While everyone was focused on the rising cost of living (food, housing, childcare, etc.), healthcare went behind our backs and did it again. Health insurance premiums are yet again on the rise. Experts are projecting that healthcare costs will increase 8% in 2025, which are up 7% from last year, which were up 6% from the year before… You get the idea. Despite the steady rise of 5-7% for premiums over the last 7 years, this year’s increase is projected to be the largest since 2012.
In other words, the cost of LIVING is more burdensome than ever.
More than ever, Americans are adding medical debt on top of medical debt; they’re putting off checkups/screenings or not filling prescriptions because of the cost; and they’re sacrificing huge portions of their paycheck to premiums even if they never seek medical care.
Even considering the atypical price fluctuations of the pandemic years, the staggering rate at which health care costs are growing overall is crushing employers and employees alike.
This is especially true if you’re one of the many organizations facing a spike of 10-30%. This puts employers in a frustrating dilemma: how are they supposed to maintain employee engagement and satisfaction while requiring them to pay more for less coverage?
The underlying reason behind the climbing rates boils down to one simple fact: health insurance costs more because healthcare costs more. Before employees come to you complaining about their insurance costs, it’s best to be prepared with facts-based explanations of your plan to battle the insurmountable costs of providing employee benefits. Before you can formulate that plan, you’ll need to understand the complexities behind rising healthcare costs.
14 Reasons Why Health Care Costs Are Going Up
1. Widespread Use of Expensive Specialty Drugs
New drug development costs a lot: from inventing the formula to extensive testing to get it approved and then marketing it to consumers. Manufacturers have a limited time to recoup as much of these costs (and the costs of all their failed formulas before they found a successful one) and make a profit before the patent expires and cheaper, generic options become available.
This year, one high-cost class of drugs in particular could drive most of the predicted increase in prescription drug spending. Demand for GLP-1s (like Ozempic) has skyrocketed in recent years for their weight-loss properties while most insurances still will only cover them for use in treating diabetes.
Beyond that, new methods for manufacturing medications are making them even more costly than before. Specialty drugs are often "biologics" procured from living cells, and many are injected or infused intravenously, making them extremely expensive. In fact, they account for a huge percentage of prescription drug spending despite making up less than 2% of all drugs on the market.
For example, recent breakthroughs in central nervous system (CNS) drugs for severe brain disorders like Alzheimer’s disease and schizophrenia are expected to improve medical outcomes. Of course, it will come with a high price tag.
On a positive note, more “biosimilars” will soon hit the market and compete with the biologics they mimic. Biosimilars produce the same effect but are cheaper to produce As more become available, they’ll start the process of lowering consumer cost and providing healthy competition in the marketplace.
Plus, the Federal government has been doing a lot lately to help prevent any one person from being financially devastated by the cost of lifesaving medication. The Affordable Care Act caps out of pocket maximums. The Inflation Reduction Act also has provisions to lower prescription drug costs for those using Medicare. Unfortunately, the end result of lowering individuals’ costs is that the burden must be shared among all policy holders through higher premiums.
2. Contract Renegotiation During High Inflation
Experts predict the delayed effects of inflation will have a profound effect on healthcare costs in 2025 and for many more years to come.
Insurance companies negotiate with healthcare systems to set prices for the coming year(s). That means even though medical supplies, pharmaceuticals, healthcare worker wages and other costs have continued to increase, many insurance companies are still paying the previously agreed upon, pre-inflation prices. For example, Medicare and Medicaid reimbursements aren’t keeping up with growing healthcare expenses, and yet the aging boomer generation means a growing percentage of the payer mix use those services. Many existing contracts have expired or will soon. New negotiations will account for the higher prices of pretty much everything. Plus, there are talks of negotiating shorter contracts more frequently.
Even as general inflation calms to more normal levels, the cumulative nature of inflation means that this year’s prices build upon all previous years. As a result, sticker shock from one bad year (2022 anyone?) takes much longer to dissipate from public perception than the actual inflation.
3. Growing Demand for Behavioral Healthcare
Insurance claims for mental health visits have increased by 83% since pre-pandemic levels. Stress, anxiety and ADHD claims are up among adults. Among minors, claims for gender identity, eating disorders and phobias have more than doubled.
To put even more pressure on the industry, there are currently not enough behavioral health professionals to meet the growing demand. The profession requires a long education and thousands of clinical hours to earn certification. Health Resources and Resources Administration predicts the nation will have a shortage of 500,000 behavioral health professionals by 2036. To counteract staffing shortages, hospitals are expected to demand higher reimbursement from insurers for mental health services.
4. Technology and Security Upgrades, Including AI
AI technology is coming to healthcare and it’s expected to save both more lives and more money. Even if we only take into consideration the technology available today, AI solutions could reduce administration costs by up to 25% and reduce medical costs by up to 11%.
Until then, we’re facing a steep startup investment of both money and time.
The healthcare industry has been slower than other industries to implement AI solutions. One of the biggest challenges is the vast amount of data needing to be organized, analyzed and protected, a time-consuming manual process, before AI tools can be trained on it. All this at a time when the experts needed to perform these tasks are rare and in high-demand.
