Employers expect benefit costs to rise 5% for third straight year

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Total health benefit cost per employee is expected to rise 5.8% on average in 2025, even after accounting for planned cost-reduction measures, according to an analysis based on a survey by Mercer.

The preliminary results in its 2024 National Survey of Employer-Sponsored Health Plans show employers estimated their cost would rise by about 7%, on average, if they took no action to lower cost.

Smaller employers (those with 50-499 employees), which typically have fully insured health plans, have been hit the hardest. They reported that cost would rise by about 9% on average if they took no action.

Based on these projections, 2025 would be the third consecutive year of health benefit cost increases above 5%, following a decade of cost increases averaging only around 3%. Meanwhile, general inflation has cooled, suggesting that other factors are contributing to the higher health benefit cost trend.

WHAT'S THE IMPACT

According to Sunit Patel, Mercer's U.S. chief actuary for Health and Benefits, several factors are contributing to faster cost growth.

"While we've seen significant increases in utilization in a few areas, such as for behavioral healthcare and GLP-1 medications, overall utilization has had a relatively modest impact on trend this year," said Patel. "The biggest driver of higher costs is price dynamics, some of which are macro in nature."

One source of pricing pressure is the widening gap between the supply of healthcare workers and the demand for healthcare services, which is increasing as older Americans become a larger part of the population, analysts said. Another is the continuing consolidation of health systems – which shows no sign of slowing down.

"Consolidation may generate savings in the future through increased efficiency and improved integration, but there is evidence it is putting pressure on pricing, as larger health systems have greater negotiating power than smaller systems," said Patel.

Spending on prescription drugs remains the fastest-growing component of health benefit cost. Employers reported that drug benefit cost per employee rose 7.2% in 2024. The ongoing introduction of very high-cost gene and cellular therapies is contributing to this higher cost growth, the report found.

The results also suggest that about half of employers (53%) will make cost-cutting changes to their plans in 2025, an increase from 44% in 2024. Generally, these changes involve raising deductibles and other cost-sharing provisions, and result in higher out-of-pocket costs for plan members when they seek care.

In recent years, many employers have avoided making these types of changes, but this becomes more difficult in a period of sustained higher cost growth.

Because the cost of healthcare coverage is typically shared between the employer and employee, managing cost is also important to minimize growth in employee premium contributions. On average, employees will pay for 21% of health insurance premiums through paycheck deductions in 2025, the same as in 2024.

THE LARGER TREND

Average costs for U.S. employers that pay for their employees' healthcare rose about 6.4% last year, largely due to economic inflation pressures. This is more than double the 3% increase to healthcare budgets that employers experienced from 2021 to 2022.

Employers of all sizes were looking to bolster their health-benefit options last year with an eye toward improving recruitment and retention, and focused on affordability and access, according to a Mercer survey.

More than two-thirds of the 700 respondents said they were looking to enhance their health and benefit offerings. In all, 61% of participating U.S. employers conducted surveys on employee benefit preferences.

Jeff Lagasse is editor of Healthcare Finance News.
Email: jlagasse@himss.org
Healthcare Finance News is a HIMSS Media publication.