Survey: Employers expect third year of high health cost growth in 2025 

Timing is everything. We conduct our annual National Survey of Employer-Sponsored Health Plans in the summer to get the most accurate view of both actual health benefit cost in the current year and projected cost for the upcoming year. Our 2024 survey has just closed, and complete results aren’t yet available, but we analyzed the responses of the first 1,800 participants to get an early look at cost increases for health plan sponsors in 2025.

Unfortunately, the picture is not encouraging. Total health benefit cost per employee is expected to rise 5.8% on average in 2025, even after accounting for planned cost-reduction measures.

_{Cost increases for 2024 and 2025 are projected; the cost increase for 2025 is based on preliminary data. Note that the cost trend for 2021 was disrupted by pandemic-related fluctuations in utilization.}

_{Source: Mercer’s National Survey of Employer-Sponsored Health Plans (beginning in 2020 results are based on employers with 50 or more employees); Bureau of Labor Statistics, Consumer Price Index, U.S. City Average of Annual Inflation (April to April) 1993-2024;} 

Employers estimated that their costs would rise by about 7%, on average, if they took no action to lower cost. Smaller employers (those with 50-499 employees), which typically have fully insured health plans, have been hit the hardest – they reported that cost would rise by about 9% on average if they took no action to lower it.

Based on these projections, 2025 would be the third consecutive year of health benefit cost increases above 5%, following a decade of cost increases averaging only around 3%. Certainly, the recent spike in inflation helped initiate this period of elevated cost growth. But given that general inflation has cooled considerably since 2022, there are clearly other factors contributing to the higher health benefit cost trend – and these may have long-term implications for health plan sponsors.

Complex forces driving higher cost trends

While we’ve seen significant increases in utilization in a few areas, such as for behavioral healthcare and GLP-1 medications, overall utilization has had a relatively modest impact on trend this year. The biggest driver of the trend is price dynamics, some of which are macro in nature.

One source of pricing pressure is the widening gap between the supply of healthcare workers and the demand for healthcare services, which is building as older Americans become a larger part of the population. Another is the continuing consolidation of health systems – which shows no sign of slowing down. Consolidation may generate savings in the future through increased efficiency and improved integration, but there is evidence that it has put pressure on pricing, at least in the short term, because larger health systems naturally have greater negotiating power than smaller systems.

Additionally, the introduction of healthcare price transparency requirements in 2021 may have the unintended consequence of driving up provider reimbursements. Healthcare providers can now see when another provider group has negotiated higher rates from a health plan, and this may influence their own reimbursement discussions. 

Spending on prescription drugs remains the fastest-growing component of health benefit cost; employers reported that drug benefit cost per employee rose 7.2% in 2024. The ongoing introduction of very high-cost gene and cellular therapies is contributing to this higher cost growth.

The employer response to faster cost growth

The survey results suggest that about half of employers (53%) will make cost-cutting changes to their plans in 2025, an increase from 44% in 2024. Generally, these changes involve raising deductibles and other cost-sharing provisions, and result in higher out-of-pocket costs for plan members when they seek care. In recent years, many employers have avoided making these types of changes, but this becomes more difficult in a period of sustained higher cost growth.

Each year the survey asks large employers (those with 500 or more employees) about their strategic priorities for their health programs in the upcoming years. During the tight labor market following the pandemic, “Enhancing benefits to improve attraction and retention” jumped to the top of the list. This year, however, the top two strategies both address the need to manage cost: “Managing high-cost claimants” and “Managing cost for specialty drugs.”

Because the cost of healthcare coverage is typically shared between the employer and employee, managing cost is also important to minimize growth in employee premium contributions. On average, employees will pay for 21% of health insurance premiums through paycheck deductions in 2025, the same as in 2024.

Employers are still concerned about healthcare affordability and ensuring that employees can afford the out-of-pocket costs when they seek care. But they also need to manage the overall cost of healthcare coverage to achieve a sustainable level of spending for the organization. Balancing these competing priorities will be a challenge over the next few years.