What Insurers Need to Know About Rising Health Care Costs for 2025

As employers brace for a projected 9% increase in health care benefit costs in 2025, insurers need to be aware of key trends influencing these changes.

Published on November 6, 2024

health care
As employers brace for a projected 9% increase in health care benefit costs in 2025, insurers need to be aware of key trends influencing these changes. Industry reports indicate that while companies anticipate higher costs driven by factors such as advanced treatments and inflation in the health sector, many are not passing the full burden onto their employees.

Cost Increases and Employer Strategies

Employers, according to surveys by organizations such as KFF and Aon, have seen a significant rise in premiums over recent years. Despite this, they have largely insulated employees from these surges to maintain workforce satisfaction in a competitive job market. The total annual premium for family coverage has risen by 24% over the past five years, yet employees’ contributions have increased by only about 5%, amounting to an average of $6,300 out of the $25,572 total.

Large employers expect an 8% increase in costs for 2025—the most substantial jump in over a decade, as highlighted by Jim Winkler, chief strategy officer at the Business Group on Health. Although a majority are prepared to absorb much of the increase to keep health benefits attractive, some will likely pass on a portion of these costs to workers through higher premiums or adjustments to plan structures.

Contributing Factors to Rising Costs

Several factors are contributing to these rising costs:

  • Prescription Drug Costs: The growing demand for high-cost medications, including weight-loss drugs like GLP-1 inhibitors, is a significant driver. While more large employers are covering these medications, many impose usage conditions to manage expenses.
  • Advanced Therapies: Treatments such as in vitro fertilization and gene therapies, while life-changing, contribute to the overall increase in health care expenditures.
  • Health Care Workforce: A tight labor market for health care workers, compounded by an aging population and the consolidation of health care providers, has further pushed up costs.

Plan Adjustments to Offset Costs

To manage costs, insurers and employers are considering several strategies:

  • Cost-Cutting Measures: According to Mercer, about half of surveyed employers plan to introduce measures such as higher deductibles or tighter approval processes for certain treatments.
  • Innovative Health Plan Designs: Some companies, like JPMorgan Chase, are offering plans with no deductibles and free primary care within limited networks. This can make care more affordable for employees while controlling employer expenses.
  • Pharmacy Benefit Changes: Adjustments to pharmacy benefit managers and negotiations with vendors are becoming more common as employers seek to reduce the rising cost of prescription drugs.

Shifts in Employee Coverage

Although employers are seeking ways to contain costs, workers may face changes in their health plans. Options like health savings accounts (HSAs) continue to be a focus for many companies, offering a way for employees to save pre-tax dollars for medical expenses. The maximum HSA contributions for 2025 will be $4,300 for single coverage and $8,550 for family coverage, with an additional $1,000 for those over 55.

Industry Implications for Insurers

Insurers must remain agile to meet the evolving needs of employers managing these cost pressures. This may involve:

  • Offering Tailored Plans: Insurers should consider plans that balance affordability and coverage, such as those with strategic use of co-payments or cost-sharing mechanisms.
  • Enhanced Pharmacy Management: As prescription costs continue to soar, insurers could enhance their pharmacy benefit management strategies to offer competitive rates and maintain plan value.
  • Education and Support for Employers: Providing tools for employers to better understand and navigate the complexities of plan options and employee contributions can strengthen relationships and client retention.

The anticipated rise in health care costs poses challenges for both insurers and employers. While large companies are currently absorbing much of the increase to attract and retain employees, adjustments in plan designs and cost-sharing measures are expected. Insurers need to adapt by offering innovative solutions that support cost management without compromising on coverage quality.