A New Budget Crisis: Healthcare Costs

Healthcare costs are rising. Again. Yes, they rise every year. Between 2013 and 2020, health-benefit costs per employee jumped between 2% and 4% annually, according to figures from Mercer. But that, it turns out, was a pittance.

This year, things are getting messy. Firms will likely face an increase in healthcare costs of 7.7% in 2025, up from 6.5% in 2023 and 6.9% in 2024, according to a new survey. Nearly half of employers expect to exceed their 2024 healthcare budgets. To be safe, experts are budgeting for leaps of 7% to 10% in 2025. The question, of course, is how will firms absorb these new costs. They have four choices, says Ron Seifert, leader of the North America Workforce Reward and Benefits practice at Korn Ferry: They can pay it, pass it on, share it, or redesign plans. “Clearly, firms are struggling with this,” he says.

To be sure, a good number will pass these expenses along, either partially or fully, as higher premiums or adjustments that create more out-of-pocket costs. But that could backfire, experts say, in a workforce that has grown less productive and less engaged due to return-to-office policies and smaller salaries. “Unfortunately, organizations do not realize that they can start with strategies much less disruptive to employees,” says Steve Kapper, head of the National Health and Welfare Benefits practice at Korn Ferry.

These include reviewing self-funding options and negotiating better vendor contracts (with pharmacy benefit managers, for instance), as well as implementing care that manages members' underlying health conditions. 

Healthcare costs are rising largely because people are returning to their typical volumes of healthcare utilization following years of pandemic disruptions, says Seifert. They are no longer deferring procedures like knee and hip replacements, and they’re seeking screenings like colonoscopies and mammograms, as well as pricier treatments, like designer weight-loss medications. Forecasting these costs is complicated by the ongoing collective-bargaining negotiations at many firms, which complicate the math by significantly shifting the details of compensation and benefits.

This month, finance departments can be found devising strategies to absorb cost jumps, such as limiting total compensation-package costs per employee. But experts say that many firms are likely to land on a mix of sharing costs with employees and redesigning plans to lower costs. Seifert says a common maneuver is to remove clinicians from a more costly provider in a region; if their doctors aren’t in the same network, employees tend not to mind. Other firms may shift toward more proactive healthcare, such as front-end screenings.

For firms sharing the cost increases, premium costs typically rise for both employees and employers. For example, if employees typically pay 20% of premium costs, they will continue to pay 20%. The messaging around this strategy, says Seifert, is “we both take the pain.” 

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