After experiencing modest cost increases during the pandemic, the average costs that U.S. employers pay for their employees’ health care is expected to climb sharply.
According to projections by Aon, employers expect health benefit cost per employee to increase 6.5% to more than $13,800 per employee in 2023. This projection is more than double the 3% increase to health care budgets which employers experienced from 2021 to 2022 but is significantly below the 9.1% inflation figure reported through the Consumer Price Index, Aon notes.
On average, the budgeted health care costs for clients are $13,020 per employee in 2022, the firm further notes. The analysis uses the firm’s Health Value Initiative database, which captures information for nearly 700 U.S. employers representing approximately 5.6 million employees and $76 billion in 2022 health care spend.
Medical claims were suppressed for most employers during the first year of the COVID-19 pandemic, during which time much care was postponed or skipped during quarantines, Aon explains. Employers have seen medical claims return to more typical levels of growth, and they anticipate inflationary cost pressures in the coming year.
“In complete contrast over the last decades, we are measuring that health care budgets for U.S. employers will come in nearly three times lower than the Consumer Price Index this calendar year,” says Debbie Ashford, the North America chief actuary for health solutions at Aon. “Despite this historic occurrence, employer health costs are expected to increase 6.5% in 2023 due to economic inflation pressures.”
Cost Pressures
One key concern about increasing health care costs is the impact on retirement savings and whether employees will cut back on their contributions. Aon notes that, for now, employers do not plan to be passing along those cost increases to employees.
Regarding 2022 health plans, employer costs increased 3.7%, while employee premiums from pay checks were slated to increase by a more modest 0.6% from 2021, according to the firm's analysis. Plan costs represent the employer’s and employee’s combined premiums for medical and prescription drug costs but exclude employee out-of-pocket payments such as deductibles, co-pays and co-insurance. On average, employers subsidize about 81% of the plan cost, while employees pay the remainder.
Employees in 2022, meanwhile, are contributing about $4,412 for health care coverage this year, of which $2,520 is paid in the form of premiums from paychecks and $1,892 is paid through plan design features such as deductibles, co-pays and co-insurance, the firm’s analysis shows.
“In what remains a tight labor market, employers are absorbing most of the health care cost increases,” Ashford further observes. “Employers are budgeting higher due to uncertainty and the anticipation that inflationary pressures will increase the cost of health care services.”
To that end, price increases driven by economic inflation typically are slow to appear in medical trends due to the multi-year nature of the typical provider contract, but will become apparent over the coming year, Ashford further explains. Other contributing factors adding pressure on health care trends are new technologies, severity of catastrophic claims, blockbuster drugs and increasing share of specialty drugs.
Financial Opportunities Through Health Improvements
Further, as employers are faced with the constant, upward pressure from health care trends each year, Aon notes that many are exploring new solutions to trim their health care costs. One worthwhile approach is to address the high costs associated with patients with chronic and complex health care conditions.
“The effect of chronic conditions has far-reaching implications beyond what we see with health care costs, out to the other areas of the business, like absence and productivity, disability and worker's compensation,” said Farheen Dam, Aon's North America health solutions leader. “By focusing on chronic conditions, not only are we improving the health and happiness of employees, but we're helping to improve the way they live and work.”
Not only that, but earlier studies suggest that reducing health care costs by addressing chronic conditions can also lead to improved retirement savings, by helping to reduce costs to the employer as well as freeing up money for the employee to increase their 401(k) contributions.
Meanwhile, Aon’s estimates appear to be on par with preliminary estimates by Mercer, which shows that U.S. employers expect health benefit cost per employee to rise 5.6% on average in 2023. The projected increase of 5.6% reflects changes that employers plan to make to hold down cost. If they made no changes, respondents indicated that the cost for their largest medical plan would rise by an average of 7%, Mercer’s analysis shows.
