Health Benefit Costs to Rise More Than 5% for Third Consecutive Year: How Employers Can Navigate the Challenges

For the third consecutive year, U.S. employers are bracing for another significant rise in health benefit costs. According to Mercer’s latest survey, employers expect a 5.8% increase in 2025, marking a notable jump after a decade of more modest increases, averaging around 3%. This growing trend raises concerns about how organizations, especially smaller businesses, can balance rising healthcare costs while maintaining affordable coverage for employees.

While healthcare costs have always been a central concern for employers, this new era of sustained, high increases presents unique challenges. Understanding the key drivers behind these rising costs, and developing effective strategies to manage them, will be critical for organizations in the coming years. In this article, we will explore these rising costs in detail, discuss the factors contributing to them, and provide actionable strategies to mitigate their impact.

Understanding the Drivers Behind Rising Health Benefit Costs

The drivers behind the rise in health benefit costs are multifaceted. While some factors, such as increased utilization, have played a role, the primary driver in 2025 is price dynamics, including inflation in healthcare services, the soaring costs of prescription drugs, and the ongoing shortage of healthcare workers. Below are some of the critical factors:

1. Prescription Drug Costs – The Fastest Growing Component

The most notable contributor to rising healthcare costs is prescription drugs, particularly high-cost specialty medications. According to Mercer’s survey, prescription drug costs rose by 7.2% in 2024 and are projected to continue driving healthcare cost inflation. One area of particular concern is the increasing use of GLP-1 drugs like Ozempic and Wegovy. While these drugs show promise in managing obesity and other conditions, their cost, which ranges from $1,000 to $1,500 per month per patient, adds a significant burden on employer-sponsored health plans.

Additionally, the introduction of costly gene and cellular therapies, which provide life-saving treatment for rare conditions, is another major factor. As pharmaceutical innovation continues, employers will need to find ways to manage the financial impact of covering these therapies.

2. Health Care Worker Shortages and Price Inflation

The ongoing shortage of healthcare workers is another significant contributor. With fewer nurses, doctors, and medical professionals available, healthcare providers are increasing their prices to account for staffing shortages. This has led to an overall increase in healthcare service costs.

In addition to higher wages for healthcare workers, there is increased demand for their services, especially in critical areas like behavioral health. As these shortages continue, employers may see further cost increases for routine care and specialized services.

3. Increased Utilization of Behavioral Health and Obesity Treatments

Although utilization of healthcare services has not had a dramatic impact on cost trends in recent years, there have been significant spikes in specific areas. Behavioral health services, for example, have seen increased utilization as more employees seek support for mental health challenges. Similarly, the demand for obesity treatments and related medications has increased, adding to overall healthcare costs.

While providing access to these critical services is vital for employee well-being, employers are now tasked with balancing affordability and coverage comprehensiveness.

The Impact on Employers

For many organizations, particularly smaller employers with fully insured health plans, the rising costs pose a substantial challenge. Mercer’s survey found that smaller employers, defined as those with 50-499 employees, are expected to see health benefit costs rise by as much as 9% in 2025 without intervention. This is a significant jump compared to larger organizations, which may have more negotiating power with insurers or self-fund their health plans.

As healthcare costs continue to climb, employers are faced with difficult decisions. Many will be forced to implement cost-cutting measures that may increase out-of-pocket expenses for employees. While this may help to manage overall organizational spending, it can also negatively impact employee satisfaction and retention, particularly if employees feel that their healthcare benefits are becoming less affordable.

Strategies for Employers to Manage Rising Health Benefit Costs

As health benefit costs rise, employers must explore various strategies to manage these expenses without compromising the quality of coverage they offer. While no single solution will fit all organizations, several proven approaches can help employers control costs and provide sustainable, affordable health benefits.

