Toolkit: Essential Health Care Cost Management Strategies
Take greater control of employee health care expenses with cost-saving approaches, compliance tips, and expert advice for smarter benefits management.
The employee benefits landscape in the U.S. has been transformed by the escalating costs of health care and other benefits, by changes in employment and benefits laws such as the Affordable Care Act (ACA), and by new initiatives and options in health care benefits, such as health savings accounts (HSAs). As a result, employers are exploring various ways to manage the costs of the health coverage portion of their overall benefits programs.
This toolkit provides a primer on various approaches that employers can take to manage health coverage costs, as well as the role of human resources in health cost management. It discusses a number of cost-management strategies and methods, in addition to compliance and legal issues, the importance of communications, and technology considerations. The toolkit also includes implementation tools and a compilation of resources from experts.
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Background and Outlook: Increasing Costs
In the U.S., health insurance has mainly been handled as a tax benefit connected to employment, where employers can deliver health benefits to employees as a tax-deductible cost of business, and employees can receive such benefits tax-free. The system has remained in place for decades, but the economics have changed as the trend of rising health care costs continues.
While employer-sponsored medical benefits are still available to 72% of private industry workers, employers are increasingly reassessing and redefining their roles as providers and subsidizers of their employees' health care. Many employers are integrating a pay-for-performance philosophy into their programs in which employees shoulder more responsibility for maintaining and improving their health and contributing more to the cost of their health coverage. Providing health benefits remains an important tool for building a competitive workforce and a way for employers to differentiate their organizations in a tight labor market. An employer's benefits package may be even more valuable than salary for job seekers with dependents and is vital to employee retention.
At the same time, health coverage is the largest employee-related benefit expense for U.S. employers. Between 2014 and 2024, group health insurance premiums for family coverage increased by 52%, according to KFF’s Employer Health Benefits 2024 Survey. With employers covering 80% of premiums on average, many workers rely on health coverage obtained through their job.
The average cost of employer-sponsored health care coverage in the U.S. is expected to increase by 9% in 2025, surpassing $16,000 per employee, according to an analysis from Aon. Inflation, the growing popularity of GLP-1 drugs, and catastrophic medical claims are key drivers.
Employers have historically tried many ways to control the ever-rising costs of medical coverage for employees. Steps that can produce cost savings relatively quickly include:
- Offering new hires coverage that is less generous than that offered to current employees.
- Requiring increased cost-sharing for all health plan participants.
- Consolidating third-party vendors or pooling insurance risks to achieve economies of scale.
- Introducing utilization control initiatives, such as prior authorization requirements and disease management programs.
Explore specific cost-control approaches in more detail throughout this toolkit and learn about the many effective tools employers can use and combine to help control their health coverage outlays.
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Pro Tip
The rise of alternative health care models such as point-of-service (POS), exclusive provider organization (EPO), and direct primary care, where employers contract directly with primary care providers and work with insurance brokers on supplementary coverage for specialists and hospital care, offer additional options for employers as they assess health care costs.
Consumer-Directed Health Plans: Making Better Choices
Employers' efforts to manage their health care costs are increasingly focused on getting employees to become better health care consumers. What this means:
- Employees: Health care consumerism encourages employees to make healthier daily choices and equips them with tools and education to better understand the cost of health care and how they can help reduce that cost.
- Employers: Health plan design, incentives, an effective communication strategy, and making it easier for plan participants to engage in healthful behaviors are all facets of consumer-directed health care.
Efforts to move employees toward greater health care consumerism are similar to the efforts employers have made to persuade employees to save for retirement in 401(k)s and other defined contribution plans. Employers are using incentives, such as health savings accounts (HSAs) or a health reimbursement arrangement (HRA) contribution, similar to a 401(k) matching plan, to reward desired behavior and encourage employees to actively engage in their health care decisions.
Flexible spending accounts (FSAs) are another highly popular option, offered by 60% of employers as reported in the SHRM 2025 Benefits Survey, compared to 61% for HSAs. In 2024, the average maximum annual employer contribution for HSAs was $1,033 for individuals and $1,633 for family plans. In 2026, HSA contribution limits are expected to increase.
Wellness Programs: Engaging Employees
Employers can contain or even reduce health care costs by implementing wellness programs. According to SHRM’s 2024 Employee Benefits Survey, 88% of employers rated health-related benefits as very important, leading every other benefit category. Of those surveyed, 39% offer wellness programs with resources. However, some studies have questioned the efficacy of wellness programs despite their popularity with employees.
