In 2024, U.S. employers will likely see the biggest increase in health insurance costs in the next decade. According to data from Willis Towers Watson (WTW), Aon, and Mercer, employer healthcare costs are expected to increase from 5.4% to 8.5%.
With healthcare costs already at an all-time high, many employers are concerned about how this change will affect their ability to offer employees a competitive and affordable benefits package.
Learn more about the factors impacting rising healthcare costs, employers’ challenges, and how best to protect employees from inflated healthcare costs.
What Is Causing the Increase in Healthcare Costs for Employers
The average American spends nearly $13,000 each year on healthcare, according to data published by Health System Tracker. The cause of rising healthcare costs for employers in the U.S. does not come down to any one source. Instead, experts believe that a combination of factors is impacting healthcare costs across the country.
With no end in sight, it is important for employers to understand what is causing these unaffordable cost spikes.
Factors Contributing to Rising Healthcare Costs
A 2023 study by the Peter G. Peterson Foundation blamed two main factors for increasing healthcare costs and utilization:
- An Aging Population– Healthcare costs continue to rise as the population expands and people live longer. Older individuals naturally spend more on healthcare than younger individuals and often require more costly procedures.
- Increasing Cost of Healthcare Services– Medical-related goods tend to rise faster than other types of goods and services. This is partially due to introducing more innovative health technologies and consolidating hospitals, resulting in less competition.
Of course, there are other factors to consider. Today, more people suffer from chronic illnesses such as high blood pressure, depression, oral disease, high cholesterol, and chronic lower back and neck pain.
There is also the problem in which medical providers are paid for quantity, not quality. This can result in overtreatment and overprescribing of medications, especially among patients who have a low potential for improved health outcomes.
The Impact of Rising Drug Prices
With drug prices continuing to rise at an unprecedented rate, many consumers are seeking alternative solutions to cut costs. A 2022 survey commissioned by Wolters Kluwer found that consumers would be willing to obtain prescriptions directly from pharmacists, purchase mail-order medications, or pursue alternative options if they resulted in lower costs.
While actions are being taken to help address the high cost of prescription drugs, many consumers continue to feel the impact. A recent KFF poll found that nearly 1-in-4 Americans who take prescription drugs report that it is difficult to afford their medications.
Rising Drug Prices
Prescription drug pricing is a significant problem and one that grows every year. The high cost of new drugs and extravagant price increases on existing medications are fueling patient’s out-of-pocket spending on prescription drugs.
Even the cost of older drugs has risen dramatically over the last decade. According to a fact sheet published by the American Hospital Association (AHA), two older drugs used to treat osteoporosis and high blood pressure experienced a price increase of more than 600% over two years.
Challenges Faced by Employers
With major increases in healthcare costs on the horizon, many employers are growing concerned about how to best manage these changes. With higher benefits expenses, employers could face additional labor-related costs on top of standard wage inflation.
In some cases, a portion of these costs may be shifted to employees. This decision could result in reduced employee productivity and morale and impact an organization’s ability to attract top talent with a comprehensive benefits package.
The Impact of Inflation
Inflation in health spending continues to outpace inflation in the rest of the economy. According to the KFF, the healthcare sector’s cost of consumer goods and services has increased significantly faster in recent years, reaching a four-decade-high inflation rate in mid-2022.
The impact of inflation is forcing employers to revise how they budget for both employee compensation and benefits. How these higher prices will impact employers will depend on their insurance models, whether fully insured or self-insured.
The Impact of Labor Shortages
Accelerated by the COVID-19 pandemic, countless healthcare facilities across the United States struggle to maintain sufficient staff to treat patients. This ongoing and gradually worsening labor shortage is not only impacting patient health but also having a direct effect on healthcare costs.
The labor shortage crisis is expected to impact patient outcomes. There is a greater likelihood of medical errors, patients are more likely to develop more serious symptoms as they wait to get seen by a provider, and mortality rates will likely increase.
Labor shortages are also financially hitting hospitals hard. According to a research report by KaufmanHall, hospitals have seen a 37% increase in labor expenses from pre-pandemic levels.
Employees at Risk of Taking on Inflated Costs
With healthcare costs projected to rise significantly in the next year, the cost of many employer-sponsored health plans is expected to be passed on to workers. One way that employers may try to mitigate cost increases is by adopting high-deductible plans.
These plans essentially shift expenses to plan members but often carry lower premiums. Some employers are taking action to help protect low-wage workers. Having a higher percentage of sharing for higher-wage workers may offset the cost to increase affordability for lower-wage employees.
The Cost-Shifting Dilemma
While many employers have tried to shift costs onto employees as healthcare expenses continue to increase, the result has not been positive. Many studies have shown that employee productivity and overall satisfaction are significantly increased when workers are happy with their benefits. However, shifting more of the cost to workers could have the opposite effect.
Some employers that adopt this strategy may find it more difficult to attract top talent and maintain existing talent. As health benefits often sway job candidates to accept a position, the act of cost-shifting could increase turnover rates and impact hiring.
The Service Industry Is Facing the Most Challenges
No sector of the service industry is safe from healthcare cost increases. Accelerating affordability issues and labor shortages have caused this industry, in particular, to lag behind others.
Many organizations within this sector are searching for new ways to help control spending and reduce the burden on workers. This could involve bundling contracts as part of a cost-reduction strategy or reevaluating how much health coverage is needed and where money can be saved.
Protect Your Employees from Inflated Healthcare Costs with New City
Americans spend a substantial amount on medical, vision, dental, and wellness plans each year, contributing to rising healthcare expenses. Currently, employer-sponsored health insurance covers nearly 159 million non-elderly individuals in the U.S., according to findings published by the KFF.
With the highest cost increase in over a decade expected to impact employers across the country in the next year, many organizations are concerned about how to proceed.
At New City Insurance, we work with businesses daily to maximize their employee benefits cost savings by crafting long-term solutions that keep renewals low year after year. To learn more about our services or to request a consultation, contact New City today at 888.210.2765.