Healthcare costs to increase by 8% next year

For the report, researchers interviewed actuaries from more than 20 health plans that cover 100 million employer-sponsored members and 10 million Affordable Care Act members to estimate healthcare inflation for next year. The findings were weighted by each health plan's size.

In 2025, commercial healthcare costs for the group market are expected to grow by 8%, which matches the 2023 estimate and is the highest projected increase since 2012. For the individual market, healthcare costs are expected to grow by 7.5%.

"Rising commercial insurance costs is not a new story," Advisory Board's Max Hakanson noted. "But what has changed is these cost increases are no longer maintaining the predictable, steady climb employers had grown accustomed to."

Since 2020, employers' healthcare costs have fluctuated at staggering rates. "Healthcare costs are already one of the largest expenses for most employers and this puts even more pressure on their budgets going forward," Hakanson added.

Factors that could drive (or slow) healthcare costs

In the report, PwC outlined inflators that could drive healthcare costs, as well as deflators that could slow the cost growth.

Inflator: The impact of inflation on healthcare providers

Currently, healthcare inflation is increasing more quickly than national inflation levels, largely due to rising costs of hospital-related services. In the fourth quarter of 2023, the hospital and related services index reached 6.3% growth relative to the fourth quarter of 2022.

Although hospitals' finances have improved in 2024, providers are still facing operational difficulties and growing expenses. Stagnant reimbursement rates for Medicare and Medicaid are also impacting providers' finances. At the same time, Medicare and Medicaid populations are making up a higher share of their payer mix, Hakanson noted. 

"The same inflationary pressure the healthcare industry has felt since 2022 is expected to persist into 2025, as providers look for margin growth and work to recoup rising operating expenses through health plan contracts," PwC wrote.

Going forward, insurers will likely face tough contract negotiations with providers as they look to recoup rising operating expenses through commercial health plans.

Inflator: Growing demand for GLP-1s and other high-cost drugs

Growing demand for high-cost drugs, including GLP-1s, is expected to drive up healthcare costs next year. GLP-1 drugs, such as Ozempic and Wegovy, have new indications for obesity and cardiovascular disease, although many insurers will only cover them for diabetes.

GLP-1s are also quite expensive, with a typical list price of more than $11,000 a year to treat diabetes. In an analysis of claims data from Employers Health, PwC found that GLP-1 utilization almost quadrupled from 2021 to 2023 and led to per-member costs increasing from $8.99 to $23.16.

New central nervous system (CNS) drugs will also likely lead to significant increases in healthcare costs over the next few years. CNS drugs are used to treat several brain disorders, including Alzheimer's disease, Parkinson's disease, multiple sclerosis, bipolar disorder, and schizophrenia. According to PwC, these new, innovative drugs could help improve patient outcomes, but they may also bring cost challenges.

"Health system and payer leaders tell us constantly that GLP-1s went from forgettable to the top of their spending list in the last couple of years," said Advisory Board's Rachael Peroutky. "This data emphasizes the need to ensure patients — and the health system — achieve the greatest value from the treatments through a comprehensive approach to cardiometabolic care."

Inflator: Increase in behavioral health utilization

Since the pandemic, both utilization and cost of behavioral health has grown. According to PwC data, the behavioral health portion of all commercial insurance claims has increased from 1.8% in 2018 to 3.1% in 2023.

However, there are currently not enough behavioral health providers to meet the growing demand. In fact, data from the Health Resources and Services Administration suggests that there is expected to be a shortage of around 500,000 behavioral health providers by 2036.

To offset staffing issues and infrastructure costs, hospitals will likely ask insurers for higher reimbursement rates for behavioral health services.

Deflator: More biosimilars coming to market

According to the report, biosimilars, which are less expensive versions of biologic drugs, will continue to gain traction and could help reduce healthcare costs.

Since January 2023, nine biosimilars of AbbVie's rheumatoid arthritis drug Humira have been launched. In addition, CVS Caremark replaced Humira with the biosimilar Hyrimoz on April 1, which led to a 36% increase in new prescriptions through April 24, according to data from Drug Channels.

According to PwC, a similar dynamic could occur across multiple medications and disease types over the next three years since at least 10 biologics will see biosimilar competition for the first time.

Deflator: Health plans reassessing total cost of care

In the report, 60% of the health plans surveyed said that "managing total cost of care" was one of their top three cost deflators. According to PwC, a common theme in interviews was "refocused attention to total cost of care management and hope for more savings through improving existing initiatives or finding new opportunities while keeping or improving the quality of care."

In the past, health plans have taken a siloed approach to improving affordability, which has not led to sustainable results. Now, health plans are taking a more holistic approach to affordability by establishing command centers focused on interconnected components that determine premium costs, such as medical costs, revenue risk, and more.

Through this holistic approach, health plans hope to moderate medical costs trends and improve affordability by reducing over-utilization and creating more efficient operations.

"Today's medical cost trend is an urgent call to action for healthcare organizations to rethink their strategies to more effectively manage the total cost of care," PwC wrote. The medical cost trend is a challenge that is inextricably linked to the broader challenge of affordability defined by the Affordable Care Act as the percentage of a member's household income used for healthcare expenses.

"While the cost increase is a hurdle for payers and employers especially, this isn't all bad news," Peroutky noted. "Increased use of innovative drugs and behavioral health services is a win for patients and for the providers working hard to meet their needs." (Kacik, Modern Healthcare, 7/17; PwC "Medical Cost trend: Behind the numbers 2025," accessed 7/17)

Health systems are under increasing pressure to reduce costs. Over years of studying cost-controlling best practices, Advisory Board has identified 20 essential tactics that can help you create near-term savings and set the stage for long-term cost discipline.