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Discovering the Right Balance: Navigating Costs While Delivering Desirable Benefits
By Burnham
Blog: Discovering the Right Balance: Navigating Costs While Delivering Desirable Benefits

Employer’s Balancing Act: Part 1

Welcome to our new series, “Employer’s Balancing Act.” We’ve designed this series to empower employers with the knowledge they need to navigate the ever-evolving landscape of healthcare benefits, containing rising costs and providing optimal value to both their company and employees. Throughout this series, we will offer a wealth of facts, statistics, and practical advice to help you strike the delicate balance between meeting your employees’ evolving benefit needs and managing your budgets effectively.

Our insights are rooted in the extensive data gathered from our 2023 Employee Benefits Mid-Year State of the Market Report, ensuring you stay well-informed about the current state of employee benefits.

Today’s benefits market is presenting employers with a challenging balancing act. The central issue revolves around how to continue offering essential benefits and enhanced coverage to attract and retain employees, all while grappling with the surge in costs driven by what some describe as unprecedented market challenges.

Finding this equilibrium is no easy task, especially as several factors continue to exert their influence on the market.

Key Factors Propelling Healthcare Costs for Employers:

1. Increased Healthcare Utilization: The frequency of delayed doctor visits and postponed medical treatments has been on the rise since the pandemic’s initial decline. This trend has led to an increase in health plan renewal rates for employers. Furthermore, the inability of patients to undergo preventive healthcare screenings, such as x-rays and blood tests, during the COVID-19 shutdowns has resulted in a worsening of various health conditions. Consequently, diagnoses of serious health conditions and diseases have seen a sharp spike, necessitating more expensive treatments.1

2. Persistent Inflation: Inflation continues to exert its influence across multiple sectors. Employers are grappling with elevated expenses across the board, encompassing higher costs for raw materials, supplies, overhead expenses, and outsourced services. This persistent inflationary pressure could potentially result in health plan expenditures for employers surging by 9-10% through 2026.2

3. Shortage of Skilled Healthcare Workers: On the provider side of the healthcare equation, a shortage of skilled healthcare professionals is wreaking financial havoc, leaving several major health systems in a precarious financial state.

4. Limited Healthcare Supplies: The American Hospital Association highlights shortages in essential healthcare supplies, ranging from medical devices to personal protective equipment and vital medications. This scarcity stems from various factors, including limited sources of raw materials (such as resins, metals, and gases), recent COVID-19 outbreaks in China, closures of pharmaceutical plants, and reduced production of certain drugs. This scarcity not only drives up costs for health plans but also forces employers to contend with higher premium rates.

5. Rising Incidence of Cancer: Industry data underscores that cancer has now surpassed musculoskeletal (MSK) conditions as the primary driver of healthcare costs. As delayed diagnoses and treatments due to COVID-19 come to the forefront, pressure on healthcare rates may intensify. Consequently, health insurers are becoming increasingly selective in their risk appetite and pricing strategies, making them less inclined to negotiate rates with employers at renewal time, thereby pushing up costs.

6. Cumulative Impact of Chronic Conditions: A significant 85% of U.S. healthcare expenses are attributable to the treatment of chronic health conditions such as asthma, heart disease, high blood pressure, and diabetes. As health issues among the U.S. population continue to rise, the cost of insuring average Americans and healthcare expenditures follow suit. Notably, nearly 40% of U.S. adults over the age of 20 are either overweight or obese, contributing to the prevalence of chronic diseases and inflated healthcare spending.

7. Escalating Costs of Prescription Drugs: Advances in new medications, specialty drugs, and cellular gene therapies aimed at treating chronic health conditions, cancers, and rare diseases have driven up the costs of prescription drugs. This cost escalation is passed on to both employer health plans and their covered employees, leading to increased rates. Moreover, the heightened use, and in some instances, misuse, of these new drugs further compounds the cost burden. For example, the increased utilization of the drug Ozempic beyond its intended treatment for Type 2 Diabetes is pressuring claims trends and expenditure. Separately, pharmaceutical companies are adjusting their pricing to health plans (and ultimately, employers) to account for lower prices and rebates they are required to provide to Medicare, as stipulated by the Inflation Reduction Act’s new measures.

Shifting Employee Demographics: Trends Impacting the Workforce

In addition to the rising healthcare costs, employers are grappling with the effects of several socio-demographic trends that are reshaping the workforce and posing challenges in delivering sought-after, cost-effective benefits to employees.

