2025 Forecast: Medical costs will continue to rise
January 9, 2025
Employers offering health insurance face some substantial headwinds going into 2025. Today is the first of a series of posts about the issues I think will have the greatest impact on employer-sponsored health insurance over the coming year(s).
Medical inflation compared to consumer prices and wage growth
Source: WTW 2024 Best Practices in Healthcare survey
Medical costs went up more in 2024 than in any single year of the previous two decades, and many employers saw double digit rate increases. The Centers for Medicare and Medicaid Services (CMS) Office of the Actuary predicted last June that employer spending on health insurance will increase by 5.3% in 2025, due to a combination of higher prices, medical advances, and general inflation. I believe that the actual cost increases employers face next year will be considerably higher.
Employer-sponsored health insurance is especially sensitive to increased provider leverage due to provider consolidation, as government payers generally set prices without negotiation. Mergers and consolidations are growing, leading to fewer (and larger!) health systems negotiating with health plans. Hospital contracts are usually negotiated in three-year cycles, so higher rates in 2025-2027 will, in part, represent catch-up from expiring contracts that included more modest rate increases.
Impressive medical advances will also lead to higher costs. GLP-1 drugs dramatically help lower medical risks for those with obesity and diabetes but substantially raise short- and medium- term medical costs for employers providing coverage. Advances in immunologic treatment can help prolong the healthy lives of people with various types of cancer, although these chronic treatments can cost over $20,000 a month. Gene therapies for rare diseases might save money over many years but will lead to higher initial costs.
The consumer and regulatory backlash against prior authorization and other types of utilization management could also increase medical costs, although utilization is responsible for less medical inflation than increasing unit prices.
The increase in total medical costs will translate to a worsening affordability crisis for lower wage workers. One-quarter of adults (24%) already say they have medical or dental bills that they are unable to pay. Almost one-third (29%) of those with employer coverage) said they or a family member had delayed of skipped needed health care or prescription drugs in the last 12 months because they couldn’t afford it. For dental care, about one-third (35%) of adults report they have delayed or skipped dental care due to costs.
Implications for employers:
Employers can demonstrate fiduciary responsibility by competitively reprocuring medical carriers, PBMs, and vendors in a regular schedule.
It may be appropriate to survey those who decide to opt-out of health coverage to find if they have alternative sources of health insurance or if they are opting for no health insurance.
Employers can also look carefully at administrative expenses of their health plans to be sure that “buy up” programs are worth the cost and critically evaluating vendor programs to be sure that they have achieved enrollment targets and are meeting their goals.
Employers can pay special attention to affordability of both premiums and out-of-pocket costs for lower wage employees.
Design plans to direct members to less expensive sites of service, such as ambulatory care centers that are not affiliated with hospitals.
Measure and decrease spending on low value care.
Increase use of telemedicine, while monitoring to be certain that this appropriately substitutes for in-person care rather than adding incremental cost.
The next posts in this series:
Employers and health systems will continue to face labor shortages
Regulation and policy changes could reshape employer-sponsored health insurance
Artificial intelligence will continue to advance in health care delivery and administration
Climate change will adversely impact health and increase health care costs
Mental health and substance use will continue to require employer attention
Infectious disease will continue to pose serious risks