Why Rising Healthcare Costs Have Become a CEO-Level Business Decision

Founder & CEO, JS Benefits Group | Forbes Business Council Contributor |
Co-Host, Executive Leaders Radio

For many companies, healthcare is one of the largest employee-related expenses on the balance sheet.

Yet it is still often managed as an annual insurance transaction.

The renewal arrives. Leadership sees the percentage increase. The broker negotiates with the carrier. Finance determines what the company can absorb. HR evaluates what employees can reasonably contribute.

Then the organization moves on.

That approach may have worked when healthcare represented a smaller and more predictable expense.

It is becoming increasingly difficult to justify today.

Healthcare costs affect profitability, compensation, recruiting, retention, budgeting and long-term financial planning. They also affect how employees experience the value of working for an organization.

That makes healthcare more than an insurance issue.

It is a business decision.

The Renewal Percentage Doesn’t Tell the Whole Story

A health insurance renewal might show a 9%, 12% or 15% increase.

That number matters.

But it doesn’t necessarily explain what is causing the increase.

Is utilization changing?

Are prescription costs accelerating?

Are a small number of high-cost claims driving the plan?

Has the employee population changed?

Are employees using certain services differently?

Is the existing plan design still appropriate?

Are the company’s contributions structured in a way that makes sense for the workforce?

Those questions matter because two companies receiving the same renewal percentage could have completely different underlying problems.

One might be experiencing a temporary claims event.

Another might have a structural problem with plan design or utilization.

Treating both situations the same simply because the renewal percentage looks similar can lead to poor decisions.

CEOs Don’t Need to Become Benefits Experts

There is a misconception that putting healthcare on the CEO’s agenda means asking CEOs to become experts in insurance.

It doesn’t.

A CEO doesn’t need to understand every provision in a health plan.

But leadership should understand the financial forces affecting one of the company’s major expenses.

The same way a CEO expects to understand revenue growth, operating expenses, customer acquisition costs and profitability, leadership should be able to ask basic questions about healthcare spending.

What is driving the cost?

What are we getting for the money we’re spending?

What can we change?

What risks are we accepting?

Are there alternatives we haven’t evaluated?

Those questions create a much more productive conversation than simply asking whether the broker can negotiate the renewal down another percentage point.

Negotiating the Renewal Is Not the Same as Managing the Cost

Negotiating with a carrier has value.

But a lower renewal does not necessarily mean an employer has solved its healthcare cost problem.

Consider an employer facing a 12% increase.

The broker negotiates it down to 9%.

That may save money compared with accepting the original proposal.

But what happens next year?

If claims continue to increase, pharmacy costs continue to rise and the plan design remains unchanged, the organization may find itself facing the same problem again.

The negotiation addressed the price.

It didn’t necessarily address the underlying cost drivers.

A sustainable approach requires an integrated employee benefits strategy that considers plan design, workforce needs, financial objectives, employee affordability and the long-term performance of the benefits program.

Healthcare Data Should Drive Decisions

The employers that manage healthcare most effectively are increasingly the ones willing to look beneath the headline numbers.

Claims data can identify significant cost drivers.

Pharmacy data can reveal where spending is accelerating.

Utilization patterns can highlight areas that deserve attention.

Employee demographics can change the risk profile of a plan.

Participation and engagement can tell employers whether employees understand and use the benefits available to them.

But data isn’t valuable simply because there is more of it.

The objective isn’t to give executives another enormous report.

The objective is to turn information into decisions.

If a relatively small number of claims represent a significant percentage of total plan spending, leadership should understand that.

If pharmacy represents an increasing share of total healthcare spending, leadership should understand that.

If employees are struggling to navigate the benefits program, leadership should understand that too.

Data should answer questions—not simply create more of them.

The Cheapest Plan Isn’t Necessarily the Best Plan

Healthcare cost management can also become too focused on the premium.

The lowest premium does not necessarily represent the lowest total cost.

A plan with a lower premium may have:

• Higher employee contributions
• Higher deductibles
• Greater out-of-pocket exposure
• Less favorable networks
• Different pharmacy economics
• Lower perceived employee value

That means employers should evaluate the economics of the entire benefits program rather than focusing on one number.

A lower company premium can look attractive from a finance perspective while creating a substantially different experience for employees.

The opposite can also be true.

A company may spend more on a benefit but achieve better employee utilization, stronger retention or greater perceived value.

The right question is not simply:

“How much does the plan cost?”

It is:

“What value are we getting from what we spend?”

Employees Are Part of the Cost Equation

Employers facing rising healthcare costs often turn to employee cost-sharing.

Higher contributions.

Higher deductibles.

Higher out-of-pocket maximums.

Those strategies can sometimes be appropriate.

But they shouldn’t become the automatic answer every time costs rise.

Employees experience healthcare differently than employers do.

An employer may see a $500,000 increase in annual healthcare spending.

An employee may experience that decision as an additional $100 per month coming out of a paycheck, a higher deductible or a prescription that has become substantially more expensive.

Over time, repeated cost shifting can change how employees view their compensation and benefits package.

That matters for employers competing for talent.

Healthcare is not just an expense.

It is part of the employee value proposition.