A technological upgrade that many organizations feel pressure to upgrade is cybersecurity, and with good reason. This is especially true as AI enters the scene, with potential government regulations soon to follow. The average cost of a healthcare data breach is $10 million, but the actual cost in lost trust is higher still. That’s why experts predict that globally, the cumulative price tag for cybersecurity will reach $125 billion by 2025 (since 2020). Guess who is footing that bill?
At the same time, more and more patients (and, as a result, doctors) are demanding an upgrade to the newest, most expensive equipment and technology available. One study shows that even though advanced technology and newer procedures don’t necessarily lead to better care, Americans believe they do. The initial price for the latest and greatest is huge, and facilities recoup the costs by passing it along to patients.
5. Shortage of Health Care Workers
There’s historically always been a healthcare worker shortage, but it’s gotten markedly worse since the pandemic. Some blame increasing emotional and physical overwork, which proves that even healthcare professionals struggle with preventing employee burnout.
Currently, the U.S. is short 13,000 healthcare, 10,000 dental health and 6,000 mental health practitioners. These shortfalls are even more extreme in predominately minority communities. 83 million Americans live in an area without sufficient access to a primary care physician, and 1 in 3 black Americans live in a cardiac desert.
Experts are predicting this trend to only get worse in the coming decade, showing that the supply of healthcare workers will actually dip before rebounding, while the demand shoots sky high. By 2036, we’re projected to reach a shortage of nearly 140,000 physicians and over 450,000 nurses. In fact, 40% of healthcare workers will reach retirement age within the next decade. Add that to the number of people simply walking away from healthcare careers, the healthcare system would have to hire 200,000 new nurses per year just to keep up with demand.
The industry faces unique challenges when it comes to a worker shortage. Almost every position in the industry – doctors, nurses, technicians – requires a specific education and training. It takes 2 to 4 years of school to become a nurse and up to a decade or more before one can practice as a physician. This significantly narrows the field of potential candidates to fill jobs. Not only that, these specialized students need specialized teachers. Right now, there aren’t enough of either in the pipeline to fill the demand.
6. Aging Population Requiring More Health Care
Baby boomers’ retirement from medical careers affects more than just staffing. Not only will these highly knowledgeable workers cease to treat patients, many of them will require more medical care themselves.
By the year 2030, 1 in 6 U.S. citizens will be older than 60. These older adults are living longer overall, and many are managing multiple chronic illnesses as they age. Geriatric patients are particularly susceptible to chronic illness and acute health problems. Statistically they will remain the most frequent users of healthcare services. With the number of geriatric patients expected to double over the next 30 years, demand for health care will increase… and so will prices.
7. Misunderstanding / Misuse of Benefits
Even the simplest of health insurance plans have a multitude of factors you need to understand. You’ve got HMOs, PPOs, deductibles, premiums, co-pays, out-of-pocket maximums, and in- and out-of-network providers, specialists, primary care providers, co-insurance… Frankly, trying to keep the acronyms and terminology straight is enough to make one’s head spin.
Do you know the correct meanings for all four terms: “health plan premium,” “health plan deductible,” “out-of-pocket maximum” and “co-insurance?” In one study by United Healthcare, only 9% of respondents did. This lack of understanding can lead employees to make costly health care choices--like visiting the emergency room when urgent care would do or choosing an out-of-network provider--that end up leading to premium increases the following year.
8. Medical Advances
Medical advancements continue to revolutionize the field of healthcare, with brilliant individuals discovering new treatments, procedures and drugs all the time. A few of these developments make health care more affordable.
However, most researchers agree that as a whole, technological advances lead to increased costs for health care. For example, breakthroughs in treatments for conditions that were once considered un-treatable (diabetes, end-stage renal disease, AIDS, etc.) vastly improve the lifespan and quality of life for sufferers of those diseases. Of course, long-term care for chronic conditions come with similarly long-term expenses.
Clinical progress has also expanded the scope of medicine by showing that conditions such as mental illness and substance abuse can be treated.
9. Unhealthy Lifestyle Choices
Nearly 80% of health care spending goes to treat conditions like hypertension, lung disease and obesity, which are heavily correlated to lifestyle choices. Although a healthy diet, regular exercise and abstinence from drug/alcoholic substances can’t guarantee optimum health, these habits keep many serious health conditions (and their associated costs) at bay.
In recent years, chronic illnesses (such as heart disease and diabetes) have become more prevalent as 60% of all Americans have at least one of them and 40% have more than one. As a result, the sickest 5% of the population accounts for 50% of the nation’s health care costs while the healthiest 50% only use 3%. Many employers are incorporating employee wellness programs to empower employees to take their health into their own hands with the help of the resources you provide.
10. Physician Employment vs. Private Practice
In 2019, the U.S. healthcare system crossed a threshold. More doctors now practice medicine as employees of hospitals, health systems and medical groups than as independent practitioners. These organizations tend to have higher costs and/or charge more than independent doctors. Likewise, procedures done in a hospital setting rather than in the doctor’s office incur a facility charge on top of the physician’s bill.
