Rising health costs push employers to rethink benefits strategies

• Key Insight: Uncover how small and midsize employers are reacting to sudden double-digit healthcare spending increases.
• What's at Stake: Benefit brokers face a major threat as employers reconsider how they manage rising healthcare risks.
• Forward Look: Expect employers to seek consultants who can educate them on alternative funding and cost-containment strategies.

Most small and midsize employers saw double-digit healthcare spending increases over the past year, prompting many to explore new health plan funding arrangements to control costs.

According to Pareto's 2026 State of Healthcare Spend report, 79% of small and midsize businesses (SMBs) reported double-digit healthcare spending increases in the past year, including one in five that saw costs rise by 30% or more.

That's pushing many employers to move beyond annual renewal discussions and reevaluate how they pay for healthcare expenses, manage risks, and control long-term costs, said Dena Bravata, Pareto's clinical advisor.

"Many of those employers are now — for the first time — investigating changing from being fully insured to self-insurance, and with that comes the need for those employers to have benefit brokers who can guide them through that transition," Bravata said.

Seventy-seven percent of SMBs are exploring new health plan funding arrangements, according to the survey, and 50% are likely or extremely likely to switch brokers. 

Read more: Health benefits spending soars, but employee confusion persists

Bravata said small and midsize employers face distinct challenges in managing healthcare costs and benefits that larger employers generally do not. "They may lack visibility into their own claims and really not understand what's driving their own healthcare spending," she said. "Second, unlike very large employers, these smaller folks may not have the same levers. They may lack the scale and infrastructure to actually implement key cost-saving interventions." 

On the flip side, being nimble also comes with some advantages, Bravata added. "If you have 50 or 100 employees and you're the CEO or CFO, you can talk to your folks and implement something new by asking what's important to employees and their families," she said.

Pareto's study is based on an independent survey of nearly 1,600 CEOs, CFOs and HR leaders at SMBs conducted between January and February.

What's driving the rise in healthcare spending?

As America's population ages, more people are living with chronic and high-cost illnesses, which can be expensive to manage and treat. Adults 65 and older made up 16.8% of the U.S. population in 2020 after growing nearly five times faster than the overall population over the previous century, according to the U.S. Census Bureau. 

A small number of conditions account for a disproportionate share of employer healthcare spending. Cancer remains one of the leading drivers of healthcare costs, and many employers see firsthand the impact it can have on employees' ability to work, quality of life, and mental health.

Cardiovascular disease, high blood pressure and high cholesterol rank among the top cost drivers for 75% of benefits leaders, according to the survey. Musculoskeletal (MSK) conditions affect nearly half of employees, and their prevalence makes them a significant expense: MSK care represents the second-largest area of healthcare spending after cancer.

Read more: Chronic illness drives healthcare spending among millennials

The growing use of specialty drugs and broader adoption of GLP-1 therapies are also contributing to rising healthcare costs. GLP-1 medications have become one of the fastest-growing areas of pharmacy spending, with roughly one in eight Americans using a GLP-1 therapy for weight loss or a chronic condition, according to the survey. 

"Many employers would like to cover GLP-1s, but do so under a constrained set of circumstances," Bravata said. "This is where having a partner who can work with the [pharmacy benefits manager] and can deliver either branded or compounded GLP-1s is a great alternative."

Read more: As GLP-1 costs climb, more employers weigh dropping coverage in 2027

Amid these cost pressures, Bravata emphasized the importance of benefits leaders working with brokers who can educate them on funding options and cost-containment strategies. 

"If they're not getting a really rich, personalized set of recommendations, they should be looking to find a consultant who can educate them more broadly," she said.