A Targeted Strategy to Mitigate Rising U.S. Health Costs

A Targeted Strategy to Mitigate Rising U.S. Health Costs
August 1, 2023 10 mins

A Targeted Strategy to Mitigate Rising U.S. Health Costs

A Targeted Strategy to Mitigate Rising US Health Costs

While medical and pharmacy costs continue to take up more of employers’ benefit budgets, there are effective cost-saving strategies that combine predictive analytics with the right tools and programs over a multi-year period.

Key Takeaways
  1. Companies have unique cost drivers; understanding specifically what they are is key to keeping costs down.
  2. It’s tempting to take an “all-of-the-above” approach to mitigate costs, but a more targeted and strategic approach will pay dividends.
  3. Mitigating serious cost increases will take time. Plan sponsors have to be prepared to measure the effectiveness of their mitigation strategies with data and analytics and adjust accordingly.

The U.S. medical trend rate is forecast to rise 9.5 percent in 2025 — a seemingly unsustainable trend, but one that has persisted for several years. Employers know they must manage these costs to prevent healthcare budgets from eating into other areas of total rewards and avoid passing more financial burden onto employees. With high-cost claimants on the rise, use of expensive drugs like GLP-1s skyrocketing and improved, yet more expensive treatments under continuous development, this is a particularly urgent issue.

In order to keep costs under control, plan sponsors need to understand the cost drivers in their organization, use predictive analytics to sharpen their cost mitigation strategies and select the right tools to ensure effective cost management.

Understanding an Organization’s Unique Cost Drivers

Not all plan sponsors will have the same cost drivers. They often vary based on disease burden, prevalence in the workforce, location, employee demographics and other social determinants of health (SDoH). That’s why it is critical for employers to collect and understand their own data. Examining overall trends can be an instructive starting point to fill in gaps or complement and confirm the data. The main drivers of costs are:

  • Increased chronic conditions: Cancer, cardiovascular and musculoskeletal issues continue to grow significantly each year. The increased prevalence of these conditions, coupled with more severe complications, are driving overall costs significantly. 
  • Emerging conditions driving costs: In 2024, the three emerging categories of claims, according to Aon’s analysis of per member per month medical paid claims, were gastrointestinal issues, neurological disorders and mental health-related costs. Gastrointestinal issues grew by double digits, with the largest cost driver being inflammatory bowel disease. Additionally, while diverticulitis was rarely seen in patients under 50 as recently as a decade ago, it’s increasingly being diagnosed in people in their 20s and 30s. Neurological disorders saw even higher double-digit growth and includes multiple sclerosis, migraines and seizure disorders. Mental health costs were similarly up, with increased demand over the past few years exacerbating provider shortages, leading to higher costs for treatment. 
  • High-cost claimants: Aon’s data shows that these members account for about 60 percent of all medical expenses, while comprising only about 5 percent of members. High-cost claims are happening more often, and increasing in both cost and recurrence rates. 
  • GLP-1 usage: These drugs are still popular for treating type 2 diabetes. Meanwhile, nearly half of U.S. employers say they are covering them for weight loss,1 with other new uses on the horizon. Despite the competition, prices haven’t come down enough to make these drugs affordable, and demand is only increasing. 
  • New therapies and more complex treatments: While gene and cell therapies haven’t become major cost drivers yet, there are many expensive therapies and treatments being brought to market. 
  • Outside factors: These have less to do with the provision of care and more to do with the business of care, but they are a significant cost driver. Health system consolidation has led to higher costs, as has general inflation. Recent trade disruptions due to changes in tariff policy are also expected to increase costs. A wide array of products used in healthcare — from durable medical equipment and medical devices to pharmaceutical components — have complex supply chains that may be affected. Because many health systems operate on thin margins, those costs are likely to be passed along. While there is not much that plan sponsors can do to affect these costs directly, they should still be carefully considered.

“The key for plan sponsors is to focus on what they can control,” says Neal Mulville, vice president of Health Innovation in the United States. “Focus on managing high-cost claims, maintaining access and getting people to cost-effective, quality providers to achieve financial sustainability that cuts through the volatility.” 

#2

Gastrointestinal issues are the number two cost driver from a medical claims perspective, and number five among high-cost claimants.

Source: Aon analysis by PMPM medical paid claims

Using Data, Benchmarking and Predictive Analytics to Identify Risks and Cost Drivers

The process of understanding where a company’s risk lies can be broken into three steps:

1. Gather and analyze data. The first step a company can take toward understanding its cost drivers is to collect data on things like claims, absences, pharmacy spend and demographics relating to SDoH, such as where people are born, where they live, learn and work, and their age.

2. Use precision benchmarking. Employers should understand their cost drivers compared to a benchmark population that is precision-matched to their unique population. When comparing plan members to a more closely benchmarked population, a company can uncover cost drivers and areas of cost mitigation opportunity. 

