Employers prepare for significant jump in healthcare costs

There’s more evidence that employers are going to be facing significantly higher healthcare costs in the coming year—information that likely will spur HR and benefits leaders into action in trying to keep a lid on climbing costs.

On the heels of other surveys that anticipate large jumps in employer-sponsored coverage, new data  from consulting firm Willis Towers Watson finds that U.S. employers project their healthcare costs will jump 6% next year, compared with an average 5% increase they are experiencing this year. Most employers see little relief in sight, as seven in 10 (71%) expect moderate to significant increases over the next three years, according to the survey of 455 U.S. employers. Additionally, more than half of respondents (54%) expect their costs will be over budget this year.

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Healthcare costs are going up because of a variety of factors, including the pandemic, general inflation, tight labor markets, provider consolidation and new, expensive drugs, says Lindsay Hunter, senior director of health and benefits, WTW. “Utilization is going up because of the pandemic—a combination of long COVID, more severe chronic disease or later-stage cancer because of missed care, and increased cardiovascular and neurologic disease in those who have recovered from COVID. Because provider contracts often last for multiple years, these increases could be sustained over the next few years,” she says.

The WTW survey isn’t alone in predicting significant increases in healthcare costs. Another report out last week from HR and benefits consulting firm Buck finds that healthcare costs for employers are increasing between 5.8% to 6.9%.

And early forecasts from Mercer suggest that U.S. employers expect health benefit costs per employee to rise 5.6% on average in 2023—but those may increase further if employers do not act to hold down costs. Without making any changes, like expanding access to virtual care through telemedicine or digital health resources, employers indicate that the cost for their largest medical plan would rise by an average of 7%, the Mercer data finds.

Employers have their work cut out for them in trying to hold down costs. Although employers are “always budget focused,” Tracy Watts, senior partner, national leader for U.S. Health Policy at Mercer, told HRE recently, organizations are particularly concerned about balancing costs and keeping good and affordable options for employees.

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Indeed, two out of three U.S. employers (67%) plan to prioritize controlling rising healthcare benefit costs over the next three years, the WTW survey finds. On top of managing costs, the survey found that 42% cite managing employee affordability as a top priority. To address a higher-cost environment, 52% will implement programs or switch to vendors that will reduce total costs, while about one in four will shift costs to employees through higher premium contributions.

But many organizations are likely hesitant to shift costs to employees given the tight labor market, experts say.

“Employers face tough choices about how to manage cost increases for the company while keeping coverage affordable for employees and attracting scarce talent in a tight labor market,” Hunter says. “Many employers are drawing a line in the sand to avoid making changes to benefits programs if that will interfere with recruiting talent.”

Employers also are considering other cost-cutting strategies, including offering low-deductible plans to reduce cost sharing for employees; structuring payroll contributions to cut costs for certain groups, such as low-wage earners; and adding or improving enhanced voluntary benefits or use of vendors in cases of catastrophic events.

There is no time to waste, experts say.

“Employers should proactively prepare leadership for these increases now while they seek longer-term solutions to mitigate cost increases, and align themselves with vendor partners offering proven solutions that can control cost increases,” Hunter says.

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Kathryn Mayer
Kathryn Mayer is HRE’s former benefits editor and chair of the Health & Benefits Leadership Conference. She has covered benefits for the better part of a decade, and her stories have won multiple awards, including a Jesse H. Neal Award and honors from the American Society of Business Publication Editors and the National Federation of Press Women. She holds bachelor’s and master’s degrees from the University of Denver.