Plan Design Should Be Revisited Regularly

One of the biggest challenges employers face is inertia.

A plan exists because it has always existed.

The carrier is familiar.

The network is familiar.

The contribution structure is familiar.

The renewal process is familiar.

But the business may be completely different from what it was five years ago.

The workforce may have changed.

The company may have grown.

Employees may have different expectations.

Healthcare utilization may have changed.

Financial priorities may have changed.

That means the plan deserves to be evaluated periodically rather than simply renewed.

Employers should look at deductibles, copays, coinsurance, networks, pharmacy benefits, employer contributions, employee contributions and funding arrangements.

The goal isn’t to change everything.

It is to make sure the benefits program still makes sense.

Alternative Funding Should Be Evaluated—Not Assumed

For eligible employers, the funding structure itself deserves consideration.

Fully insured plans can offer predictability and simplicity.

Level-funded and self-funded arrangements can provide other potential advantages depending on the employer’s size, financial position, claims experience and tolerance for risk.

A level-funded health plan may be worth evaluating for an employer looking for an alternative to traditional fully insured coverage, although suitability depends on the organization’s specific circumstances.

There is no universal answer.

An alternative funding arrangement isn’t automatically better.

But neither is staying with the same funding model simply because it has always been used.

Employers should evaluate their options based on their own circumstances.

That means understanding the financial implications, the risks and the potential opportunities before making a decision.

Healthcare Cost Management Should Be Ongoing

Perhaps the biggest change CEOs should make is to stop treating healthcare cost management as an annual exercise.

The renewal shouldn’t be the beginning of the conversation.

It should be one point in an ongoing process.

Throughout the year, leadership should be asking:

• What changed?
• What are we learning?
• Where are costs moving?
• Are our vendors delivering value?
• Are employees using the plan effectively?
• Are there emerging cost drivers?
• What should we address before the next renewal?

Effective healthcare cost management isn’t about finding one magic solution.

It is about continuously evaluating the factors that influence healthcare spending and making informed decisions before the next renewal arrives.

The CEO, CFO and CHRO Should Share the Same Objectives

Healthcare can fall into an organizational gap.

HR may own the benefits program.

Finance may own the budget.

The CEO may be focused on the broader business strategy.

But healthcare affects all three.

The CFO needs to understand financial sustainability.

The CHRO needs to understand employee experience, recruiting and retention.

The CEO needs to understand how benefits fit into the organization’s overall business strategy.

Those perspectives should not operate independently.

A decision that reduces costs but significantly damages employee affordability may create another business problem.

A decision that improves benefits without regard to long-term affordability can create a financial problem.

A decision that simply negotiates the renewal without addressing underlying cost drivers may only delay the problem.

The strongest strategies bring the three perspectives together.

Benefits Technology Can Improve the Equation

Technology is also changing how employers manage benefits.

Modern platforms can simplify enrollment, improve communication, integrate with payroll and HR systems, and provide employees with easier access to information.

Analytics can help employers understand utilization and spending.

But technology is not a substitute for strategy.

A new benefits platform cannot fix a poorly designed health plan.

More data doesn’t automatically produce better decisions.

Technology is most valuable when it supports a clearly defined objective.

Employers should first determine what they are trying to accomplish and then select the tools that help them execute and measure that strategy.

The Bigger Business Question

The healthcare conversation ultimately comes down to a larger business question.

Are we managing healthcare, or are we simply paying for it?

Those are not the same thing.

Paying for healthcare means waiting for the renewal, reviewing the increase and determining how much of the cost to absorb.

Managing healthcare means understanding the drivers, examining the plan, evaluating alternatives, monitoring performance and making adjustments throughout the year.

The second approach requires more work.

But for employers facing persistent healthcare cost pressure, doing more work upfront can be far more valuable than repeatedly reacting to the same problem.

Healthcare Belongs in the Executive Conversation

Healthcare has traditionally been viewed as an HR issue.

But the financial impact has become too significant to keep it isolated within one department.

For CEOs, the opportunity is not simply to reduce the next renewal.

It is to create a benefits strategy that balances financial discipline, employee value and long-term sustainability.

That means asking better questions.

It means challenging assumptions.

It means looking at the data.

It means evaluating the plan rather than automatically renewing it.

And it means recognizing that healthcare decisions can influence the organization far beyond the insurance budget.

The employers that approach healthcare this way won’t necessarily have the lowest premiums.

But they can be better positioned to understand their costs, manage their risks and make more informed decisions about one of their most important investments in their workforce.

Healthcare is no longer just a benefits expense to be renewed.

It is a business cost that deserves executive-level strategy.

About the Author

Jennifer Schaefer, MBA, ChFC, CLU, RHU, REBC, SHRM-SCP is the Founder and CEO of JS Benefits Group, an employee benefits consulting firm that helps employers develop competitive benefits programs, manage healthcare costs and make informed decisions about their workforce.

Jennifer works with employers on employee benefits strategy, health plan design, healthcare cost management, cost containment, employee retention, benefits technology and compliance. She is a Forbes Business Council Contributor and Co-Host of Executive Leaders Radio, where she discusses employee benefits, leadership, workplace trends and the future of work.