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Medical Plan Costs Expected to See Bigger Rise in 2023

Employers avoid benefits cuts despite new cost pressures

August 16, 2022 | Stephen Miller, CEBS

A nurse is looking at a patient's cell phone.

This article has been updated.

Employers in the U.S. expect medical plan costs per employee to rise 5.6 percent on average in 2023, HR consultancy Mercer reported. While significantly higher than the premium increase of 4.4 percent expected for 2022, the 2023 increase lags overall inflation, which is currently running at about 8.5 percent year over year.

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The cost-increase forecast is based on the first 864 employers with 50 or more employees responding, through Aug. 4., to Mercer's National Survey of Employer-Sponsored Health Plans. The survey launched June 22 and remains open, with a final report expected this fall.

"Because health plans typically have multiyear contracts with health care providers, we haven't felt the full effect of price inflation in health plan cost increases yet," said Sunit Patel, Mercer's chief actuary for health and benefits.

The effect of higher health care prices on plan costs "will be phased in over the next few years as contracts come up for renewal and providers negotiate higher reimbursement levels," he said. "Employers have a small window to get out in front of sharper increases coming in 2024 from the cumulative effect of current inflationary pressures."

Patel cautioned that while most large, self-insured employers have a good sense of their 2023 premium costs at this time, many smaller, fully insured employers have not yet received renewal rates from their health plans. "Those may well come in higher as insurance carriers hedge their bets in today's volatile health care market," he added.

The projected increase of 5.6 percent 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 percent.

Focus on Affordability

Despite rising costs, most employers are not planning to increase employees' share of coverage costs in 2023, such as by raising deductibles or co-pays, Mercer reported.

Among large employers (those with 500 or more employees) responding to the survey, employees will be required to pick up 22 percent of total health plan premium costs, on average, in 2023 through paycheck deductions, unchanged from 2022 and 2021.

In a survey conducted earlier this year, Mercer found that 11 percent of large employers will offer employees free coverage in at least one medical plan in 2023; another 11 percent are still considering it.

"Health care affordability is a real issue for many employees, especially with inflation stressing household budgets," said Tracy Watts, Mercer's national leader of U.S. health policy. "Employers want to do what they can to keep more money in employees' paychecks and remove cost barriers when care is needed.

"In today's environment of record-breaking inflation and widespread labor shortages, employers face a really tough balancing act," Watts added. "They must manage rising health care costs while making smart decisions about how to attract and retain the workers they need. For now, we are seeing the majority of employers prioritizing attractive benefits."

Forecast: Average Health Care Cost per Employee Rising to $13,800

The average costs that U.S. employers pay for their employees' health care will increase 6.5 percent to more than $13,800 per employee in 2023, up from $13,020 per employee in 2022, according to professional services firm Aon.

The firm's projections are derived from its database of health care costs and benefit designs for nearly 700 U.S. employers representing 5.6 million employees. The projections were developed after taking plan design changes and workforce adjustments into account.

In terms of 2022 health plans, employer costs increased 3.7 percent, while employee premiums from pay checks were slated to rise a more modest 0.6 percent from 2021, according to the firm's analysis.

Increase to U.S. Health Care Plan Costs from 2021 to 2022

Plan Cost	2021	2022	Change from 2021 to 2022
Employer Cost	$10,123	$10,500	+3.7 %
Employee Premiums from Paychecks	$2,504	$2,520	+0.6 %
Total Plan Cost	$12,627	$13,020	+3.1 %

Source: Aon.

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 percent of the plan cost, while employees pay the remainder, Aon reported.

Slight Increase for Employees in 2022

Employee Costs	2021	2022	Change from 2021 to 2022
Employee premiums from paychecks	$2,504	$2,520	+0.6 %
Employee out-of-pocket costs	$1,798	$1,892	+5.2 %
Total Employee Costs	$4,302	$4,412	+2.6 %

Source: Aon.

"In what remains a tight labor market, employers are absorbing most of the health care cost increases," said Debbie Ashford, the North America chief actuary for health solutions at Aon. "Employers are budgeting higher due to uncertainty and the anticipation that inflationary pressures will increase the cost of health care services."

A key driver of cost growth and budget volatility for employers are new treatments and increased care costs for patients managing long-term complex conditions, Ashford said. She noted that "it is not uncommon to see 1 percent of membership driving 40 percent of health care [spending] in any given year."

Cost-Containment Strategies

In June, insurance broker and consultancy NFP reported escalating health care costs were causing employers to rethink plan designs and offerings.

NFP's 2022 US Benefits Trend Report, based on a February and March survey of 563 HR benefits decision-makers, showed that two-thirds of employers want innovative cost-containment solutions. When considering cost containment, roughly three-quarters of employers believe that each of the following are important factors:

Increasing employee access to quality providers (83 percent).
Making costs more transparent (79 percent).
Reducing out-of-pocket expenses for drug costs (79 percent).

"Today, employers realize 'total cost transparency' and holding the provider accountable are also essential" for lowering benefits expenses, said Heidi Cottle, head of cost-containment strategies at NFP. Next-generation plan design, she said, adds incentives that encourage employees to choose in-network providers that offer high-quality, cost-competitive services.

More than 1 in 3 employers (36 percent) cited "cost containment" as a primary driver for offering health care delivery alternatives such as telemedicine, the survey showed. Half of the respondents had introduced virtual solutions in mental health (55 percent) and primary care (54 percent) in the previous 18 to 24 months. Roughly one-third had implemented virtual solutions for urgent care (37 percent) and emergency care (31 percent).

Related SHRM Articles:

IRS Sets 2023 Health Plan Premium Affordability Threshold at 9.12% of Pay, SHRM Online, August 2022

Inflation Reduction Act's Health Care Provisions Could Affect Employers, SHRM Online, August 2022