Beyond the Blame Game: Why Employers Keep Paying More for Less

https://www.kff.org/health-costs/health-policy-101-employer-sponsored-health-insurance/

A few years ago I spent a long stretch building a direct-to-employer product, which meant a lot of my time was spent across the table from employers and working side-by-side with brokers. I was sitting with HR leaders and CFOs listening to what kept them up at night about their health benefits. I heard the same story enough times that I stopped thinking of it as one company's problem and started seeing it as the system working exactly as designed.

Premiums go up again this year, like they do every year. The employer wants to pass some of that increase through to employees, because that is the obvious lever to pull. But something stops them almost every time. It might be a union contract, or a labor market where the company down the street is offering a richer plan and they can't afford to lose people over it, or it might just be that leadership believes taking care of their people matters and raising costs on employees during a year when wages barely moved feels wrong. Whatever the reason, the employer absorbs the increase instead of passing it along, and their margin gets a little thinner.

Do that every year for five or six years and thin margins become a real problem.

Self-Insured and Watching the Variance Grow

For larger employers who self-insure, meaning they pay claims directly and use an insurance carrier mostly to administer the plan and negotiate provider rates, the picture gets even more volatile. In a self-insured world, the employer is the one holding the risk. Some years the spend is predictable within a reasonable range. But healthcare has a habit of producing outliers: a premature birth requiring months in the NICU, a cancer diagnosis needing a six or seven figure treatment course, a rare disease with a drug that costs half a million dollars a year. These catastrophic cases used to be occasional. Now I hear from employer after employer that they are becoming a normal part of the plan year, not the exception.

The result is that the range of possible outcomes for a self-insured employer's healthcare spend keeps getting wider. You can budget for average. You cannot budget as easily for a plan year where three employees each need care that costs more than a house. That unpredictability is exhausting for a CFO trying to plan twelve months out, and it is a big part of why self-insured employers have become so aggressive about stop-loss insurance and case management programs aimed at catching high-risk conditions early.

Fully Insured and Just Watching the Number Climb

Smaller employers who are fully insured, meaning they pay a set premium and the insurance carrier takes on the risk, don't feel the variance the same way. What they feel instead is the renewal letter. Every year the number goes up, often by a meaningful percentage, and there is very little the employer can do about it beyond shopping carriers or trimming benefits. They aren't watching catastrophic claims hit their own balance sheet. They're just watching the bill get bigger with no clear line of sight into why.

How We Got Here

Go back far enough and you can see why employers ended up holding this responsibility in the first place. During World War II, wage and price controls meant companies couldn't compete for workers with higher pay. Health insurance wasn't restricted the same way, so employers started offering it as a way to attract talent in a labor market where they had few other tools. It worked. Employer sponsored coverage spread quickly, and by the time the war ended it had become a standard part of how American companies competed for employees.

What started as an attractant has become an expectation. Nobody takes a job today and feels grateful their employer offers health insurance the way someone might have in 1946. It's assumed. And an expectation is a much harder thing to walk back than a perk ever was, which is part of why employers keep absorbing cost increases rather than touching the benefit itself.

A Buyer Without Leverage

Layer onto that history the fact that a single employer has almost no real leverage over the price of care. A hospital system in a given market might carry thousands of contracts with dozens of insurers, each negotiated separately and each confidential. An employer with a few thousand employees is a rounding error to that hospital system. They can threaten to leave the network. The hospital, more often than not, can shrug. Large national employers try to solve this by pooling into bigger negotiating coalitions. Smaller employers usually take whatever the carrier hands them and hope their broker got a good deal.

Renting a Middleman to Manage Another Middleman

Then there's the pharmacy benefit manager, or PBM, sitting between the employer, the drug manufacturer, and the pharmacy. PBMs negotiate rebates from drug manufacturers in exchange for favorable placement on a formulary. Those rebates can be enormous, and historically much of that value hasn't made it back to the employer or the employee at the pharmacy counter in any transparent way. This is the problem Mark Cuban’s company is trying to address and one in which he is very vocal about on LinkedIn. And, it’s a real problem. More than one employer I sat with couldn't tell me how much of the rebate they were getting, or whether a cheaper drug got excluded from the formulary because it wasn't the best clinical option or because it didn't come with the biggest rebate.

Wellness Programs and the Search for a Silver Bullet

Somewhere in the last fifteen years, wellness programs became the answer every employer reached for. Step challenges, biometric screenings, smoking cessation incentives, gym discounts. I believe genuinely in prevention, and I supported plenty of these programs myself. But the research on whether they meaningfully bend the cost curve is mixed at best. Employees who were already healthy tend to be the ones who participate. The employees driving the highest-cost claims, often dealing with chronic disease, mental health conditions, or social barriers to care, are frequently the hardest to reach with a step challenge.

Employers kept investing in wellness because it was something they could control and point to, even when the return on that investment for total cost of care stayed uncertain. The truth is that results from a wellness program take three things to materialize that are all difficult in their own way. First, you need employees to engage in their own health. Engagement is the single hardest job in all of medicine. Second, you need time. While some results of wellness programs can be seen in the short-term, the real pay off comes from what is avoided in the long-term. How many of those employees that you spend time and effort to engage in a wellness program will be with your company in 5 years? 10 years? 20 years? Finally, to make wellness payoff, you need luck. No amount of wellness work is going to prevent all of the catastrophic cases that drive so much variance that it can easily overshadow any gains made.

So Why Do Employers Keep Paying?

Put it together and the picture looks less like employer negligence and more like an employer negotiating with one hand tied behind their back, holding an obligation that started as a competitive advantage and turned into table stakes. They lack transparency with so much hidden in the black box. Whether it's a union contract, a tight labor market, or a genuine sense of obligation to their people, something keeps them from passing the increase through, so their margins take the hit instead. And the tools they've been given to manage cost, like wellness programs, haven't delivered what was promised.

Employers aren't the villain in this story any more than patients were in the last one. They're a buyer stuck holding a responsibility that has become an expensive expectation. Until that changes, the renewal letter will probably keep showing up every year looking the same way it always has: a bigger number, and no good answer as to why.

Great read from KFF on this topic: How Much Do Workers Contribute Towards the Premiums for Employer-Sponsored Health Insurance? - Employer-Sponsored Health Insurance 101 | KFF

This is the third article in this series, with new installments posting on Thursdays.

Intro - Beyond the Blame Game: An Operator's Perspective

Post 1 - Beyond the Blame Game: The Patient's Choices

Post 2 - Beyond the Blame Game: Why Employers Keep Paying More for Less

Post 3 - Beyond the Blame Game: The Insurance Company's Paradox

Post 4 - Beyond the Blame Game: Hospitals aren't the Problem… but They are a Problem

Post 5 - Beyond the Blame Game: Why Physicians Feel Trapped

Post 6 - Beyond the Blame Game: Regulation and Over-Regulation

Post 7 - Beyond the Blame Game: The Role of Private Equity in our Tangled System

Post 8 - Beyond the Blame Game: Don't/Do Drugs

Post 9 - Beyond the Blame Game: A Fragile Workforce

Post 10 - Beyond the Blame Game: What Can We Do?