Why health costs are going to hit workers hard next year

Large employers anticipate significant health benefit cost increases, with projections indicating a median jump of 9% to 10% next year, primarily fueled by rising drug expenses, particularly biologics and GLP-1s, and increased demand for medical procedures. In response, companies are reversing prior trends by shifting more of these escalating costs to employees, with 51% planning to do so, and are actively exploring alternative, more restrictive health plan designs to control expenditures. This strategic pivot reflects a more aggressive stance by employers to manage persistent cost inflation, impacting employee benefits and potentially signaling a broader restructuring of corporate healthcare provision.

Analysis

A significant shift is underway in corporate healthcare benefits, as large employers are forecasting a median health cost increase of 9% to 10% for the upcoming year, a sharp acceleration driven by rising demand for medical procedures and escalating drug costs. Pharmacy expenses, which now constitute 24% of total employer health spending, are projected to climb 11% to 12%, fueled by pricey biologics, specialty drugs, and particularly the soaring demand for GLP-1 obesity treatments. In a notable reversal of recent trends, a majority of employers (51%, up from 44% last year) intend to shift these higher costs to employees through increased premiums, signaling an end to the practice of absorbing such increases to compete in a tight labor market. Concurrently, employers are adopting more aggressive cost-containment strategies, including scrutinizing vendor contracts and implementing alternative health plans like exclusive provider organizations (EPOs) and high-performance networks. Nearly a quarter of large employers will have these narrower network plans in place next year, with another 36% considering them, indicating a structural move toward more restrictive but theoretically more efficient healthcare delivery. This trend is further compounded by concerns that potential government spending cuts to Medicare and Medicaid could lead providers to increase prices in the commercial market to offset lost revenue, creating additional cost pressure on employer-sponsored plans.

Key Decisions for Investors

• Investors should scrutinize healthcare providers and insurers for their exposure to the shift towards narrower, high-performance networks, as companies not included in these preferred plans or those with weak pricing power may face significant margin pressure.
• While the surging demand for GLP-1 drugs is a clear tailwind for pharmaceutical manufacturers, the intense focus on their cost as a primary driver of inflation creates a risk of aggressive utilization management and pricing pushback from employers and PBMs.
• The direct shift of healthcare costs to employees will likely dampen consumer discretionary spending, posing a headwind for retail, leisure, and other consumer-facing sectors as household disposable income is further constrained.
• Evaluate companies across all sectors on their ability to manage this escalating operational expense, as those who successfully implement cost-containment strategies without harming employee retention may gain a competitive margin advantage.