Drugs, inflation driving higher health plan costs across U.S. — including Minnesota

Higher medication spending and a delayed impact from labor shortages and medical supply expenses are fueling a noticeable uptick in employer health plan costs next year.

Mercer, the New York-based consulting firm, says its latest survey results suggest the average rate of increase across the country in 2024 will exceed 5% for a second consecutive year — a significant change from much of the past decade when increases more typically averaged about 3%.

Data suggest the rate of increase this year in Minnesota could be greater than the national average.

"We look like we are entering a period of higher health care cost increases — and it's not like [costs] weren't high before," Beth Umland, a partner and research director in the health benefits practice at Mercer, said in an interview. "So the idea of that ticking up another couple of points higher, and now running above inflation, is definitely concerning for employers."

The report is the latest sign of a general rise in health care costs.

Kaiser Family Foundation reported in October that family premiums for employer coverage across the country this year are up 7% to nearly $24,000, a big shift from the previous year when the California-based group's annual survey found costs were holding steady. The worker portion of the premium this year is about $6,575.

"Rising employer health care premiums have resumed their nasty ways," Drew Altman, the president and CEO of KFF, said in a statement at the time.

In September, Minnesota regulators granted premium increases for next year ranging from 1.9% to 5.5% to carriers in the state's individual health insurance market, where self-employed people buy coverage. The range of increases is higher than changes from those health insurers for 2023.

Employers with two to 50 workers buying in Minnesota's health insurance market for small groups also are seeing the increase, with the largest carriers in the market raising rates on average between 4% and 7% for next year.

Mercer's national survey of more than 1,900 employers, which was released last month, found the average health benefit cost across the country this year is $15,797 a person, an increase of 5.2% over the 2022 average of $15,013. The rate factors what employers and employees collectively pay not just for family coverage, but also policies for individual workers.

The Mercer survey includes 52 firms in Minnesota, where the average health benefit cost this year came in at $16,661, an increase of 6.6% over last year.

National results show that costs grew fastest — at an average rate of 7.8% — among smaller employers with between 50 and 499 employees. Larger firms, which generally have more leverage and tools for managing costs, saw an average increase of 4.6%.

For next year, employers are expecting an increase of 5.2% once again.

"I don't know that we're entering a period of runaway inflation where the trend is going to keep going up, up, up every year," Umland said. "But that's a 5% increase on top of a very high base. So, two years of 5% increases is no joke."

For several years, the cost of prescription drugs has been the fastest-growing category of health benefit costs, according to Mercer. But the rate in 2023 jumped even higher to 8.4% due in part to the growing popularity of drugs for diabetes and weight loss, known as GLP-1s.

Minnetonka-based UnitedHealth Group, which runs one of the nation's largest health insurance companies, sounded alarms in October over the cost of new drugs, which include weight-loss medications such as Wegovy, made by Danish manufacturer Novo Nordisk.

U.S. regulators last month approved a new weight-loss medication called Zepbound from Indianapolis-based Eli Lilly.

"The word is out that these drugs really work," Umland said. "I think it will be hard not to cover them going forward."

Employers also are contending with the expense of new gene and cell therapy treatments for some rare diseases. The medications offer "fantastic" hope for patients, Umland said, but at very large costs.

She said those treatments, in particular, are making it harder for employers to forecast costs by introducing the chance of greater variability from year to year.

Since the start of the COVID-19 pandemic, health care providers have been struggling with higher costs due to general inflation, labor shortages and greater medical supply costs. It takes a while, Umland said, for those costs to show up in what employers pay to run their health plans, since insurance contracts typically span several years.

"This is the year — 2023 — where enough health plans renewed their contracts with providers, and employers were starting to see that in the average cost increases," Umland said. She added that inflation is "going to take a while to work its way through — it's not like it's over this year."