heads together and craft sustainable strategies that take continued health cost increases into account, according to a new CFO survey by Mercer.
Mercer’s 2023 National Survey of Employer-Sponsored Health Plans found the average health benefit cost per employee is approaching $16,000. In addition, 67% of respondents in the CFO survey named healthcare costs as a significant concern, and 39% said business results would be “materially impacted” if employers’ healthcare costs are over budget by 4% or less.
“The last time we saw health insurance increases like this was in the very early 2000s. People are just not used to this.”
— Jeff Levin-Scherz, M.D., population health leader, WTW
Controlling healthcare costs was listed as a top priority by 69% of respondents in WTW’s latest Best Practices in Healthcare Survey — 39% of whom projected healthcare cost increases of between 5% and 10% in the next three years.
“This past year, we saw the highest rate of healthcare inflation in two decades,” said Jeff Levin-Scherz, M.D., population health leader of the health and benefits practice at WTW. “It’s looking like that’s going to be the case for the next few years. The last time we saw health insurance increases like this was in the very early 2000s. People are just not used to this.”
What’s Contributing to Rising Health Costs?
Higher unit cost pressures hitting physicians and hospitals are one contributor to the recent spike in health costs, said Sunit Patel, senior partner and chief health actuary at Mercer.
Medical innovations are also playing a major role — including high-cost drugs such as GLP-1 medications used to treat diabetes and obesity, as well as cellular and gene therapy, such as treatments for hemophilia, which can exceed $3 million.
“Clearly, these drugs can make many employees and family members dramatically healthier, but they’re hard to fit into a budget when you’re trying to keep your healthcare affordable,” Levin-Scherz said.
The cost per member per month of four major GLP-1 drugs more than doubled between 2022 and 2023, according to WTW research. And two-fifths of CFOs in Mercer’s survey found the cost of GLP-1 drugs significantly concerning.
WTW also found that while 38% of respondents covered GLP-1 drugs for obesity in 2023 (with an additional 24% planning to in 2024 or considering doing so in 2025), about 10% will only cover them for employees with a higher body-mass index (BMI) than that recommended by medical societies such as the American Gastroenterological Association and the Endocrine Society.
Effects on Workers
Rising health costs are placing an increasing burden on American workers, with half of U.S. adults saying it is difficult to afford health costs, and 40% saying they skipped or postponed needed health care because of the cost, according to KFF, a nonpartisan health policy research, journalism and communications organization.
“High medical prices create more economic inequality,” Levin-Scherz said. “It hurts much more for a lower-wage worker to have to pay $1,000 out of pocket.”
And while switching health plans or networks may result in cost savings, it could also lead to an interruption in care for workers with chronic illnesses who have established therapeutic relationships with more expensive providers, Levin-Scherz added.
How TR Pros and CFOs Can Collaborate
To avoid shifting costs to employees, organizations this year have been exploring other benefit trends, including a renewed focus on preventive and primary care, pushback on prescription drug prices and more.
“Sometimes, change is necessary. Be willing to disrupt the current delivery models.”
— Sunit Patel, senior partner and chief health actuary, Mercer
WTW and Mercer suggested TR professionals and CFOs:
- Take a fresh look at carrier contracts to determine if the coverage and discounts available are cost-effective.
- Explore the possibility of switching from a fully insured plan to a self-funded model to cut costs.
- Utilize third-party clinical management services or centers of excellence.
- Consider high-performance networks or networks with lower-cost providers.
- Restrict out-of-network coverage for non-emergency services.
“Sometimes, change is necessary,” Mercer’s Patel said. “Be willing to disrupt the current delivery models.”
It is important for TR professionals to collaborate — closely, early and frequently — with finance departments while making health benefit decisions, Mercer’s survey noted.
Both departments should work together to explore the probability of claims varying from the budget at certain levels, determine a tolerable level of variability and review strategies to mitigate larger shifts, Patel said.
Ongoing data collection and reporting are also key. Almost one-fifth of CFOs in Mercer’s survey said they don’t believe they have the right amount of input on benefits decisions.
“The conversation is easier if finance has been a stakeholder all along, being a part of the decisions and aware of potential volatility,” Patel said. “If not, then if there are unpleasant surprises, some of those conversations become difficult. It’s very difficult within a plan year to adjust decisions.”
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