Types of Wellness Programs
Wellness benefits use a range of approaches:
- Targeting preventable and chronic conditions such as obesity, high glucose, and elevated cholesterol.
- Using incentive programs to motivate employees to complete activities such as annual health risk assessments or smoking-cessation or weight-reduction programs.
- Emphasizing holistic health with rewards such as gift cards or lower health premiums for participation in self-care regimes and nutrition logging.
For wellness programs to be effective, employees must know about and participate in the offerings. Employers view low engagement as the greatest obstacle to their wellness initiatives, and digital wellness tools are a growing trend. Another way to engage employees is to align the program with a broader public awareness campaign, such as American Heart Month or Mental Health Awareness Month.
Employers need to be aware of the laws related to wellness programs if they are considered medical care or involve disability-related questions, and of the legal risks involved with program incentives.
- HIPAA: Under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), employers' group health plans are not permitted to vary premiums for employees on the basis of health factors , but employers are allowed to offer wellness programs and wellness incentives. Programs comply with HIPAA’s nondiscrimination rules if participation is open to all similarly situated individuals and rewards are not tied to meeting health-related standards.
- EEOC: The Equal Employment Opportunity Commission (EEOC) rule on employer wellness programs clarifies limits on financial incentives.
- ADA: The Americans with Disabilities Act (ADA) applies if the program asks employees disability-related questions or involves a medical examination.
Examples of compliant programs include those that:
- Reimburse all or part of the cost of membership in a fitness center.
- Reward participation in a diagnostic testing program instead of the program outcome.
- Reimburse employees for the cost of a smoking cessation program regardless of whether the employee quits smoking.
- Reward attendance at a monthly health education seminar.
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Pro Tip
Before implementing a particular wellness program or initiative, an organization should carefully consider the potential costs, advantages, levels of employee participation, and legal concerns.
Shifting Health Care Benefit Costs to Employees
A major trend in managing health care costs is having plan participants take on increasingly larger portions of those costs. Methods include:
- Raising the deductibles and co-payments for medical services.
- Having participants pay larger shares of premiums.
- Increasing the cost of using out-of-network health providers rather than in-network providers.
Employers must balance this approach with affordability requirements under the Affordable Care Act (ACA).
Working Spouse Provisions
Working spouse provisions — also called "spousal carve-outs or exclusions” — generally take one of three forms:
- A premium surcharge for the working spouse is required if they have declined health insurance offered by their employer.
- The working spouse is required to purchase health insurance through their employer's plan first.
- The working spouse is excluded if similar coverage is available from the spouse's employer (not commonly used).
Employers must also be aware of the nuances of spousal exclusions, which can determine whether they are effective — and legal. For example, creating a carve-out in which an employee’s spouse becomes ineligible triggers a HIPAA special enrollment for the spouse’s employer. In addition, some states have laws and regulations that limit the design of spousal carve out and surcharge plan provisions.
Prescription Drug Benefit Changes
Over the past several years, prescription drug cost-increase trends have outpaced medical cost trends. Drug benefit costs per employee rose 7.2% in 2024, and more expensive specialty and weight loss drugs are entering the market.
For example, the high cost of GLP-1 drugs such as Ozempic and Wegovy are a big reason for rising health care costs, but there are cost-saving strategies employers can take. GLP-1 drugs used for weight loss represent 10.5% of claims on average as of May 2025.
Popular drug cost cutting measures include:
Pharmacy Benefit Managers (PBMs): These third-party companies use a multitiered list of medicines called a formulary that saves on drug costs by requiring prior authorization for some medications, step therapy — seeing if less-expensive drugs work first — and other methods. PBMs can also create digital formularies used with popular health apps.
Co-pay Accumulators: These programs exclude value of co-pay assistance cards or manufacturer rebates from patient deductibles to discourage the use of expensive medicines when cheaper or generic (and equally effective) options are available.
Employers should note that these types of cost-cutting programs have come under fire for creating barriers to care.
Other tactics to manage prescription drug costs include:
- Requiring prior authorization before filling a prescription.
- Quantity limits.
- Having the member pay the difference between generic and brand prices.
- Closed formulary excluding certain brand name drugs.
- Integrated medical and pharmacy data for more effective cost management.
- Mandatory mail order for maintenance medications.
