How can employers control health care costs as medical expenses surge? According to PwC, medical costs in the group health plan market are expected to increase by 8 percent in 2025. Both employers and employees are feeling the impact, which is necessitating cost containment in health care.
Why are health care costs increasing?
Health care costs have been rising for a while. Inflation is one factor, but health care costs have historically risen at levels that far exceed regular economic inflation rates, meaning that inflation doesn’t provide a full explanation.
According to PwC, other significant factors behind rising health costs include behavioral health utilization and prescription drug spending. In both 2023 and 2024, medical costs were higher than in previous years, largely due to higher-than-expected use of glucagon-like peptide-1 (GLP-1) drugs and greater utilization of inpatient and outpatient care due to deferred care driven by the COVID-19 pandemic.
Both employers and employees shoulder these rising costs. Employers end up paying more for employee health benefits, and employees face higher premiums, deductibles and copays. In some cases, out-of-pocket costs may be so great that employees skip or delay care, which may ultimately result in worse health outcomes and losses in productivity.
Health Care Cost Containment Strategies
Although health costs are rising, employers may be able to counter the trend with effective health care cost containment strategies.
While cutting benefits may seem like the easiest route, this approach can have major downsides. Employers offer health plans because these benefits help them achieve a variety of goals, from attracting the most in-demand workers to reducing sick days and boosting productivity. If employers cut health benefits entirely, they could see unintended consequences that cost more in the long run. For example, a company’s best employees may quit in search of better benefits, resulting in operational disruptions and increased recruitment, hiring and training costs.
With the right strategies, though, it may be possible to provide health care coverage of the same or even better value while controlling costs.
Tiered Networks
Tiered networks can be one way to focus on quality of care and have become a popular cost control strategy.
Typically, health plans use provider networks. Plan enrollees who receive care outside of this network may face higher out-of-pocket costs or be denied coverage entirely. Alternatively, with a tiered network model, there are multiple groups of health care providers.
Typically, this arrangement has three tiers:
- The first tier consists of preferred providers. They offer the highest quality of care at the lowest prices. Plan enrollees who use providers in this tier typically have lower out-of-pocket costs.
- The second tier consists of providers that offer a standard level of care at the standard price. Plan enrollees who use providers in this tier typically have slightly higher out-of-pocket costs.
- The third tier consists of providers that offer lower-value care. Plan enrollees who use providers in this tier may have significantly higher out-of-pocket costs.
A tiered network incentivizes plan enrollees to seek out providers who offer the highest value of care, which may lower costs while leading to better outcomes. However, enrollees who want to see other providers still have the option to do so, as long as they accept a greater share of the cost.
High Deductible Health Plans (HDHPs)
High Deductible Health Plans (HDHPs) could help to control costs by encouraging employees to take an active role in their health care spending. Particularly when paired with Health Savings Accounts (HSAs), these plans can allow employees to set aside pre-tax dollars for medical expenses, creating a financial incentive for them to make informed decisions about their care.
HDHPs also help to promote cost awareness by requiring higher out-of-pocket payments, which may motivate employees to compare costs, seek preventive care and avoid unnecessary procedures. By integrating HDHPs into a broader strategy that includes benefit education and population health management, employers can create a more sustainable approach to managing health care costs.
Employee Education and Wellness Programs
Employers may be able to lower health care costs by implementing programs that educate employees about their health benefits and promote overall wellness.
Through employee benefits education, employers can give workers the knowledge they need to make cost-effective health care decisions, such as visiting urgent care over an emergency room when appropriate. Additionally, providing tools to compare health care costs and hosting informational sessions can make it easier for employees to navigate their options.
Wellness initiatives like stress management workshops, on-site biometric screenings and fitness class discounts can help inspire healthier lifestyles. These efforts may not only lead to fewer insurance claims in the long-term but can also support a more engaged and productive workforce.
Self-Funded Benefits
Self-funded employee benefits can offer employers a way to manage rising health costs while maintaining meaningful coverage for employees. With this benefit funding model, employers assume the risk and pay for employees’ health care claims directly, which may be partially funded by employee premiums. This approach may provide greater transparency into spending and a higher degree of flexibility in the benefits offered.
While self-funding can be cost-effective, it also comes with financial risks, particularly if claims exceed expectations. Many self-funded employers purchase stop loss insurance to limit their liability for high-cost claims.
Another potential issue with a self-funded program is ensuring compliance with federal regulations, such as the Employee Retirement Income Security Act (ERISA). Partnering with an experienced benefits advisor can help employers navigate these complexities and create plans that are both compliant and optimized for cost containment.
Limiting Access to Expensive Care
When plan enrollees skip or delay necessary care, their health conditions may worsen, resulting in higher costs down the road. On the other hand, when plan enrollees undergo unnecessary care or diagnostic tests, they can incur extra costs and raise the overall price of care. Finding a middle ground is challenging.
One strategy is to restrict eligibility for services to certain groups. For example, many plans only cover certain tests or vaccines for certain age groups, based on current medical guidelines. Some employers also restrict coverage of popular but expensive GLP-1 drugs, which are increasingly being used for weight loss.
Using a Benefits Broker
The good news is that there are many health care cost containment options available. The bad news is that they each have their own pros and cons, so it’s easy to inadvertently create new challenges while attempting to solve another.
Navigating employee benefits, especially health plans, can be complex, but you don’t have to do it alone. Higginbotham’s experienced team is here to help you create customized and strategic benefit options that meet the needs of your workforce and the budget of your organization. Get in touch with an employee benefits specialist today to learn more about how we can provide tailored benefits solutions for your team.
