A new study predicts that group health insurance costs will jump 8% in 2025, on par with what American employers have experienced this year and in 2023.

The higher rates reflect the costs borne by health insurers, which are seeing more claims for care that was postponed during the COVID-19 pandemic and a steady rise in the cost of pharmaceuticals as more innovative and effective drugs come to market, according to the study by PricewaterhouseCoopers.

Additionally, health plans have seen a surge in demand and utilization for behavioral health services, which has been hampered by a limited supply of in-network mental health professionals, who are also demanding higher reimbursement rates.

And while drug costs are rising, some of the medications may actually reduce future health care costs for those taking them. There are also new biosimilar drugs coming to market that cost a fraction of the originals.

Cost drivers

Thanks to a continuing stream of pharmaceutical breakthroughs that are saving patients’ lives and/or improving their quality of life, insurers have to make coverage decisions. Many of the new drugs are costly, but they may also reduce overall health care costs in the long run as they may reduce the need for expensive intervention and emergency treatments.

Two classes of drugs that are on health insurers’ radar in 2024 and 2025 are:

• GLP-1 agonists (annual cost: about $11,000).Various of this category of drugs treat type 2 diabetes, and can assist with chronic weight management and may reduce secondary cardiovascular events.
  Most health plans offer coverage of GLP-1 agonists for type 2 diabetes. However, health plans won’t cover them solely for weight management, which is not considered an essential health benefit under the Affordable Care Act.
• Central nervous system drugs (annual cost: about $22,000). This includes various drugs treating conditions such as Alzheimer’s, Parkinson’s, multiple sclerosis and schizophrenia.
  While these medications may make it difficult for health plans to manage their costs, the report notes that despite the initial cost, health plans may see reduced medical costs as patient health improves.

Mental health services are also driving costs, and they were listed among the top three inflators of drug costs by health plans surveyed for the PwC report.

While the per member per month outlays for mental health services have historically been too low to be considered a cost driver of overall medical costs, spending on mental health has jumped 50% since the pandemic. As a result, behavioral health services are accounting for a greater portion of health plan spending.

The main factors affecting costs are a significant supply and demand imbalance for behavioral health services. Health plans are competing with each other to sign on mental health providers from a pool that is not enough to satisfy demand.

Counterbalancing costs

There are three trends that could counterbalance some cost increases.

Biosimilars. — Biosimilars are biological products that are “highly similar” to and have “no clinically meaningful differences” from an existing Food and Drug Administration-approved reference product. One of the most recent drugs that has seen a flood of competing biosimilars hit the market is Humira (adalimumab), a medication that reduces the signs and symptoms of moderate to severe rheumatoid arthritis.

One report estimates that the savings generated by biosimilars in 2022 was $9.4 billion in the United States. Another analysis performed in early 2023 projects total savings from biosimilars to range from $125 billion to $237 billion between 2023 and 2027.

Health plans are increasingly focused on reducing wasteful spending, which is forcing them to look at:

Exploring new pharmacy benefit manager models. — This is in light of continuing reports of the country’s largest PBMs actually increasing the cost of medications for payers (health plans, self-insured employers and insureds).

Integrating medical and pharmacy benefits. — An example of this is a health plan pharmacy team identifying when members haven’t picked up prescriptions, aren’t taking medications as prescribed or not refilling prescriptions on time.

Connected benefits allow for real-time medical, behavioral health and pharmacy data analysis to help maximize management of chronic conditions, close care gaps and monitor prescription use and potential interaction.

A study of its own clients by health insurer Health Care Service Corporation found that large employer groups with integrated pharmacy and medical benefits saved an average of $516 per member per year in medical costs over a three-year period.

The takeaway

As health insurance costs continue to rise, we can work with you to find health plans that will fit your and your employees’ budgets and help you look for actions to take that could have a positive effect on your rates.

While the number of U.S. workers choosing high-deductible health plans has leveled off during the last two years, uptake has been growing rapidly among one segment of the working population: Gen Z employees.

