As employers begin to predict what next year holds in terms of pay raises and health care costs, a new analysis predicts even steeper hikes for health care than other estimates.
Average costs for U.S. employers that pay for their employees' health care could increase 8.5 percent to more than $15,000 per employee in 2024, according to Aon, a global professional services firm.
The projected increase would nearly double the 4.5 percent hike in health care budgets that employers experienced from 2022 to 2023. On average, Aon estimated that the budgeted health care plan cost for employers this year is $13,906 per employee.
The report from Aon, which was released earlier this month, is substantial, as the firm analyzed health care costs for more than 800 U.S. employers representing 5.6 million employees.
Although inflation has been abating in recent months, it's finally caught up with health costs, said Debbie Ashford, the North America chief actuary for health solutions at Aon. Even while inflation was spiking during the past two years, employer-sponsored health care costs did not see dramatic increases during that period due to the multiyear nature of typical medical provider contracts.
"Even though inflation is subsiding, the health care trend 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 of years but were unable to pass on to payers," she said.
In general, employers are seeing medical claims return to typical pre-pandemic levels, and organizations should anticipate more inflationary cost pressures in the coming year, Ashford said.
Newly indicated weight loss drugs, new technologies, the severity of catastrophic claims and the increasing share of specialty drugs are also contributing to higher health costs, she said.
Aon's report comes on the heels of one released earlier in August by the International Foundation of Employee Benefit Plans (IFEBP), which found that U.S. corporate employers project a median health care cost increase of 7 percent for 2024. The nonpartisan group with more than 31,000 members surveyed 171 employers for its results.
Julie Stich, vice president of content at IFEBP, told SHRM Online that rising prescription drug costs and catastrophic health claims—as well as overall general inflation—contributed to the projected hike. The IFEBP analysis also cited more chronic health conditions as a reason for higher health costs next year.
While Aon's research predicts higher health costs, there is a stipulation: The projected 8.5 percent rise will occur if employers do not implement any cost-saving strategies. These strategies—which include utilizing control initiatives, such as requiring prior authorization, embracing disease management or adding nurse advice lines; adding employee wellness initiatives; and changing plan design initiatives, such as having dependent eligibility audits, offering high-deductible health plans, or requiring spousal surcharges or carve-outs—can hold down costs for organizations.
But there's one strategy that is unlikely to be very common next year: passing on higher costs to employees.
Aon, like IFEBP, found that even though organizations are projecting significant health care cost hikes, they are hesitant to pass those increases along to employees.
Farheen Dam, the North America health solutions leader at Aon, said employers continue to absorb most health care cost increases because "plan sponsors are hesitant to shift significant cost to plan participants and make benefits less affordable," particularly in a tight labor market.
Employees in 2023 are contributing about $4,675 a year for health care coverage, of which $2,682 is paid in the form of premiums deducted from paychecks and $1,993 is paid through plan design features such as deductibles, co-pays and co-insurance, according to Aon's analysis. On average, Aon said, employers subsidize about 81 percent of the plan cost, while employees pay the remainder.
Stich noted that given retention concerns, employers will absorb more of the cost to keep employees' paychecks unchanged.
"It speaks to the impact of benefits on both attraction and retention," she said. "Employers are likely anticipating, 'If we make our employees pay more, will that put us out of alignment with what our competitors for talent in our industry or in our locale are doing?' They don't want to price themselves out of the running."