- Four-tier or higher pharmacy plan design.
- No co-pay for select generic medications.
Techniques focusing on specialty drugs include:
- More aggressive use of management protocols for specialty medications.
- Requiring specialty medications to be obtained through a specialty pharmacy.
- Pharmacy plan designed with a specialty tier with greater cost sharing.
Pro Tip
Although reducing pharmacy benefits costs serves a worthwhile and necessary goal, employers should keep the larger picture in mind. Cost-cutting that denies individuals access to necessary medications or creates financial hardship may have negative effects on an employer's long-term health care costs and workers' health and productivity.
Have more questions about managing employee health care programs?
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Additional Cost Management Options
Auditing Family Member Eligibility
Providers of audit services have reported in past years that audits found more than 12% of covered dependents to be ineligible. Employers providing coverage to nonqualified applicants not only waste money but risk violating federal requirements and the Internal Revenue Code.
Telehealth
Virtual doctor visits rose in popularity as the pandemic made patients more accustomed to them, increasing consumer demand to the point where telemedicine is becoming a standard service. Offering telehealth coverage can save employers money on health costs because it reduces visits to the emergency department and fees for telehealth visits are typically lower. Quantum Health reported in 2024 that an increase in telehealth and urgent care visits led to a reduction in emergency room visits that saved approximately $15.65 per member per member per month from 2018 to 2022.
Tiered Health Insurance Plans
Some employers opt to offer insurance plans that charge premiums based on how many participants are included on an employee’s plan, or other factors. This can help manage costs, especially given that adult children can remain on their parents’ plan until they turn 26. In addition to per-participant tiers, some employers also offer income-based tiers that charge less for lower wage earners.
Health Risk Assessments
This approach helps employers gain a better understanding of their employees' health risks and where to focus their wellness programs. Employees are more likely to be informed and engaged in health improvement efforts if they learn their health risks through confidential, personalized health risk assessments and are given tools to improve their risk behaviors. Employers need to be aware of aware of limits established by the Americans with Disabilities Act (ADA), the Genetic Information Nondiscrimination Act (GINA), and the Affordable Care ACt (ACA).
Vendor Contract Negotiation
Benefits experts indicate that health insurance providers have a generally accurate sense of an organization's "pain" threshold — the level of a premium increase an organization will tolerate. A current carrier will likely keep raising rates year after year because it knows most organizations do not want to take on the difficulties of re-enrolling an entire employee group with a new provider. Employers can request that services administration, network access, wellness programs, and reinsurance be unbundled for comparison purposes and negotiate each piece for more cost control.
Self-Funded Plans
Under a self-funded insurance plan — also called self-insured — the employer assumes the liability and risks of providing health coverage in exchange for more control over the plan's administration and funding. Self-funded plans are most prevalent among organizations with 500 or more employees, although they can also work for smaller companies. Just over one quarter of organizations, 27%, offer a self-insured plan according to the SHRM 2025 Benefits Survey.
Retiree Benefits
Similar to the reduction in traditional pension plans, a decline in retiree health benefits has taken place over the past decade, mainly to cut costs, which has also generated backlash.
SHRM Resources
Health Insurance Dependent Audit Checklist
Leveraging Employee Self-Service Portals
Q&A: Heath Risk Assessments: Benefits and Legal Compliance Tips
Communicating with Employees About ACA Health Care Benefits
Part-Time Employees and the ACA
Employer Coverage Mandates Under the ACA
Q&A: Self-Funded Insurance Explained
Pro Tip
Employers can offer bonuses or reduced health insurance premiums to employees who voluntarily take health-risk assessments or enroll in recommended disease management or behavior risk management programs.
Legal Issues
Many of the approaches that employers can take in managing health coverage costs are subject to various requirements of major employment laws. Employers should be familiar with the general purposes of federal laws such as ERISA, HIPAA, COBRA, and the ACA as well as the applicable situations noted throughout this toolkit. HR professionals also need to consider state laws.
Example: There is no qualifying event that triggers offering COBRA when an employee makes a voluntary choice to drop dependents from the health insurance plan during open enrollment. COBRA generally requires that an employee, spouse or dependent child be covered by the plan the day prior to the qualifying event. However, there is an exception in the regulation regarding spouses or dependent children who are dropped by an employee in anticipation of divorce or legal separation, known as the anticipation of divorce or legal separation rule.
