It’s a tale as old as time: Healthcare costs are rising faster than inflation, and employers are struggling to manage them as they eat up a larger and larger share of their budgets.
Healthcare costs are expected to rise by nearly 8% in 2025, according to a report by the Business Group on Health, contributing to a more than 50% increase since 2017.
“We are now experiencing the highest year-over-year increase in more than a decade,” Jim Winkler, chief strategy officer at the Business Group on Health, said in an email. “Employers have absorbed the majority of cost increases over the past four years, and they likely cannot continue to do so.”
Pharmacy expenses are primarily responsible for recent increases in healthcare costs. From 2021 to 2023, the median percentage of healthcare spending on pharmacy rose from 21% to 27%, according to the Business Group on Health. As a result, 3 in 4 employers say they are “very concerned” about total pharmacy costs, the report says.
In addition, more people are using GLP-1 weight loss drugs, including Ozempic, Wegovy, Zepbound and Mounjaro, to treat diabetes, obesity and other conditions.
However, while the drugs are clinically effective, they’re expensive at a price tag of about $700 to $800 per month. More than 2 in 5 adults under age 65 with private insurance — about 57.4 million people — may be eligible for GLP-1s, which could accelerate healthcare spending.
“GLP-1s are a major contributor to pharmacy cost overall, especially as utilization extends to medical conditions beyond diabetes and weight management,” Winkler said.
Higher rates of chronic conditions, including cancer, cardiovascular conditions, diabetes and mental health, also contribute significantly to rising healthcare expenses for employers. While much of those costs are attributable to an aging workforce, initial cancer diagnoses have grown more severe among young people who deferred or delayed care during the COVID-19 pandemic, Winkler said.
Consolidation and reduced competition among healthcare providers also contribute to rising costs, especially for inpatient care.
These are six key strategies employers can use to manage healthcare costs in 2025.
1. Hold vendors accountable for clinical outcomes and financial results.
More than 8 in 10 employers are implementing or strongly considering using the request for proposal process to secure better pricing from vendors, according to the Business Group on Health.
Employers should rigorously assess the ROI associated with vendors’ solutions, use shared performance metrics that align with the organization’s clinical and financial goals, and replace underperforming partners as needed, Winkler said.
However, demonstrating the ROI for “wellness or other cost-containment measures can be challenging,” said Jennifer Chang, HR knowledge advisor at the Society for Human Resource Management.
2. Lean into programs that align with value-based care models, including in-network providers that encourage cost-effective, high-quality outcomes.
Using centers of excellence — select providers that deliver specialized medical care that meet specific cost and quality benchmarks — can help lower costs for behavioral health and other services, Chang and Winkler said.
High-performance network models that encourage more cost-effective care through greater provider-payer collaboration and value-based payment, as well as advanced primary care programs that tie reimbursement to managing specific chronic conditions, such as diabetes, can also help employers lower healthcare spending, Chang and Winkler said.
3. Adopt new strategies to manage pharmacy costs.
Alternative pharmacy benefit management programs that are more transparent, less reliant on rebates and encourage the use of biosimilars can help employers rein in rising pharmacy costs, Winkler said.
“Pharmacy is actually multiple programs that need to be fully integrated from a user experience and data-sharing perspective,” Winkler said.
Employers do not need to use the same vendor for all their pharmacy needs, which provides additional opportunities to save costs. Employers should also pair GLP-1 access with nutritional counseling, diabetes management and other condition management approaches to maximize the benefits of these new weight management drugs.
4. Help employees navigate the healthcare delivery system.
Care navigators, employee trainings and other resources can help ensure that employees access and use the highest quality, most cost-effective care, experts said. Explaining cost-sharing mechanisms, such as copays and deductibles, to employees will allow them to “use their healthcare benefits wisely,” Chang said.
5. Build worksite health centers.
A growing number of organizations are investing in employer-sponsored primary care clinics that offer employees no- or low-cost services at or near workplaces because “they’ve been running into a brick wall” trying to reduce costs through the traditional healthcare delivery system, said Megan Colleen McHugh, a health services researcher and professor at Northwestern University’s Feinberg School of Medicine.
WHCs can increase employees’ use of preventive medical services, improve chronic care management and enhance quality of life, according to a new study co-authored by McHugh. The paper, which evaluated the findings of 10 previous studies, found that WHCs delivered annual cost savings ranging from approximately $35,000 to $2.1 million and ROI from $1.09 to $15.88 per $1 of investment.
However, WHCs “only work if you’re a large employer” because they have high fixed costs, and there is very little evidence about the quality of care they deliver, McHugh said.
6. Leverage data analytics to determine which cost management strategies make the most sense.
Employers must assess vendor performance, clinical conditions, network utilization and geographic access limitations to determine the best approach to lowering healthcare costs, experts said.
Analyzing claims data, for example, can help employers identify what is driving their healthcare spending and “target interventions for high-cost areas,” Chang said.
Pitfalls employers should avoid
However, in their quest to lower healthcare costs, employers must avoid strategies that could lead to employee dissatisfaction, reduced engagement or unintended consequences, Chang said. Employers need to consider their organizational culture, including its “tolerance for disruptive change,” Winkler said.
Excessive employee cost-sharing, for instance, can harm employee morale and retention, while abruptly cutting benefits without excellent communication and support can “lead to backlash,” as employees may perceive increased cost-sharing measures as a reduction in total compensation, Chang said.
Cost-containment measures can also create equity issues if they disproportionately affect lower-income employees, she said, adding that one-size-fits-all health plans that don’t consider workforce demographics or needs can lead to lower adoption and employee dissatisfaction.
In addition, adopting new plans or wellness initiatives can “strain HR resources and require significant coordination,” Chang said.
Employers can manage these challenges effectively by engaging employees early, providing transparent and consistent communication and rolling out changes gradually, Chang said. They should also monitor and adjust cost-containment measures based on employee feedback and utilization data, as well as ensure cost-sharing changes and wellness programs are inclusive and equitable, she said.
Additionally, creating a workplace that supports employees’ physical, mental and emotional well-being through healthy cafeteria options, on-site fitness facilities and other measures can help “foster a culture of health,” Chang said, helping to lower healthcare costs upstream of the pharmacy and healthcare delivery system.
