Inflation and other factors greatly impact the healthcare industry and put employer health insurance at risk. According to McKinsey’s latest analysis, the annual U.S. national health expenditure is expected to be $370 billion higher by 2027 due to inflation compared to pre-COVID-19 levels.
While many insurance providers already feel these effects, the most significant impact is on employers and consumers. McKinsey predicts that healthcare costs for employers could increase by 9 to 10 percent per year through 2026.
The United States has one of the most complex healthcare systems in the world, and as a result, changes in the industry are generally slow. However, many technological and environmental factors have contributed to changes in healthcare, many of which are likely to impact employer health insurance in the near future.
The Evolving Landscape of Employer-Sponsored Health Insurance
For decades, employer-sponsored health insurance has helped countless Americans maintain good health and wellness. It remains the primary source of health coverage for approximately 54.3 percent of the U.S. population.
The roots of employer-sponsored health insurance in the U.S. date back to the early 20th century when several major companies started offering employees health coverage as a benefit. During this time, employers could not raise wages due to price and wage controls during World War II, making health insurance a valuable benefit that was appealing to many workers.
Rising healthcare costs in the 1970s and 1980s caused a shift towards managed care. Several managed care organizations, such as Preferred Provider Organizations (PPOs) and Health Maintenance Organizations (HMOs), emerged as popular options as they helped to curb healthcare spending.
By 2010, the Affordable Care Act (ACA) was passed, resulting in a significant shift in the health insurance landscape. This act helped expand healthcare coverage, improve quality of care, and better regulate the health insurance market.
During this time, consumer-driven health plans (CDHPs), such as Health Savings Accounts (HSAs), gained popularity. CDHPs commonly featured tax-advantaged accounts with high-deductible health plans (HDHPs), motivating people to make more cost-conscious healthcare decisions.
Factors Influencing Employer-Sponsored Health Plan Costs
Employers throughout the U.S. can expect medical plan costs to rise 5.6 percent on average per employee in 2023, according to Mercer’s National Survey of Employer-Sponsored Health Plans. Due to many healthcare plans having multi-year contracts with healthcare providers, the full impact of inflation in the health industry has not yet been felt.
However, as more contracts reach their renewal period and providers negotiate higher reimbursement levels, employers can expect to see higher healthcare prices. Some of the key factors that are influencing employer-sponsored health plan costs include the following:
The Aftermath of the COVID-19 Pandemic
Since the start of COVID-19, it has been questioned whether premium rates should continue to be influenced by pandemic-related factors. When setting premium rates in 2022, several factors were considered, such as legislative changes, telehealth utilization, and American Rescue Plan subsidies.
While nearly half of all payers claimed that the pandemic would not impact their rates, premiums were a major concern for consumers during the pandemic. Although several years have passed, challenges related to the COVID-19 pandemic remain and continue to influence premium-setting in 2023.
The Impact of New Healthcare Technology
Emerging technologies in the healthcare sector have saved countless lives and improved the overall quality of care. However, new technology is also to blame for the continuing increase in medical costs.
Some innovations, such as vaccines, lead to lower short-term spending, but other medical advances cause spending to increase, such as new treatments for previously untreatable terminal conditions. According to Forbes, new medical technologies are responsible for 40 to 50 percent of annual cost increases.
The impact of any new technology on healthcare costs depends on several key factors, such as if the new technology supplements existing treatments and if it is a full or partial substitute. In addition, costs are affected based on whether the new technology will affect the cost or use of other healthcare services like doctor visits or hospital stays.
Employers and Employees are Under Financial Burden
Both employers and employers are feeling the effects of increasing healthcare costs. According to a Los Angeles Times and Kaiser Family Foundation survey, 2 in 5 adults covered by employer-sponsored insurance reported having difficulty affording their premiums, medical care, and prescription drugs.
Employer-sponsored insurance premiums continue to outpace inflation and wage growth, causing workers to experience the financial burden of affordable healthcare and other essentials. This burden tends to affect lower-income employees the most.
A 2022 Employer Health Benefits Annual Survey by KFF revealed that companies with more low-wage employees, on average, contributed 10 percent less toward single coverage premiums and 13 percent less to family health coverage premiums compared to companies with fewer low-wage workers.