Before implementing a new plan or making changes to an existing one, employers should consult with health coverage experts and legal counsel to avoid breaching the boundaries of laws and regulations regarding the equitable treatment of employees. Employers must avoid practices that could be discriminatory toward individual employees or groups of employees.
Communication: Early, Often, and Varied
Effective communication with employees is critical for success when rolling out health care cost-control measures. In communicating about health care benefits, employers should consider the following recommendations.
Communicate early and repeat the message often. Health care communications experts recommend ongoing communication rather than concentrating only during open enrollment season. More employers now believe they need to engage employees continually in health consumerism because the results it can produce derive from day-to-day decisions.
Use a variety of media. Traditional communication methods include home mailers, open enrollment, inserts in paycheck envelopes, posters around the workplace, and a benefits fair. Electronic methods include intranet communications, e-mail, internal messaging apps, mobile-device and social-media access to health benefits information. Gamification during open enrollment is another option. Face-to-face communication remains important.
Provide employees with tools to help them make cost-effective health care benefit choices. With cost information at their fingertips, employees are able to make more insightful decisions about health benefits for themselves and their households and learn to balance cost, convenience, and quality in a manner that meets their budgets.
Encourage employees to evaluate how they and their family members used health care in the previous 12 months. Suggest that they consider how much they spent out-of-pocket on deductibles, flat-dollar co-payments, and percentage-of-cost co-insurance and review the number of doctor visits and the cost of ongoing medications. Employees who have an HSA or an HRA should determine what remaining balance they might be able to apply to the subsequent year's expenses.
How to Communicate Employee Benefits — and Leverage Them for Engagement
In this All Things Work podcast episode, Keren Maldonado, SHRM’s director of total rewards, shares practical tips for making benefits communication clear and engaging, while emphasizing how tailored strategies can enhance employee recruitment and retention
Pro Tip
Using the right balance of technology and face-to-face communication for employee benefits can make a big difference in employee satisfaction.
Technology and Metrics
Employers can use technology to provide employees and their health plan dependents with information and tools to manage their health, as well as their health care costs. Technology can also help employers understand the vast amount of data in their health plans, which can enable them to pinpoint potential areas of escalating health costs and identify opportunities to control those costs. A health plan's data holds vast potential. Organizations can use aggregate data, such as by analyzing open enrollment data, to help design plans, improve employees' health, and drive down expenses.
Data mining: Data mining, the process of identifying data patterns and turning them into useful information, uses analytical software to examine a health care plan's raw data. Plan sponsors can use data patterns to make plan design decisions. Key information in this context includes:
- The health services being used.
- The services that are available but are hardly or never used.
- The benefits or services that are currently not part of the plan but that the data suggests should be included.
How it works: Medical data management companies collect such information from health insurers, third-party administrators, health maintenance organizations, and pharmacy benefits managers. The data companies organize the information into a specific clinical use and financial dataset. Sophisticated software allows analysts to sort, combine and contrast key data elements to help decision-makers and clinical managers take effective corrective actions. Individuals' information is not disclosed; the data is aggregated, and thus the information does not violate the privacy protections mandated by HIPAA.
Predictive modeling: Predictive modeling uses claims data and lifestyle analytics to identify potential catastrophic claims and illnesses and can sort a population according to its risk of nearly any outcome. This means identifying subsets of employees who are likely to need high-cost health care of one type or another within six to 12 months. Organizations can then offer services such as health coaching to particular subsets to better manage their health and reduce the likelihood that they will need avoidable, costly care.
Applying AI: AI tools can analyze aggregate information about employee behavior, spending, and claims patterns. Using large sets of aggregated data, HR can direct employees to the best benefits plans for their needs. AI can also help HR benefit managers choose the right plans for the company.
Metrics: As each fiscal year draws to a close, an organization's leaders should look for ways to save money and control health care costs in the coming year. As part of this process, they should gather and analyze data that can give them a clear picture of health plan enrollees and total health plan costs. Some key metrics in these areas include:
- Enrollee information, such as the numbers of employees; spouses or partners; and other dependents who are enrolled and using the health coverage.
- Direct costs such as paid claims and administrative costs.
- Indirect costs attributable to health issues, such as lost time because of disability.
- Trends in benefits use.
- Benchmark data on the cost of health care and employer cost-sharing trends.
Pro Tip
HR teams can reach out to their brokers or benefit consultants to oversee requests for proposals from technology vendors and compare health care analytics platforms.
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