The 2024 “State of Employee Benefits Report” by benefits administration provider Benefitfocus found that 45% of Gen Z workers and 43% of millennial workers surveyed were enrolled in HDHPs. The report notes 84% of employers offer both HDHPs and traditional health plans to ensure that they can met the needs of a multi-generational workforce.

It emphasizes that employees often choose health plans that will end up costing them more than it should in terms of out-of-pocket expenses or premiums, and that employers should help by providing assistance and education.  

Study findings

The trend of more Gen Z workers gravitating to HDHPs makes sense, since these plans are best suited for younger individuals who are generally healthier and have fewer health problems than their older counterparts — Gen Xers and Baby Boomers.

HDHPs feature higher deductibles and more out-of-pocket expenses in exchange for lower premiums upfront. The plans are typically tied to a health savings account (HSA), which employees can fund with pre-tax dollars to reimburse for health-related expenses.

But employers are cautioned against offering just HDHPs as they are not a good fit for everyone, particularly those who are regular users of their health plans or have chronic conditions that require more doctors’ visits, medical procedures and medications.

The study suggests that employers should offer a mix of plans that will meet the needs of their workforce. It found that:

• 64% of health plan enrollees selected a traditional plan in plan year 2024, compared to 69% in 2022.
• Across generations, higher-salaried individuals choose HDHPs over traditional plans.
• Generation X has the highest premiums compared to other generations, across all plans.
• The average employer covers 78% of their employees’ health insurance premiums, up from 74% in 2022. Despite the increase, employees are still facing higher premium outlays.
• Participation in HSAs and flexible spending accounts fell 20% from 2022 to 2024, indicating that employers are not doing enough to educate their staff about these tax-advantaged accounts.

One of the keys to a successful employee benefits program is to ensure that your workers are all choosing a plan that is best for their life situation. Choosing the wrong plan could end up costing them more in either:

• Upfront premiums for an unnecessary expensive plan with strong benefits that the employee may not use because they are young and/or healthy, or
• Out-of-pocket expenses if they choose a plan that has a high deductible when they are frequent users of medical services, either due to pre-existing conditions or other issues that crop up later in life.

What you can do

The report recommends that employers:

Focus on assistance and education — The study found that 70% of workers want help from their employer to better understand the employee benefits they are enrolled in or are considering.

To help your staff choose the plan that’s going to give them the most bang for their buck, your guidance and advice can be crucial. During your educational sessions, provide scenarios of how choosing the wrong plan can financially burden an enrollee. Provide tools that can help them ascertain which plan is right for them.

Offer a mix of plans — To ensure that employees have access to the health plan that is best for their health circumstances and budget, you should offer a mix of HDHPs and traditional health plans like health maintenance organizations and preferred provider organizations.

You can tailor your employee benefits educational sessions to each generation. Make sure not to overgeneralize, as there are instances when a younger person should be in an HMO or PPO.

Offer voluntary benefits — Not all voluntary benefits are created equal, and some add more value than others. These plans complement an existing health insurance plan by providing a financial backstop when faced with an unexpected medical emergency. They include:

• Accident insurance
• Critical illness/specified disease insurance, and
• Hospital indemnity insurance.

As well, benefits that help with other unexpected expenses that life deals increasingly burdened employees, are growing in popularity:

• ID theft protection,
• Legal insurance, and
• Pet medical insurance.

One often overlooked cost driver to your employee benefits plans is administrative errors and oversights that are the result of sloppy record-keeping and a lack of checks and balances among your account and human resources teams.

If you are not diligent in keeping up with outgoing employees, are not paying enough attention to admin details and checking billing for errors, and are not reviewing accounts regularly, you could be leaving money on the table unnecessarily and overpaying for your group health insurance and other employee benefits you offer.

The following are some of the most common administrative mistakes that could lead to overspending on your group health plan.

Failing to keep up with staffing numbers

If your human resources and accounting are not talking to each other, you risk failing to account for personnel that leaves and continuing to include them in the health insurance roster and paying their premium.

