Surveys of employers are making one thing clear: Healthcare costs are rising faster than they did before the pandemic, and those costs are being driven by inflation, the increasing use of weight loss medications, and higher overall medical expenses. As employers and insurers grapple with these escalating costs, hospitals will undoubtedly be affected.
As financial pressures mount, many employers are exploring or expanding alternative payment and coverage models, a trend that could significantly alter hospital revenue streams.
An evolving reimbursement landscape
For many hospitals and health systems, commercial reimbursement is a financial lifeline. It helps offset the shortfalls from government programs like Medicare and Medicaid, which often pay less than the actual cost of care. According to a 2022 report from the Commonwealth Fund, private insurers typically pay nearly double the rates offered by Medicare for similar hospital services. Medicaid reimbursement rates are even less favorable, with fee-for-service payments for physician services falling approximately 30% below Medicare rates.
These discrepancies in reimbursement levels mean that hospitals rely heavily on commercially insured patients to maintain financial stability. But if employers intensify their efforts to control healthcare spending or demand higher quality and cost-effectiveness, hospitals could face a range of financial impacts.
"The strong U.S. economy and a general labor shortage have collectively served as a great buffer for payers and providers, but in recent conversations with employers and their advisors, we hear that employers' ability to continue to invest in rising healthcare costs is fraying (one advisor described employers as approaching a 'benefits cliff') and they are willing to consider healthcare cost management options they had not seriously considered in the past," Joyjit Saha Choudhury, managing director with Kaufman Hall, wrote in an October analysis.
Potential consequences include increased competition and pressure to lower rates if insurers narrow their provider networks, shifts in revenue and patient volumes as more employees move from employer-sponsored group plans to individual or exchange-based coverage, a growing number of patients seeking lower cash prices for services, and heightened scrutiny of the quality of care delivered. These factors could lead to a significant reshaping of the hospital landscape, influencing everything from pricing strategies to patient care protocols.
The growth of Medicare Advantage enrollment, which now covers nearly 33 million people, or 54% of the eligible Medicare population, also presents challenges for hospitals. As more seniors opt for these plans, hospitals must navigate a complex regulatory environment marked by tighter CMS regulations, reduced payments, and rising care costs for insurers. Some large carriers have announced plans to exit certain markets in 2025 or reduce benefits to adapt to these financial pressures.
"We expect insurers to prioritize margin over membership, and we expect large insurers will use their scale and market clout to limit provider rate increases over what will prove to be a challenging contract negotiation season," S&P Global analysts wrote in August.
The employer perspective
Around half of all Americans receive health insurance through employer-sponsored plans. The average cost of employer-sponsored coverage is expected to jump 9% from 2024 to 2025, according to estimates from Aon published in August. Healthcare costs per employee are projected to surpass $16,000 per employee in 2025, driven by rising employment levels, inflation and rising pharmaceutical costs. In 2024, employers budgeted an average of $14,823 per employee for healthcare costs. These costs have risen by more than 20% over the past five years and by 43% over the past decade.
The Business Group on Health, which represents large employers, published its annual survey of employers in August and projected healthcare costs will rise 7.8% on average in 2025, the highest increase in a decade. Most employers surveyed reported being concerned or very concerned about the appropriate use or long-term cost of GLP-1 and other new weight loss drugs.
Some employers have stopped covering the drugs, citing high costs. In June, Blue Cross Blue Shield of Michigan said it would no longer cover GLP-1 drugs to treat obesity in its fully insured commercial plans. In addition to the 67% of employers surveyed by the business group who said they covered GLP-1 drugs to treat obesity in 2024, 3% said they would add coverage in 2025, and 13% said they were considering adding coverage in 2026 or 2027.
Alternative payment models
In response to these rising costs, employers are adopting various strategies to manage their healthcare spending more effectively. Some of the measures being considered include shifting more costs to employees through higher premiums, deductibles, copays, and coinsurance.
Other employers are looking to implement narrow network plans, which limit the number of providers included in their network to control costs. Health plans may also increase the use of reference-based pricing, which sets a maximum payment amount for services based on a benchmark, such as a percentage of Medicare rates, regardless of the provider’s usual charges.
Direct contracting, where employers bypass traditional insurance networks and contract directly with healthcare providers, is becoming more popular. A 2024 survey by Brighton Health Plan Solutions found that 75% of the 150 benefits executives surveyed were already using direct contracting, with 41% of those not currently using it considering adopting this model by 2025. This approach allows employers to negotiate directly for healthcare services, potentially securing lower rates and better control over quality.
"Healthcare costs continue to rise at unsustainable rates and are straining both employers and employees. Small and mid-sized businesses, in particular, are disproportionately impacted, often struggling to provide health insurance at reasonable costs," Alessa Quane, chief insurance officer at Oscar Health, told Becker's. "We need a fundamental shift in how health insurance is financed and offered in America to address this issue."
Another alternative model gaining traction, including at Oscar, is the Individual Coverage Health Reimbursement Arrangement (ICHRA), which allows employers to offer employees a defined, tax-advantaged contribution that can be used to purchase individual health plans through state exchanges. According to a 2024 report from the HRA Council, employer adoption of ICHRAs has increased by 29% since 2023, with over 200,000 employees now covered under this model.
Increasing legal pressures
Despite the rising cost of care, some employers may continue to play a passive role, according to Mark Cuban. In January, he wrote on X that most self-insured employers and their CEOs, "don't know and don't really want to know where their healthcare benefit dollars are going."
But in July, the Cost Plus Drug co-founder issued a big warning to self-insured employers: If your company receives pharmacy rebates through employee benefits, prepare for an eventual lawsuit.
"It’s not a question of if, it’s a question of when," he wrote on X. "The inevitable class action suit will dwarf the tobacco settlements."
Mr. Cuban's tweet points to another pattern: large, self-insured employers are beginning to encounter lawsuits from their workers over alleged mismanagement of health and pharmaceutical benefits, often citing violations of their fiduciary duties under the Employee Retirement Income Security Act (ERISA). For example, Wells Fargo is facing a lawsuit for allegedly overpaying for pharmaceutical services through its contracted pharmacy benefits manager, Express Scripts. Similar legal challenges have been brought against companies like Johnson & Johnson and the Mayo Clinic, highlighting the growing trend of employee activism and accountability regarding healthcare benefits.