Three trends driving cost hikes for employer-based health care

Health care is costing more for U.S. employers that pay for their workers’ health care, and three trends are driving those cost hikes.

Aon reported earlier this year that average costs for U.S. employers that pay for their employees' health care will increase 8.5% to more than $15,000 per employee in 2024.

The projected increase, which assumes employers do not implement employee cost sharing increases and other cost-saving strategies, is nearly double the 4.5% increase to health care budgets that employers experienced from 2022 to 2023.

Debbie Ashford, the North America chief actuary for health solutions at Aon, gave InsuranceNewsNet a rundown of the top three factors influencing higher employee health care costs for 2024.

1. Inflation: Inflation is the first trend driving cost increases, she said.

“Inflation typically makes up around half of cost increases,” she said. “We’re seeing a lag in inflation in the health care sector. That’s because of the multiyear nature of provider contracts. The provider contract between providers and insurance companies typically lasts around three years. As those contracts come up for renewal over the past couple of years and going into next year, we are seeing providers ask for a little bit more money. So the impact of inflation, therefore, will be spread out over a few years as opposed to hitting the health-care sector all at once. That is adding another percentage point of increase over the usual increase of around 4%.”

COVID-19 is still impacting health insurance costs, particularly when it comes to medical usage, Ashford said.

2. Medical Utilization: “Another driver of increased health care costs is an increase in medical utilization, which is returning to pre-COVID-19 levels,” she said.

“During the pandemic, we found that many people were afraid to seek care. But now many of those fears are behind them and people are returning to get services that they put off.’

3. Prescription Drug Costs: The final trend impacting health care cost increases, Ashford said, is prescription drug costs.

“Prescription drug costs are escalating at a higher rate than medical costs,” she said. “A large reason for that is the growing number of specialty drugs, particularly the GLP-1 drugs and drugs such as Wagovy and Ozempic that were originally put out there to treat diabetes, but now many participants are also taking those for weight loss. We’ve seen usage of those drugs basically double between 2022 and 2023.”

A continued tight labor market means that many employers may be reluctant to pass higher health care costs to their workers, said Janet Faircloth, senior vice president of Aon’s health innovation team.

“A lot of these decisions were made a while ago, in advance of seeing the health care trends starting to increase for 2024,” she said. “So I think we’re still seeing fairly moderate employee contribution increases and minor price changes going into 2024. But as we’re starting to see some employers start their planning for 2025, we expect to see more significant changes in contribution increases.”

In the future, employers will continue to be challenged by pharmacy costs, Faircloth said.

“I think we will see more targeted plan design changes to address some of those costly medications and treatments,” she said. “I think we also will see vendor changes as a way to rein in costs. More employers are looking at streamlining vendors or changing vendors to get better prices or deeper discounts on health care and services. We also will see a continued focus on mental health and adding services to support that.”

Faircloth said Aon also is beginning to see employers guide their workers to the best hospitals and physicians based on cost and quality, such as centers of excellence for surgery.

Susan Rupe is managing editor for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at Susan.Rupe@innfeedback.com. Follow her on Twitter @INNsusan.

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Susan Rupe is editor in chief, magazine, for InsuranceNewsNet. She formerly served as communications director for an insurance agents' association and was an award-winning newspaper reporter and editor. Contact her at susan.rupe@innfeedback.com.