The Rising Cost of Healthcare: What C-Suite and HR Leaders Need to Know

Understanding the Key Cost Drivers Impacting Employer-Sponsored Plans

Healthcare costs in the U.S. are rising at an unprecedented rate, presenting a growing challenge for employers striving to maintain competitive and sustainable benefits. With total healthcare spending reaching $3.8 trillion in 2019 and projected to surpass $7 trillion by 2031, organizations must prepare for increased financial pressures while ensuring employees receive the care they need. A deeper analysis of healthcare spending trends highlights key cost drivers that HR and benefits professionals must navigate, from chronic disease management to disparities in care delivery. Understanding these factors is critical to designing cost-effective and employee-centric health plans.

Where Are the Dollars Going?

Chronic Conditions Drive the Highest Costs

Between 2010 and 2019, nearly 77% of personal healthcare spending was attributed to just a few major health conditions. The top contributors to healthcare costs include type 2 diabetes, which accounted for $143.9 billion in spending, followed by musculoskeletal disorders such as joint pain and osteoporosis at $108.6 billion, oral disorders at $93 billion, and ischemic heart disease at $80.7 billion.

When considering broader categories, cardiovascular diseases led all conditions with $265.4 billion in spending, followed closely by neoplasms (cancer) at $258.8 billion and musculoskeletal disorders at $245.2 billion.

Among these, type 2 diabetes stood out as the single condition with the highest healthcare costs, with spending increasing at a rate of 1.9% annually after adjusting for inflation and demographic changes. Notably, 57.5% of diabetes-related spending was attributed to adults aged 65 and older, reinforcing the burden of chronic conditions on employer-sponsored retiree benefits and Medicare.

The Growing Demand for High-Cost Care

Looking at overall healthcare expenditures, 42.2% was spent on ambulatory care, including outpatient visits and specialty care, while 23.8% was dedicated to hospital inpatient care.

Prescription drugs represented 13.7% of total spending, underscoring the rising financial impact of pharmaceuticals.

The significant portion of spending on outpatient care highlights its role as the first line of defense for managing chronic conditions. However, increasing prescription drug prices and inconsistent access to primary care continue to drive costs upward.

Emerging Cost Trends: What Employers Must Prepare For

Mental Health and Substance Use Disorders

One of the most concerning trends for employers is the rapid rise in behavioral health-related costs. Between 2010 and 2019, spending on autism spectrum disorders increased by 12.7% annually, followed by opioid use disorders at 8.7%, alcohol use disorders at 6.7%, and other substance use disorders at 6.3%. These sharp increases signal an urgent need for expanded mental health coverage, early intervention strategies, and workplace support programs.

Employers that invest in robust Employee Assistance Programs (EAPs) and comprehensive behavioral health benefits will be better positioned to manage these escalating costs.

Emergency Department Costs on the Rise

Emergency department care has also seen some of the fastest-growing costs in healthcare spending, largely due to increased utilization for non-urgent conditions. Many emergency room visits could be avoided if employees had better access to primary care and chronic disease management programs. The high costs associated with emergency care are driven by the intensive nature of treatment and significant price variations across geographic regions.

Employers can play a key role in reducing unnecessary emergency room visits by promoting telemedicine for non-urgent medical needs, encouraging the use of urgent care over the ER for minor conditions, and providing chronic disease management programs that help employees prevent acute complications. Educating employees on when and where to seek care can lead to significant cost savings while improving overall health outcomes.

What This Means for HR Leaders and Benefit Strategies

Given these challenges, employers must optimize their benefits strategies to manage costs while maintaining quality coverage.

1. Optimize Cost Management Through Plan Design

A well-designed plan should balance affordability and access to care. Value-based insurance design (VBID) can help by encouraging high-value services, such as preventive care, while reducing reliance on low-value, high-cost treatments. Implementing tiered networks and Centers of Excellence can direct employees to high-quality, cost-effective providers. Additionally, prescription drug costs can be controlled through formulary management, step therapy, and targeted pharmacy benefit strategies.

2. Prioritize Preventive and Chronic Disease Management

Preventive care and chronic disease management must also be prioritized. Employers should invest in wellness programs that target diabetes, heart disease, and musculoskeletal disorders, as well as offer on-site or near-site clinics to facilitate access to preventive care. Expanding mental health and substance use disorder coverage is also essential, given the rising costs and increasing prevalence of behavioral health conditions in the workforce.

3. Leverage Data and Analytics for Smarter Decision-Making

To stay ahead of cost trends, HR leaders should leverage data and analytics to make smarter decisions about benefits offerings. By analyzing claims data, utilization reports, and cost projections, employers can anticipate trends and adjust benefits strategies proactively.

4. Support Employees in Navigating the Healthcare System

Additionally, supporting employees in navigating the healthcare system through healthcare navigation services, price transparency tools, and telehealth options can empower them to make cost-effective healthcare choices.

The Future of Employer-Sponsored Healthcare

With healthcare spending projected to exceed $7 trillion by 2031, organizations that proactively manage costs while prioritizing employee well-being will maintain a competitive edge. A data-driven, preventive, and strategic approach to benefits can help companies mitigate financial risk while improving health outcomes for their workforce.

For C-suite leaders and HR professionals, the time to act is now—aligning benefit strategies with these cost trends will ensure a more sustainable and effective healthcare plan for the future.

Source: JAMA.  Tracking US Health Care Spending by Health Condition and County Press; February 14, 2025.