1. Increasing Diversity: A strong push for more inclusive workplaces has led to greater diversity in employee populations concerning age, generation, ethnicity, and sexual orientation. This shift has driven a growing demand for a range of lifestyle benefits. As a result, employers are reevaluating their benefit programs to cater to this expanding spectrum of employee needs. However, this transformation often requires increased budget allocation, particularly for the universally sought-after benefit: affordable health insurance.6

2. Aging Workforces: There’s no denying that the American workforce is getting older. Data from the Bureau of Labor Statistics indicates that the 55-and-older segment is growing at a rate more than three times that of the overall labor force. In contrast, the annual growth rate of employees in the 16-24-year-old age group is on the decline.7 This aging workforce has several implications for employers:

  • Older employees are more likely to have chronic conditions like diabetes, arthritis, and heart disease. While those over age 65 might transition to Medicare plans, this still leaves approximately 73 million individuals increasing their utilization of hospitals, doctors, physical therapists, health clinics, and prescription drugs. This, in turn, drives up health plan premiums for both employers and employees.
  • There’s a heightened need for retirement savings plans and other benefits among older employees. Job stability, competitive pay, full-time work, pension benefits, paid leaves, and phased retirement options become increasingly important to this demographic, prompting employers to reconsider their benefit offerings.8

3. Widening Skills Gap: The aging workforce also means a wave of retirements is on the horizon. In a few short years, the majority of Baby Boomers will exit the U.S. workforce. However, according to a Korn Ferry report, Gen X and Millennial workers may not have had sufficient time or training to step into the highly skilled roles left vacant, potentially creating a skills gap for employers.

  • With fewer younger professionals ready to assume these demanding positions and even fewer possessing the necessary skills, employers are compelled to explore avenues for upskilling, reskilling, and retaining existing employees eager for growth opportunities within their organizations.
  • By 2030, more than 85 million jobs could remain unfilled due to a shortage of skilled workers.9

4. Changing Job Market: The recent landscape of tech layoffs, banking failures, and looming economic uncertainties has encouraged employees to hold onto their current jobs, tilting the job market in favor of employers. As a result, employers are likely to take measures aimed at regaining control over hiring and recruiting costs, payroll, organizational culture, and productivity. These steps may uncover potential savings that can be redirected to meet rising expenses in other areas.

In light of these evolving trends and factors contributing to escalating costs, employers have traditionally responded to higher premiums by shifting a larger share of the cost burden onto employees. For instance, transitioning more employees to high deductible health plans (HDHP) has meant reduced upfront premium payments but higher out-of-pocket costs through copays, deductibles, and coinsurance.

However, there is a limit to how much more employees can bear:

  • Medical bills are already responsible for over 66% of personal bankruptcies, making them the leading cause of financial distress.
  • A significant 40% of Americans are apprehensive about their ability to afford healthcare in the coming year.10

As a result, despite the projected increase in health plan rates over the next few years, employers are leaning toward absorbing these cost increases to the extent possible. This approach aims to avoid alienating employees, further straining recruitment and retention efforts, and mitigating the challenges posed by labor shortages.

Coming Up Next in Our Series:

In the series “Employer’s Balancing Act,” we are going to delve deeper into ways that employers can manage inevitable cost increases that come with providing healthcare benefits. Are you wondering how to ease the financial burden both for your business and your employees? Stay tuned for Part Two as we discuss these strategies and more.

Additionally, check out our 2023 Employee Benefits Mid-Year State of the Market report for a comprehensive analysis of the trends and data impacting the Employee Benefits market.

1 Medical Economics, “January 2023 a mixed bag as new year starts for hospitals,” February 28, 2023, Richard Payerchin

2 McKinsey & Company, “The gathering storm: The threat to employee healthcare benefits,” October 2022

3 National Library of Medicine, “The Relation of the Chronic Disease Epidemic to the Health Care Crisis,” July 8, 2022

4 Business Group on Health, “2023 Large Employers’ Health Care Strategy and Plan Design Survey,” August 23, 2022

5 CMS.gov, “National Health Expenditure Projections 2021-2030,” 2023

6 Workest, “Lifestyle Spending Accounts: Everything You Need to Know”

7 Bureau of Labor and Statistics, Bureau of Labor and Statistics, “Labor force projections to 2024: the labor force is growing, but slowly,” December 2015

8 AARP. “High on Priority List for Older Workers: Meaningful Employment and Flexibility,” January 18, 2023, Lona Choi-Allum

9 Korn Ferry, “The $8.5 Trillion Talent Shortage,” Michael Franzino, Alan Guarino, Yannick Binvel, Jean-Marc Laouchez

10 Retire Guide, “49+ US Medical Bankruptcy Statistics for 2023,” August 30, 2022, Lamia Chowdhury

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