Everyone has been watching for the implications the COVID-19 pandemic and other macroeconomic factors would have on healthcare costs. Would costs increase due to care that was deferred during the pandemic? How would healthcare prices and utilization be impacted by general inflationary pressures? What contribution would healthcare labor challenges and pandemic-related hospital revenue losses make? How would deteriorating mental health impact physical healthcare costs and healthcare trends overall?

When WTW examined cost trends a year ago, the evidence of health cost inflation was slow to emerge. In fact, medical inflation was significantly lower than it had been in decades and lower than consumer goods inflation. A year later, the impact on healthcare costs is evident. Average cost increases for medical and Rx services are close to 8%, and medical inflation has far eclipsed that of consumer goods, threatening the affordability and sustainability of coverage.

According to WTW’s 2024 Best Practices in Healthcare Survey, employers project their healthcare costs will increase by 7.7% in 2025, compared to 6.9% in 2024 and 6.5% in 2023. Reasons for this surge include general inflation, the cost of prescription drugs, labor shortages, and providers and hospital systems renegotiating multi-year contracts to recoup revenue lost during the pandemic.

4 reasons behind rising healthcare costs

The following factors are contributing to the continued rise of healthcare costs:

1. Cancer costs and severity are increasing.

With cancer driving approximately 30% of medical costs, deferred preventive cancer screenings during the pandemic were a key concern. Many cancers can be prevented or treated early through timely screenings. Today, increases in cancer costs are in mid-double digits, and cancer is a leading driver of high-cost claims. Specifically, screenable cancers such as breast and colon cancer are driving costs, as well as expensive cancer therapy treatments. This rise in costs is likely due to cancers that are more advanced at the time of diagnosis and higher costs of oncology pharmaceuticals.

2. Unit cost inflation is on the rise.

Significant unit cost inflation was anticipated post-pandemic as providers and hospital systems attempted to recoup lost revenue and as consolidation continued in the provider space. Additionally, economic inflation and decreased competition in healthcare were expected to lead to higher future costs. In 2022, data did not show significant increase in the average unit cost of services, likely due to provider contracts being locked in over multi-year periods. However, 2023 data showed medical unit cost inflation of 5.5% over last year. As provider contracts are renewing, unit costs are rising as predicted.

3. Prescription drugs, GLP-1s are driving costs.

Drug costs continue to drive higher healthcare spending for employers, with an annual trend of 15% hikes over 2022 before rebates. While expensive pipeline drugs, diabetes and obesity treatments (especially GLP-1s), and specialty cancer drugs are providing needed treatment for individuals, they are increasing the cost of healthcare. Prescription drugs and pharmaceuticals are driving up both trends and the total cost of care, now accounting for 30%-35% of total healthcare costs (compared to 20%-25% 10 years ago).

4. Mental health remains a top priority.

The prevalence of anxiety and depression is continuing to rise nationwide. According to the Centers for Disease Control & Prevention’s household pulse survey, major symptoms of anxiety and depression are more than twice as common now compared to before the pandemic. WTW’s data show employer mental/behavioral health costs continue to increase: The average cost per person/portion of spend attributable to increase was 24% in 2023 relative to 2022.

Fortunately, there are actions employers can take to help mitigate these costs. The first is to know how to use your data. In a rapidly evolving healthcare system, retrospective claims analysis provides limited insights. Use predictive analytics and machine learning models that project future outcomes to proactively manage risk. By doing so, HR leaders can gain insights into their own health trends, risk factors and expected future healthcare use patterns. They can then make informed decisions and tradeoffs about healthcare benefits, employee wellness programs and other initiatives that can improve employee health outcomes and better manage healthcare costs.

Organizations should implement effective risk management strategies to address the unpredictable nature of healthcare costs. The landscape has become one of constant fluctuation, making it more difficult to budget and plan for the future. To navigate this complex environment, employers must take action and prioritize risk management.

Some strategies include:

• Financial risk mitigation, such as captives and stop loss.
• Unit cost management through steerage to high-quality/low-cost providers via alternative networks or health plans.
• Active pharmacy cost management, including review of GLP-1 coverage and pharmacy program financial arrangements, clinical programming and support for members.
• Managing overall population health risk through thoughtful care management programs and steerage to quality care (such as Center of Excellence solutions).

By proactively addressing healthcare cost challenges and implementing effective risk management strategies, HR leaders can mitigate financial risks, enhance employee satisfaction and achieve long-term sustainability.

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