Obviously, this is typically not an issue in a small organization of 10 to 15 employees, but the more workers you have, the easier it is for one to slip through the cracks after they leave.

Consider having HR review personnel numbers monthly and updating your files to avoid this happening.

Failing to check for ‘age-outs’

Workers who have turned age 65 may not require your company health plan anymore, since they are eligible for Medicare. You can reduce health care administration and benefits costs substantially by keeping an eye out for age-outs each year.

Missing changes to plans

Before and during open enrollment it’s important to review all of the benefits plans that you offer — health, dental and vision coverage — to make sure there aren’t any changes that will increase the cost of any of the plans.

Sometimes a plan will introduce additional coverage that your employees may not need and, if you are not staying on top of changes, you may miss the opportunity to move them to another plan.

Admin mistakes by insurers

Administrative mistakes made by the insurers you contract with can be overlooked, forcing you to overpay for your employees’ coverage.

Your accounting and HR teams should regularly audit your insurers’ billings to check for errors and ask the companies to correct any that are found. One of the most common mistakes is for an insurer to have an incorrect employee count. But the carriers can make other mistakes in billing, too.

If you notice an increase in your monthly bill with no new staff additions, you may want to delve deeper.

The takeaway

By putting in place administrative controls and a regime for regular billing and personnel-count auditing, you can avoid mistakes that add to your employee benefits costs.

Keep an open line of communication with your insurers in case you need to work with them to address any issues that arise.

With multiple generations working side-by-side in this economy, the needs of your staff in terms of employee benefits will vary greatly depending on their age.

You may have baby boomers who are nearing retirement and have health issues, working with staff in their 30s who are newly married and have had their first kids. And those who are just entering the workforce have a different mindset about work and life than the generations before them.

Because of this, employers have to be crafty in how they set up their benefits packages so that they address these various needs.

But don’t fret, getting something that everyone likes into your package is not too expensive, particularly if you are offering voluntary benefits to which you may or may not contribute as an employer.

Think about the multi-generational workforce:

Baby boomers – These oldest workers are preparing to retire and they likely have long-standing relationships with their doctors.

Generation X – These workers, who are trailing the baby boomers into retirement, are often either raising families or on the verge of becoming empty-nesters. They may have more health care needs and different financial priorities than their older colleagues.

Millennials and Generation Z – These workers may not be so concerned about the strength of their health plans and may have other priorities, like paying off student loans and starting to make plans for retirement savings.

Working out a benefits strategy

If you have a multi-generational workforce, you may want to consider sitting down and talking to us about a benefits strategy that keeps costs as low as possible while being useful to employees. This is crucial for any company that is competing for talent with other employers in a tight job market.

While we will assume that you are already providing your workers with the main employee benefit – health insurance – we will look at some voluntary benefits that you should consider for your staff:

Baby boomers — Baby boomers look heavily to retirement savings plans and incentives, health savings plans, and voluntary insurance (like long-term care and critical illness coverage) to protect them in the event of a serious illness or accident. 

You may also want to consider additional paid time off for doctor’s appointments, as many of these workers may have regular checkups for medical conditions they have (64% of baby boomers have at least one chronic condition, like heart disease or diabetes).

Generation X — This is the time of life when people often get divorced and their kids start going to college. Additionally, this generation arguably suffered more than any other during the financial crisis that hit in 2008. You can offer voluntary benefits such as legal and financial planning services to help these workers.

Millennials and Generation Z — Some employee benefits specialists suggest offering these youngest workers programs to help them save for their first home or additional time off to bond with their child after birth.

Also, financially friendly benefits options, such as voluntary insurance and wellness initiatives, are two to think about including in an overall benefits package.

Voluntary insurance, which helps cover the costs that major medical policies were never intended to cover, and wellness benefits, including company-sponsored sports teams or gym membership reimbursements, are both appealing to millennials and can often be implemented with little to no cost to you.