Why employers can't afford to stick with a traditional healthcare model

Each year, employers grapple with the ever-rising costs of healthcare by adjusting their budgets or reducing coverage to make room for inflated costs. Increasingly, they're looking for a better way. 

"The level of price intolerance has been met, and for many employers, exceeded," says Oliver Ayres, president of Key Benefit Administrators. "And because of that, they're really being forced to look at alternative methods." 

In 2024, healthcare premiums are projected to increase 8.5%, according to Aon, with employers spending nearly $15,000 per employee. And those price hikes aren't just being felt by employers: 85% of Americans have at least $500 in medical debt, while 6% have over $1,000, according to KFF, totaling $220 billion. 

Read more: How much longer can employers endure rising healthcare costs?

It's clear the current system is working for no one, says Guy D'Andrea, executive director of the Catalyst for Payment Reform, a nonprofit organization focused on improving the healthcare marketplace. Yet changing the status quo is not so simple. 

"Employers have tried a number of different strategies over decades to try to get a handle on the cost of care, but we're not seeing progress in terms of cost savings," D'Andrea says. "Employers are highly motivated to look for alternative solutions that might make a difference, but organizations tend to have some risk aversion, and it's hard to be disruptive. We don't want to pull the rug out from under anybody." 

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Big risk, big reward for cost-savings

Yet many employers are embracing that risk for the reward of lower costs and higher quality care. For example, self-funded plan options give employers control over these outcomes, and a way to mine their data to improve the employee experience, Ayres says. 

"Self-funded employers are able to make plan decisions and take data to really manage the performance of their benefit plan the way they manage everything else within their business, whereas in a fully-shared market, you're asking somebody to manage that for you," Ayres says. "There's an element of risk — healthcare has an element of surprise. But sometimes that lack of predictability allows employers to think of it differently." 

Read more: This company saved $5 million with a self-funded health plan

Self-funded plans take on the financial risk of paying for an employee's medical expenses directly, yet they save money by not having to pay premiums to insurance companies. The plans also allow employers a high level of autonomy to price-compare their benefit options, and use information from their own population to invest in healthcare options that will make the biggest impact. 

Several other alternatives are continuing to evolve in the space: A direct-to-employer option allows an employer to negotiate directly with a provider, while direct primary care plans enable employees to go to specific primary care offices in their locale for free before they're referred for further care if needed. Overall, companies save 8-10% on healthcare costs through self-funded options, according to data from KFF. Meanwhile, a direct primary care plan has saved some organizations more than 40%, according to data from E Powered Benefits, a health plan management firm.  

"The idea is really to start with a clean sheet of paper and not have some of the legacy constraints that you have in organizations that have been around for a long time," D'Andrea says. "[Employers] can create more emphasis on access to primary care, the use of virtual care systems, or focus on the use of higher value providers in order to create overall improved performance within those populations." 

Creating a balanced healthcare ecosystem

Making the switch can come with some hurdles — specifically around education on how to manage these benefits. At Catalyst for Payment Reform, the advocacy group provides education around plan design and best practices to facilitate communication between employers, providers and health plan administrators.  

"We need to be very intentional about educating various stakeholders about the impact these changes will have. We need to get leadership buy-in," D'Andrea says. "There's a lot of change management and a lot of organizational management that goes into adopting these new strategies that really goes beyond the technical details of the plan design." 

Read more: Self-insured vs. fully insured: What it takes to customize healthcare plans 

The ultimate goal is to improve the healthcare experience for employees, Ayres says. That takes effort from employees, too: By engaging in preventive care and feeling empowered to utilize their benefits when they first start feeling unwell. 

"The more engaged the employees and their families are in their own health, it takes that pressure off of the healthcare system," he says. "Members play a really important role through  their health decisions and behaviors, but also when they navigate the healthcare system, to do it in a way that is responsible and going to the right point of service." 

Creating a non-traditional health plan takes a village, Ayres says. But when embraced and properly balanced, employers can cultivate a healthcare "ecosystem" that benefits everyone. 

"The ecosystem typically has included a consultant, broker or some sort of payer, like a third party administrator or voluntary carrier," Ayres says. "Now, one of the most important pieces is the provider who is actually providing medical care. They are very important stakeholders in that ecosystem, and you have to find a way to create a partnership or relationship for it all to really work together."