1. Evaluate Prescription Drug Coverage Options

Given that prescription drugs are the fastest-growing component of healthcare costs, employers should explore alternative approaches to managing their drug benefits. For instance, implementing a pharmacy benefit management (PBM) strategy that includes formularies, drug tiering, and step therapy can help contain costs while still providing access to necessary medications. Employers may also want to explore bulk purchasing programs or negotiate directly with manufacturers for high-cost specialty drugs.

Another option is to consider offering incentives for employees to use lower-cost generic drugs where possible. By educating employees about the financial impact of their medication choices, employers can encourage more cost-effective use of prescription drug benefits.

2. Adopt Value-Based Care Models

Value-based care is another strategy that can help employers manage healthcare costs. This approach focuses on paying providers based on patient outcomes rather than the volume of services rendered. Employers can work with health plan providers to adopt value-based contracts that incentivize healthcare providers to deliver high-quality, efficient care.

In value-based care models, providers are rewarded for keeping patients healthy and reducing unnecessary hospitalizations and procedures, which can ultimately result in lower costs for employers.

3. Telehealth and Virtual Care Solutions

Telehealth has become an essential tool for managing healthcare costs, particularly in the wake of the COVID-19 pandemic. By offering telemedicine options, employers can provide employees with access to medical consultations without the need for costly in-person visits. This not only reduces overall healthcare spending but also provides employees with a convenient and efficient way to receive care.

Telehealth is particularly useful for managing chronic conditions, mental health issues, and routine check-ups. Employers should ensure that telehealth services are fully integrated into their health benefit offerings to maximize cost savings and improve access to care.

4. Cost-Sharing Adjustments and Plan Design

Another strategy employers are adopting is adjusting plan design to increase cost-sharing with employees. This can involve raising deductibles, increasing co-pays, or implementing higher premiums for certain services. While this may not be the most employee-friendly approach, it can be necessary to manage overall healthcare spending.

However, employers must strike a delicate balance. Significant cost-sharing increases can lead to employee dissatisfaction and may discourage employees from seeking necessary care. To mitigate this, employers should consider tiered plan options that provide employees with different levels of coverage based on their needs and financial situations.

5. Wellness and Preventive Health Programs

Wellness programs aimed at improving employee health can also help reduce healthcare costs over time. By encouraging employees to adopt healthier lifestyles and engage in preventive care, employers can reduce the likelihood of costly chronic conditions like diabetes, heart disease, and obesity.

Incentive-based wellness programs that reward employees for participating in health assessments, fitness programs, or smoking cessation initiatives can drive long-term cost savings. Additionally, providing education on preventive care and early detection of health issues can further reduce healthcare expenditures.

A Balanced Approach: Managing Costs Without Sacrificing Employee Well-Being

While employers are under pressure to control rising healthcare costs, it is essential to remember that health benefits are a key driver of employee satisfaction, engagement, and retention. Reducing coverage or increasing out-of-pocket expenses too drastically can lead to a decline in employee morale and productivity, which ultimately affects the bottom line.

Employers must take a balanced approach, focusing on both cost management and maintaining access to quality care. The key is to implement cost-saving measures that are fair and transparent while ensuring that employees understand the value of the health benefits they receive.

How Axis HR Solutions Can Help

As the trend of rising health benefit costs continues into 2025 and beyond, employers are facing a challenging landscape. Navigating these complexities requires strategic planning, innovative solutions, and a deep understanding of the factors driving healthcare costs.

At Axis HR Solutions, we specialize in helping organizations develop and implement tailored health benefit strategies that align with their financial goals while supporting employee well-being. From prescription drug management to telehealth integration and value-based care models, we work closely with employers to design cost-effective health benefit plans that provide lasting value.

Our team of experts can guide you through the process of evaluating your current health benefits, identifying areas for improvement, and implementing cost-saving measures without compromising the quality of care your employees receive. Visit us at axishrky.com to learn how we can help you navigate the rising tide of health benefit costs and create a sustainable, employee-focused benefits strategy for the future.