3. Leverage predictive modeling to analyze the risks. Employers are using advanced machine learning to forecast their future population risk and identify high-cost claimants before they occur. Predictive modeling through tools like Aon’s Health Risk Analyzer can help employers understand and mitigate future costs. It also provides a view into future risk drivers, allowing companies to address needs for their specific population.

4. Optimize data with price transparency laws and trends. Hospitals and payers are now required to publicly post negotiated rates between payers and providers. Historically, this information was not available to employers who wanted to evaluate different network options and how well carriers were negotiating with their providers. This data now allows employers to review available networks at a more granular level.

“While there are many concerns with the consistency of this data, we have seen significant improvements in quality and we expect data usability to continue to improve over time," explains Todor Penev, head of Commercial Analytics at Aon. "Employers can start using transparency data today to identify rate disparities in both their current and alternative carrier networks. Price transparency, combined with established network evaluation methods, gives plan sponsors unprecedented new detail when evaluating network arrangements and optimizing choices in each market.”

Once these areas of need have been identified, companies can move on to mitigating the risks they find. For example, potential high-cost claimants can be steered toward preventive services, screenings and care management. Companies with specific populations that face unusually high risk for certain conditions can focus on networks and providers that offer the best pricing. Turning insights gained from the process into effective action requires knowing what tools and programs will work per specific circumstance. 

Implementing a Targeted Approach with the Right Tools 

It seems as though every provider, network and system has its own set of tools or programs. The temptation may be to use an all-of-the-above strategy. But, just as with the cost drivers themselves, these tools should match the specific population’s needs. Focusing on the most relevant ones will pay off. 

Value-led approaches are an important way employers can begin to mitigate cost increases. This includes steering plan members through guidance services or other methods toward optimal providers, including higher quality providers that deliver cost-effective care. In evaluating what tools to use, companies should look for those that make it easier for their members to choose the right providers for their circumstances. 

Another thing to consider in evaluating programs is improved access to and affordability of primary care. Long-term health outcomes will likely improve as a result, ultimately controlling costs downstream.

And finally, don’t overlook vendor strategy. Because companies have a fiduciary responsibility to their plan members, the choice and oversight of vendors becomes even more important. Vendors should not be selected solely on the basis of price, but rather the overall value to the plan member. This means evaluating and choosing vendors thoughtfully, embedding mechanisms to match the clinical and behavioral need to the point solution and linking payment to outcomes.

Exploring Alternative Financing Strategies

Even with a targeted approach implemented, outside factors may still drive costs too high. Organizations should consider whether they would benefit from alternative financing strategies.

  • Stop-loss reinsurance is the primary tool companies use to transfer high-cost claimant claims risk. However, with claimants growing in both number and cost, there may be additional strategies that plan sponsors want to consider.
  • Captives are another choice for large claimant protection. Some companies are choosing to insure their stop loss with a captive, as well as implementing employee benefit cell captives. An employee benefit cell captive is an insurance solution that enables businesses to self-insure their employee benefits in a simplified and efficient manner, while taking advantage of the benefits of a captive insurance structure. It allows flexible benefit design like a standalone captive. 
  • Health risk financing provides employers with a new mechanism to protect their budget through credit financing. This allows employers to convert budget hits to steady payment streams over time. Additionally, it can allow employers to fill coverage gaps such as lasers, improve capital efficiency and smooth cash flow by using credit-based solutions that enable organizations to deal with unexpected expenses. 
Quote icon

Rather than trying to 'boil the ocean' by using an all-of-the-above strategy, understand your unique cost drivers and then implement a targeted strategy. It takes a long-term strategy to address the market trends driving costs, but it can be done.

Charles Smith, MD
Chief Medical Officer, North America

Taking a Long-Term View on Mitigating Costs

Mitigating health costs will take time and a coordinated program with multiple moving parts. It’s unlikely the current high-trend environment will slow significantly in the short term if the underlying cost drivers continue to be a factor.

No matter what strategies are used to mitigate costs, regular measurement and evaluation are vital to determine if the company’s efforts are working. While mitigating costs is an important goal, plan sponsors also need to keep in mind that much of the cost increases are in the form of valuable care. Reasonable long-term mitigation is the key to success. 

 

1 Aon’s 2025 U.S. Health Survey

 

Aon’s Thought Leaders

Charles Smith, MD
Chief Medical Officer, North America

Meghan Rausch, FSA
Senior Vice President, Health Analytics, North America

Leanne Metcalfe, PhD
Senior Vice President, Health Analytics, North America

Amitabh Deka, MD
Medical Director, Health Solutions, North America

Anna Kay Dykes
Vice President, Delivery System Transformation, North America

Dan Manolache
Senior Vice President, Health Analytics, North America

Todor Penev
Senior Vice President, Commercial Analytics, North America

Steve Diemesevich
Vice President, Pharmacy Consulting, North America

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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