According to the Medicare Payments Advisory Committee, the total payment for the most common office visit when performed in a hospital outpatient setting is $124.40. That’s nearly double the $69.97 charged for the same visit in a physician’s office. In addition, employed physicians are under an implicit expectation to admit their patients to the hospital that employs them, even if there’s a better or lower cost facility available.
11. Provider Mega-Mergers
Health care systems across the country have been merging at record rates over the last decade. In Q1 of 2024, there were 20 such deals and 4 of them were so-called mega-mergers, in which the smaller party had revenues of over $1 billion+ annually. Experts expect this trend to accelerate in 2025.
In theory, the intent of these mergers is to make more resources and funding available for research and high-cost procedures, leading to a higher quality of care. Unfortunately for Americans, mergers have been shown to decrease the patient experience without improving mortality rates. At the same time, when providers achieve monopolies, consumers in that market inevitably see prices go up. Research shows that health care consolidation leads to a reduction in operating costs by 15%-30% but an increase in the average price of hospital services by 6%-18% (and some studies have found prices exploded 20%-50% in certain areas). Hospital merges have even shown to reduce wages and benefits of workers in those markets.
Currently, the 10 largest health systems own a quarter of the healthcare market, giving them unprecedented bargaining power with insurers. These healthcare mergers are affecting prices to such a degree that President Biden issued an executive order to encourage more competition in the American economy. The Federal Trade Commission is also concerned, and in 2024 moved to block several high-profile mergers.
12. Administrative Costs
Usually when we pay our health care bills, we think of the services provided by doctors, nurses and technicians. What we don’t stop to consider is that administration costs account for 25% of U.S. health care costs, thanks in large part to complex billing processes associated with America's healthcare system.
In all, American insurers pay 3 TIMES the amount of money per person on administrative costs than the next highest country, and 5 times the average of other developed nations.
For every U.S. doctor, there are 10 administrative employees on the payroll. Not only that, new administrative employees are being hired at a staggering rate. Since 1970, healthcare managers have increased by 3,800% compared to a 200% increase in doctors nationwide. That’s not cheap.
13. Mistakes and Waste
While still not perfect, I think we can all forgive higher costs when they’re buying us better health care outcomes. Unfortunately, nearly 25% of all healthcare spending is considered wasteful. That’s billions of dollars a year that otherwise could have gone towards hiring more nurses, buying more lifesaving equipment, or better yet, remained in the pockets of hard-working Americans. Instead, it’s spent on administrative waste, dealing with medical fraud, unnecessary tests & procedures, repeating tests because of poor record keeping, medical malpractice, inconsistent billing, misuse of medical equipment… the list goes on and on.
It’s not just the healthcare providers making the mistakes. Americans looking abroad for discount cosmetic surgery through medical tourism often return to American providers to repair damage caused by botched surgeries or infections. These revisionary surgeries often cost more than paying for safe procedures in the first place. Also, experts are proving that worker’s compensation pays for less than 25% of the costs associated with job-related injuries, meaning this is one more instance where society has to share the monetary burden.
14. New Illnesses
If we’ve learned anything from 2020, it’s how much a new disease can turn the world as we know it completely upside down. On May 11, 2023, the U.S. declared the global public health emergency from Covid-19 to be officially over. The disease, however, is not completely gone and neither are the financial ramifications.
The harsh lesson is that new illnesses require staggering amounts of money in order to extensively research and test treatments and vaccines. That can be very expensive. Many facilities end up raising prices to help cover these new costs and to prepare for the uncertainty that comes with a new disease. Whether it’s another variant of Covid-19 or something new altogether, we’re all too aware that future new illnesses are a very real, and very scary, possibility.
How To Strengthen Your Benefits Package
According to the Medical Journal of America, decreasing medical costs would require several huge, fundamental changes. For example, healthcare should focus on preventing (rather than treating) preventable disease, providers should prioritize cost-effective business practices and citizens should all live healthy lifestyles and get living wills. It’s a wonderful dream and absolutely attainable if everyone works together. In the near future, however, we have yet another increase to contend with.
While it’s true you can’t spell hero without HR, that still doesn’t give human resources professionals the superhuman ability to fix the American healthcare system alone. However, you can make a huge difference to the employees who look to you for help and guidance. You can have all the answers ready when they complain about rising premiums. You can proactively support healthy lifestyle choices with an employee wellness program. Most importantly, you can design an inclusive benefits package with perks that help offset rising costs.
Now that you know the many complex causes of rising healthcare costs, you’ve taken the first step toward combatting them. For example, one great way to offset rate increases is to add money-saving perks, like employee discount programs, to your benefits package. They’ll help soften the blow of increased premiums and provide ways for employees to stretch their paychecks a little further. For insights around picking the best perks (and the best employee discount programs) for your group, read How To Pick The Right Voluntary Benefits and A Buyer’s Guide for Employee Discount Programs.
