We are facing a dangerously high state of expected healthcare cost increases that threaten the affordability and the sustainability of coverage.
The aftermath of the pandemic, inflationary pressures and deteriorating mental health have each contributed to an unprecedented level of uncertainty and variability in healthcare costs in recent years. A year ago, the signs of health cost inflation were slow to appear, and we expected that higher medical inflation lay in wait for 2024. Now, the average cost of medical and pharmacy services has gone up by almost 8%. Medical inflation is much higher than that of consumer goods.
Our 2024 Best Practices Survey shows healthcare trend is increasing, with employers expecting average cost increases of 7.7% in 2025 versus 6.5% in 2023 (before plan changes). This is the highest rate of medical inflation in almost two decades.
There were several reasons to expect this surge, including:
We’ve been consulting with our clients to manage and mitigate the ongoing market forces driving increased costs.
Let’s review the factors contributing to this surge, which are expected to continue driving double-digit increases over the next year.
Increasing cancer costs and severity. We asked — will care deferred in 2020 lead to larger claims further down the road?
A key concern was deferred preventive cancer screenings during the pandemic. Cancer drives roughly 30% of medical costs. Many cancers can be prevented or treated early through timely screenings.
A year later, we are seeing mid-double-digit increases in cancer costs and increased prevalence in high-cost claims due to cancer. Specifically, screenable cancers such as breast and colon cancer are driving costs as well as expensive cancer therapy treatments. Increased costs are likely due to a combination of cancers that are more advanced at the time of diagnosis and higher costs of oncology pharmaceuticals.
Unit cost inflation is on the rise. We wondered — will we see big increases in unit costs as providers and hospital systems try to get back the money they lost and as more providers join together?
Our review of 2022 data showed no significant increase in the average unit cost of services. We expected that this was due to provider contracts being locked in over multiyear periods. Our 2023 data now shows medical unit cost inflation of 5.5%. As provider contracts renew, unit costs are rising as predicted.
Prescription drugs, GLP-1s continue to drive costs.
Drug costs continue to drive employer healthcare spending higher with an annual trend of 15% over 2022, before rebates. Expensive pipeline drugs, diabetes and obesity treatments (especially GLP-1s) and specialty cancer drugs are providing needed treatment for individuals but also increasing the cost of healthcare.
Prescription drugs and medicines are increasing the trend and total cost of care. They now make up 30% to 35% of total healthcare costs, compared to 20% to- 25% 10 years ago. You should monitor and manage drug costs, which are likely to continue to drive healthcare costs higher.
Mental health care continues to be a top priority. We questioned whether employers should worry about deteriorating mental health in their employees and what the cost impact might be?
The prevalence of anxiety and depression is continuing to rise nationwide. The Center for Disease Control and Prevention’s household pulse survey shows that major symptoms of anxiety and depression are more than twice as common now compared to before the pandemic.
Our data show employer mental/behavioral health costs continue to increase. The average cost per person/portion of spend attributable to increase in our book of business was 24% in 2023 relative to 2022. However, more people can get care and use mental health services. This may help to lower future healthcare costs by improving employee wellbeing.
Know how to use your data. In a rapidly changing healthcare system, retrospective claims analysis provides limited insights. Use predictive analytics and machine learning models that project future outcomes to proactively manage risk. By using predictive analytics, you can gain insights into your organization’s health trends, risk factors and expected future healthcare use patterns. You can make informed decisions and tradeoffs about healthcare benefits, employee wellness programs and other initiatives that can improve employee health outcomes and better manage healthcare costs.
Check out our new Actionable Comprehensive Timely (ACT) analytics solution for more information.
Implement effective risk management strategies. Employers are grappling with the unpredictable nature of healthcare costs. The landscape is constantly fluctuating, making budgeting and plan for the future more difficult. To navigate this complex environment, you must take action and prioritize risk management.
Strategies include:
By proactively addressing healthcare cost challenges and implementing effective risk management strategies, you can mitigate financial risks, enhance employee satisfaction and achieve long-term sustainability.
Unless otherwise noted, analysis is based on:
