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  • Writer's pictureTroy Vermillion

Rising Costs of Healthcare: A Straight Forward Analysis

Discover Effective Strategies to Tackle Rising Pharmacy Expenses - Group Benefits - TROYVERMILLION.COM

The rising cost of employer healthcare insurance is influenced by several factors, including the increasing prices of healthcare services, the role of pharmacy benefit managers (PBMs), price transparency issues, the impact of high-cost medications like GLP-1 drugs, new gene therapy treatments, and the off-label use of expensive drugs with low efficacy.

This article will delve into these major factors, supported by relevant statistics and sources, to provide a comprehensive understanding of the healthcare cost epidemic.

Rising Healthcare Costs

Healthcare Service Prices

The primary driver of rising healthcare costs is the increasing price of healthcare services rather than an increase in utilization. According to the Health Care Cost Institute, approximately two-thirds of per-person medical cost increases are due to rising prices of services such as hospital stays, physician visits, and surgical procedures. For instance, the average cost of a hospital stay has increased by over 50% in the past decade, with notable variations across different types of services.

Employer Contributions

Employers typically cover a significant portion of health insurance premiums, and their contributions have steadily increased over the years. In 2023, employers covered 83% of their employees’ self-only insurance plans and 73% of employees’ family insurance plans on average. The average annual premium for family coverage was $23,968, and for self-only plans, it was $8,435, reflecting a substantial financial burden on both employers and employees (Kaiser Family Foundation).

Impact on Small and Large Businesses

The burden of healthcare costs varies significantly between small and large businesses. Smaller employers often face higher per-employee costs due to their limited bargaining power with insurers. A study by the National Small Business Association highlighted that nearly 70% of small businesses find it challenging to offer health benefits, and many have reported cutting back on hiring or reducing benefits due to rising costs.

Pharmacy Benefit Managers (PBMs)

Market Concentration

Pharmacy Benefit Managers (PBMs) play a crucial role in the prescription drug market, managing pharmacy benefits for health plans and employers. Three major PBMs—Caremark (CVS Health), Express Scripts (Cigna), and OptumRx (UnitedHealth Group)—processed nearly 80% of all equivalent prescription claims in 2023. This concentration allows them to negotiate significant rebates and manage pharmacy networks, but it also raises concerns about market power and transparency (American Medical Association).

Rebate Aggregation

Large PBMs often act as aggregators for smaller PBMs, consolidating rebate invoices to negotiate better pricing. This practice can lead to double counting when evaluating covered lives and complicates transparency. The Congressional Budget Office estimates that rebates account for about 20-30% of the list price of brand-name drugs, but the actual savings passed on to consumers and employers are often unclear.

Hidden Profits in the Pharmacy World

PBMs generate significant hidden profits through mechanisms like spread pricing, where the PBM charges a health plan more for a prescription than it reimburses the pharmacy, pocketing the difference. A report by the PBM Accountability Project estimated that spread pricing and other profit-generating tactics contributed to billions in hidden profits annually. This lack of transparency in pricing and rebates has drawn criticism and regulatory scrutiny.

High-Cost Medications

GLP-1 Drugs

GLP-1 receptor agonists, such as semaglutide (Ozempic and Wegovy) and liraglutide (Victoza), are increasingly popular for managing type 2 diabetes and obesity. These drugs are highly effective but come with high price tags.

For instance, the monthly cost of Ozempic can exceed $800, posing a significant financial burden on patients and insurers. Despite their benefits, the high cost of these medications contributes substantially to overall healthcare spending.

New Gene Therapy Drugs

The advent of gene therapy has introduced groundbreaking treatments for previously untreatable conditions but at extraordinarily high costs. Drugs like Zolgensma, used to treat spinal muscular atrophy, can cost over $2 million for a single dose.

Similarly, Luxturna, a gene therapy for a rare form of inherited vision loss, is priced at $850,000 for a one-time treatment. While these therapies offer life-changing benefits, their costs present significant challenges for healthcare systems and insurers.

Expensive Drugs with Low Efficacy Scores

Humira (Adalimumab)

Off-Label Uses: Humira, a tumor necrosis factor (TNF) inhibitor, is often prescribed off-label for various dermatologic conditions and inflammatory diseases. Despite its high cost, the evidence supporting its off-label use is often limited. For instance, Humira is used to treat conditions like skin cancer and other inflammatory conditions without robust clinical trial data to back these uses.

Cost vs. Efficacy: The high cost of Humira does not necessarily correlate with improved patient outcomes in these off-label uses. This discrepancy highlights the need for more stringent evaluation of off-label prescriptions to ensure cost-effectiveness and clinical benefit.

Rituximab (Rituxan)

Off-Label Uses: Rituximab is another expensive biologic that is frequently used off-label. It has been prescribed for conditions such as rheumatoid arthritis and various dermatologic conditions without FDA approval for these indications at the time of use. The evidence supporting these off-label uses is often based on limited trial data.

Efficacy Concerns: While Rituximab can be effective for certain conditions, its off-label use raises concerns about efficacy and cost, especially when used without strong supporting evidence from clinical trials.

Expensive Drugs and Perceived Efficacy

Price-Quality Relationship: Research has shown that the perceived efficacy of a drug can be influenced by its price. Expensive drugs are often judged to be more effective than their cheaper counterparts, even when there is no difference in actual efficacy. This phenomenon can lead to the continued prescription of high-cost medications despite their low efficacy scores.

Placebo Effect: The placebo effect can be stronger for expensive drugs, further complicating the assessment of their true clinical benefit. Patients and physicians may perceive these drugs as more effective simply because they are more expensive, which can drive up healthcare costs without corresponding improvements in patient outcomes.

Low-Value Prescribing

Metrics for Low-Value Prescribing: Efforts like the EVOLV-Rx metric aim to identify and reduce low-value prescribing practices. These metrics focus on medications that are costly but provide little clinical benefit, such as those used off-label without strong evidence or those prescribed inappropriately prolonged dosages.

Examples of Low-Value Drugs: The development of metrics to detect low-value prescribing practices can help identify drugs that are frequently prescribed but offer minimal clinical benefit. This includes expensive brand-name medications that are used when cheaper, equally effective generics are available.

Cost-Effectiveness in Drug Approval

Regulatory Approaches: In the US, the FDA's criterion for drug approval is often based on non-inferiority to existing treatments rather than improved patient outcomes. This can lead to the approval and widespread use of expensive drugs that do not offer significant clinical benefits over cheaper alternatives.

International Comparisons: Other countries may have more stringent cost-effectiveness criteria for drug approvals, which can help control healthcare costs and ensure that new drugs provide real clinical benefits. The lack of such criteria in the US contributes to the continued use of expensive drugs with low efficacy scores.

Price Transparency and Variation

Price Transparency Rules

New federal rules require hospitals and insurers to make payer-negotiated rates for common services available to consumers. The Transparency in Coverage rule, effective in 2021, aims to empower consumers with information to make cost-effective healthcare decisions.

However, the effectiveness of these rules in reducing costs is still debated. Studies have shown that while transparency can lead to some price reductions, higher prices do not necessarily correlate with better quality of care (Health Affairs).

Geographic Price Variation

Prices for common health services vary widely across and within regions. For example, the price of knee and hip replacements can differ significantly even within the same metropolitan statistical area (MSA). A report by the Health Care Cost Institute found that prices for knee replacements ranged from $15,000 to over $50,000 depending on the region, illustrating the significant geographic variation in healthcare costs.

Cost Differences: Medicare vs. Major Carrier Payers

Hospital Payments

The cost differences between what Medicare pays and what major carriers pay for hospital services can be substantial. Here are specific examples:

  • Knee Replacement Surgery:

  • Medicare: Approximately $12,000

  • Major Carrier: Between $20,000 and $50,000

  • Hip Replacement Surgery:

  • Medicare: Approximately $15,000

  • Major Carrier: Between $25,000 and $60,000

  • Coronary Artery Bypass Graft (CABG):

  • Medicare: Approximately $40,000

  • Major Carrier: Between $70,000 and $150,000

Imaging Costs

The cost differences between imaging services at hospitals versus imaging centers are also significant. Here are specific examples:

  • MRI Scan:

  • Hospital: $1,500 - $3,000

  • Imaging Center: $400 - $900

  • CT Scan:

  • Hospital: $1,200 - $3,200

  • Imaging Center: $300 - $700

  • X-Ray:

  • Hospital: $250 - $500

  • Imaging Center: $50 - $150

Consumer-Driven Healthcare

Quality vs. Price

Patients often lack usable quality information, leading them to perceive higher prices as indicators of higher quality. This misperception can drive up costs as patients opt for more expensive services without clear evidence of better outcomes.

