Even though inflation is subsiding according to the latest government data, the average costs that U.S. employers pay for their employees’ health care is expected to surge next year.
According to projections by Aon, the average costs for U.S. employers that pay for their employees' health care will increase 8.5% to more than $15,000 per employee in 2024.
Remarkably, the projection increase—which assumes employers do not implement employee cost sharing increases and other cost saving strategies—is nearly double the 4.5% increase to health care budgets that employers experienced from 2022 to 2023. While the projection is applicable in a status quo environment, Aon consultants do expect many employers to implement cost-saving changes or programs to help mitigate this increase. On average, the budgeted health care plan cost for clients is $13,906 per employee in 2023.
The analysis uses the firm's Health Value Initiative database, which captures information for more than 800 U.S. employers representing approximately 5.6 million employees and $77 billion in 2023 health care spending.
Cost Pressures
Why are the costs projected to surge? Aon notes that, since the pandemic, employers are seeing medical claims return to typical levels of growth and should anticipate more inflationary cost pressures in the coming year.
“While economy-wide inflation spiked during the past two years, employer-sponsored health care costs did not see dramatic increases during the same time period due to the multi-year nature of typical medical provider contracts,” explains Debbie Ashford, the North America chief actuary for Health Solutions at Aon. “Even though inflation is subsiding, health care [spending] is growing as medical providers push insurers for larger cost increases to cover the higher costs of wages and supplies that they endured during the last couple years but were unable to pass on to payers.”
Other contributing factors include the proliferation of newly indicated weight loss drugs, new technologies, the severity of catastrophic claims and an increasing share of specialty drugs, notes Ashford.
While employer costs increased 4.5% for 2023 health plans, employee premiums from paychecks were slated to increase by a more modest 1.7% from 2022, according to Aon'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.
Increase to U.S. Health Care Plan Costs from 2022 to 2023
| Plan Cost* | 2022 | 2023 | Change |
|---|---|---|---|
| Employer Cost | $10,736 | $11,224 | +4.5% |
| Employee Premiums from Paychecks | $2,638 | $2,682 | +1.7% |
| Total Plan Cost | $13,374 | $13,906 | +4% |
What impact will these changes have on saving for retirement? The study doesn’t address that, but Farheen Dam, North American Health Solutions leader at Aon, notes that they are seeing employers continuing to absorb most of the health care cost increases. “In a tight labor market, plan sponsors are hesitant to shift significant cost to plan participants and make benefits less affordable,” she emphasizes.
To that end, employees in 2023 are contributing about $4,675 for health care coverage, of which $2,682 is paid in the form of premiums from pay checks and $1,993 is paid through plan design features such as deductibles, co-pays and co-insurance, according to the firm's analysis.
Even so, as one might presume, the rate of health care cost increases vary by industry, as does the proportion of cost shared by the plan, employer plan sponsor and employee. The professional services industry has the highest average employer cost increase at 7.5%, while the manufacturing industry has the highest average employee cost increase at 2.9%. The retail and wholesale industry has the lowest average change in employee contributions: a half percent decrease from 2022 to 2023.
Increase by Industry to U.S. Health Care Plan Costs from 2022 to 2023
| Industry | Employer Cost | Employee Paycheck Contributions | Total Plan Cost |
|---|---|---|---|
| Health Care | 3.2% | 1.2% | 2.8% |
| Manufacturing | 3.1% | 2.9% | 3.1% |
| Professional Services | 7.5% | 0.0% | 5.7% |
| Public Sector | 4.7% | 1.7% | 4.2% |
| Retail and Wholesale Trade | 3.5% | -0.5% | 2.5% |
| Technology and Communication | 5% | 2.6% | 4.5% |
* Based on the weighted average cost of clients in Aon's analysis in both 2022 and 2023.