Rising Premiums and Out-of-Pocket Costs
Despite many employers implementing new policies and programs to help improve healthcare affordability, employees will likely continue to experience cost increases. According to a survey by Willis Towers Watson (WTW), one in four employers plan to shift these rising costs to employees through higher premiums.
The survey also revealed that 23 percent of respondents implemented higher out-of-pocket costs for using less efficient services, such as high-cost imaging facilities and non-preferred labs. By 2024, nearly one in five employers will use this strategy to help discourage these costly practices.
There are several reasons behind rising healthcare costs in the U.S. The population continues to grow unhealthier, with at least half of people in the United States having at least one chronic disease, according to the Centers for Disease Control and Prevention (CDC).
New technologies, lack of control in choosing their healthcare plan, and inflation’s impact on the economy have all contributed to rising healthcare expenses.
The Impact on Employee Wages and Overall Compensation
Rising healthcare costs are becoming more evident to employees as premium contributions are generally deducted on pay stubs. In contrast, out-of-pocket costs are paid through medical bills or directly at the point of care.
However, employers remain responsible for the bulk share of employee healthcare costs. The Kaiser Family Foundation found that employers were responsible for 66 percent of total health expenditures for employees with family coverage on average.
Employers are looking for ways to reduce their share of healthcare costs, such as by passing on these expenses to employees. This is done in a number of ways, such as by increasing copayments or deductibles, increasing worker premium contributions, or reducing employment.
Employer Strategies for Adapting to Changing Healthcare Needs
While change is an inevitable fact of life, there are strategies that employers can implement to better adapt to changing healthcare needs.
The pandemic caused widespread disruptions in many businesses’ cost-management efforts as employers focused solely on workplace safety. However, with healthcare costs increasing, many employers are refocusing on cost management strategies to slow this cost growth over the long term.
Employers are implementing various effective strategies to improve healthcare affordability, such as introducing programs to improve health condition management, managing the cost of specialty prescription drugs, and steering employees toward high-value care.
Some other employer strategies for adapting to changing healthcare needs include the following:
Personalize Health Insurance Options
Over the last decade, many businesses have shifted from offering workers traditional benefits to a new and improved model: personalized benefits. This newer model enables businesses of all sizes to provide employees with sustainable and attractive benefits that deliver real value.
Employees have specific wants and needs, and while it is not always possible to address every employee’s needs individually, employers can offer universally desired benefits.
There are several ways that employers can implement a personalized employee experience, such as by providing workers with a monthly or annual expense allowance through an employee reimbursement card or lifestyle savings account (LSA).
Reimbursement plans enable employers to review and analyze employee expenses and reimburse workers for approved expenses, such as medical and remote work costs. Offering personalized health insurance options is also an excellent way to attract and retain top talent.
Integrate Health Technology
To adapt to changing healthcare, employers must be open to new technologies and understand the rising costs associated with advanced tech in the healthcare sector. In the modern age, employees require access to a plan design that includes telehealth options.
This type of plan allows employees to access quality healthcare without physically entering a healthcare facility but also gives employees access to a network of specialists, such as psychologists, nutritionists, and mental health experts.
This is especially important post-COVID as nearly half of all Americans revealed in a National Institutes of Health (NIH) survey that they have had recent symptoms of anxiety or depressive disorder.
Many insurance providers across the country are employing personalized services in an attempt to attract more customers as well as reduce costs for their customers. Many big players in the industry are also implementing AI tools and Big Data to help improve healthcare services.
Protect Your Employees with Comprehensive Employer-Sponsored Health Insurance Plans by New City
Inflationary pressures in the U.S. could possibly increase annual employer healthcare expenses and directly affect vulnerable household finances. Increased affordability challenges, coupled with issues exacerbated by the COVID-19 pandemic, have resulted in troubling healthcare changes affecting employer-sponsored health insurance.
Working with an experienced employee benefits consulting firm is critical to achieving long-term cost savings without sacrificing plan quality. The team of highly qualified benefits consultants at
New City Insurance builds custom plans with all major carriers to maintain employee networks, improve coverage and cut costs. To learn more, request a consultation with New City or call 888.210.2765.