A study published in JAMA Internal Medicine found that there is little correlation between price and quality for many medical services, highlighting the challenge consumers face in making informed healthcare decisions.

The good news for you, is that equipping your employees with these tools has never been easier. Just contact me today and I'll show you how.

Employer Strategies

Contribution Strategies

Employers can manage costs by adjusting their contribution strategies or health plan features. For instance, small employers may cover more of their employees' premiums compared to larger businesses. The 2023 Employer Health Benefits Survey by the Kaiser Family Foundation found that 54% of small firms offered health benefits, with many opting for high-deductible health plans to manage premium costs.

Alternative Health Benefits

Employers can offer health reimbursement arrangements (HRAs) or health stipends as alternatives to traditional group health plans. These options can help control premium costs while still providing valuable benefits to employees. The IRS reports that HRAs have grown in popularity, allowing employers to reimburse employees for individual health insurance premiums and out-of-pocket medical expenses.

Additional Factors

Administrative Costs

The administrative burden of managing health benefits adds to the overall cost for employers. This includes the complexity of navigating different health plans and compliance with regulatory requirements.

According to a study by the Commonwealth Fund, administrative costs account for about 8% of total healthcare spending in the United States, significantly higher than in other high-income countries.

Healthcare Trends

The steady increase in healthcare services and costs, which has outpaced both workers' wages and inflation, makes it challenging for employers to offer comprehensive health benefits. The Bureau of Labor Statistics reports that from 2010 to 2020, healthcare costs grew at an average annual rate of 4.5%, compared to an average inflation rate of 1.8% during the same period. This disparity underscores the growing financial strain on employers and employees alike.


In summary, the rising cost of employer healthcare insurance is driven by increasing healthcare service prices, the market dynamics of PBMs, the introduction of high-cost medications like GLP-1 drugs and gene therapies, the off-label use of expensive drugs with low efficacy, geographic price variations, and the challenges of price transparency and quality measurement.

The disparities between Medicare and major carrier payments, as well as between hospital and imaging center costs, further complicate the landscape.

What You Can Do About It

Alternative Funding Strategies

To mitigate these costs, employers can explore several alternative funding strategies:

  • Level Funding: Combines the predictability of fully insured plans with the cost savings potential of self-insurance. Employers pay a set monthly fee, and any unused funds at the end of the year are refunded.

  • Captives: A group of employers forms a captive insurance company to provide health coverage. This can help smaller employers gain purchasing power and reduce costs.

  • Self-Insuring: Employers pay for medical claims directly, which can be more cost-effective for larger organizations with stable employee health trends.

Consumer-Driven Healthcare Options

  • Health Savings Accounts (HSAs): Paired with high-deductible health plans, HSAs allow employees to save pre-tax dollars for medical expenses.

  • Health Reimbursement Arrangements (HRAs): Employers reimburse employees for out-of-pocket medical expenses and premiums, offering flexibility and potential cost savings.

Pharmacy Contract Carveouts and Reviews

  • Pharmacy Contract Carveouts: Employers can separate pharmacy benefits from medical benefits, allowing for more tailored and transparent management of drug costs.

  • Contract Reviews: Regular reviews of pharmacy contracts can help identify and eliminate spread pricing, excessive rebates, and high-expense drugs with low efficacy. Replacing these with more effective, lower-cost alternatives can significantly reduce spending.

Addressing these issues requires a multifaceted approach involving policy changes, market reforms, and innovative employer strategies to ensure sustainable and affordable healthcare coverage for all.

So if you're tired of the same old strategies, contact me today and I'll show you a better way forward.

Troy Vermillion - Author


1 commentaire

07 juin

Love this article! I learned a lot about what I knew was frustrating me. Thank you Troy.

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