Published December 18, 2025, in the Harvard Business Review. Reposted with permission.
Healthcare costs are surging again, and U.S. employers are on the front lines. They purchase coverage for more than half of all Americans and are confronting significant increases in premiums — double digit in some cases — after several years of more moderate growth. Can employers bend the spending curve?
The prospects are, at best, uncertain. The fundamental question is whether they have the skill and motivation to take on a broken healthcare system. To significantly curtail health costs, employers will have to do things they’ve mostly avoided in the past, such as banding together in group purchasing arrangements, enrolling employees in value-based-care (VBC) plans, and using their political muscle to seek drug policy reforms.
High Prices and Surging Volumes
Solutions to the healthcare cost problem start with understanding its causes. The basic logic couldn’t be simpler: It’s a matter of Ps and Qs. Total costs are the product of the price of healthcare services times the quantity consumed. Both are currently accelerating.
High healthcare prices have been a long-term issue, especially in the commercial sector where Medicare and Medicaid don’t set the fees. In normal markets, competition checks exorbitant prices, but in healthcare, competition is disappearing. Consolidation among providers is rampant: As many as 90% of metropolitan hospital markets are considered highly concentrated. Large hospital systems are gobbling up physician practices, adding to their negotiating leverage.
Drug prices are also a well-known issue in the United States, which pays, on average, two or three times what other high-income countries pay. Flaws in the functioning of the market are again at work. Patents and their manipulation by biopharmaceutical companies keep drug prices elevated for branded products. Temporary drug- or company-specific deals negotiated by the Trump administration are at best a partial solution.
Rising wages in the healthcare sector are still another factor pushing up health prices. These reflect labor shortages hanging over from the pandemic, which has caused frightened and overworked health staff to flee healthcare, and the growing use of more expensive locum tenens providers — healthcare professionals who work temporarily to fill gaps in patient care at a healthcare facilities. And, of course, tariffs and general inflation affect healthcare like any other market.
Prices, however, are not the only problem. The volume of health services in the commercial sector is also trending upward. Reliable recent data on use of hospital and physician services is hard to find, but private insurers are reporting surging volumes in the Medicare Advantage and other markets. This may reflect the inevitable effects of an aging, overweight population with high associated rates of diabetes, hypertension, heart disease, and cancer. The arrival of GLP-1s for diabetes and weight management is increasing use of high-cost drugs. In the long term, they may reduce illness and costs, but in the short term, they are inflationary.
The Employer Record
Whether with respect to price or volume, employers have a decidedly mixed record in combating increases in healthcare costs. Though a few large companies have experimented with innovative, cost-control plans, these never scaled or persisted. More commonly, employers have addressed the symptoms, not the causes, of cost growth: They’ve passed the increased costs onto their employees by raising employees’ premium contributions, deductibles, and copays.
The result has been the hollowing out of employer-sponsored insurance. Unpublished data from the Commonwealth Fund show that at least one in five Americans with employer coverage are underinsured, meaning that they spend either more than 10% of their incomes (excluding premiums) on out-of-pocket healthcare costs or 5% or more if they are low-wage earners or they have a health plan deductible that is 5% or more of their incomes. In 24 states, workers’ deductibles exceed 5% of median income.
A more definitive strategy would be to fight back on prices. This would require employers to join forces to increase their market power to negotiate lower prices with powerful local healthcare providers. State governments have done this successfully for their large employee plans in Oregon, Washington, and New Mexico. Private employers, however, have proved unable or unwilling to join together in large purchasing coalitions that could face down providers in local markets. They’ve also failed to lobby forcefully for reforms in patent law that would increase competition and reduce prices in drug markets.
Another strategy is the use of tiered insurance arrangements, in which employers offer plans where employees pay lower premiums and copays if they use select providers who have agreed to accept lower prices while providing the same or better quality of care. Wider choice plans are usually offered as well but only if employees pay higher premiums and copays. Some tiered arrangements may channel patients needing complex, high-cost procedures, such as heart or liver transplants, to centers of excellence that have reputations for quality and offer volume discounts.
The general problem with tiered insurance is that most employer costs are concentrated in a minority of sick employees who buy the high-cost plans so they can preserve choice of provider. As for centers of excellence, they often require that patients travel far from home and family for treatment, which may be one reason that they’ve proved difficult to scale. More importantly, they don’t address the patients with common chronic illnesses, such as hypertension, diabetes, heart disease, stroke, cancer, and obesity, that drive the bulk of healthcare costs.
If prices are hard to control, what about limiting the use of services? Some employers have experimented with wellness programs that incent employees to use preventive services and adopt healthy lifestyles. These are undoubtedly good public health investments, but their payoffs in healthcare cost reduction for individual employers have been difficult to demonstrate.
Employers have also doubled down on what’s called “utilization management” (UM). This involves insurers carefully scanning claims and denying those deemed medically unnecessary or outside covered benefits. UM includes the much-maligned practice of prior authorization — the requirement that a doctor obtain advance approval from the insurer before providing certain services, medications, or equipment. UM is effective but has steep side effects in administrative costs and hair-pulling frustration for doctors and patients, which causes employee discontent. This frustration — felt broadly among insured Americans — caused the shocking online applause that occurred in the aftermath of the appalling assassination of a United HealthCare executive in December 2024.
The most promising approach to controlling volume and overall costs may be what’s called value-based care (VBC). Under VBC, employers contract for insurance plans that transfer financial risk to provider organizations such as health maintenance organizations and accountable care organizations. When they have to worry about patients’ overall costs, providers increase reliance on primary care, which can avoid unnecessary emergency room and hospital use.
The problem in selling this to employers is that they have to restrict employees to using providers in the VBC network. Restricted choice is always unpopular with employees. Also, many harried benefits managers and CEOs have trouble understanding the ins and outs of these more complex financial arrangements. Raising deductibles and copays is always simpler and indeed, may be the option most employers chose yet again.
AI to the Rescue?
So what about artificial intelligence? Some employers and insurers hope that it will transform utilization management: enabling companies to surgically excise claims for unnecessary and uncovered services with far less hassle and employee irritation. It could, for example, speed up the prior-authorization and claims-review processes and increase their accuracy, though there is also considerable concern among the public and state regulators that AI will be abused to just deny more services. Some also dream that it will transform healthcare into a sleek, cost-efficient enterprise: perhaps therapy bots can reduce behavioral health use or AI applications can increase control of chronic illness.
Unfortunately, despite widespread speculation, there is no reliable data yet about AI’s overall cost effects, including its ability to make utilization management more efficient or tolerable. Adding to the uncertainty is the fact that AI is a double-edged sword. Providers can use it to increase their revenues (i.e., employer costs) by increasing their efficiency in billing: making sure that no claim goes unsubmitted and that every claim demands the maximal justifiable payment. Billing for the use of AI itself is also a potential health-system cost.
When it comes to AI battles, providers enjoy one major advantage: motivation. Their survival depends on maximizing their healthcare revenues. For many employers, however, reducing healthcare costs isn’t a life-or-death matter.
How Motivated Are Employers to Control Costs?
Indeed, employer motivation may lie at the heart of the American health-cost dilemma. Health spending is not only complicated and frustrating; it may also be marginal to the financial welfare of many companies.
On average, healthcare is 7% of employee compensation in the U.S. private sector. Assuming that total employee compensation averages 60% of employer costs, health insurance amounts to only about 4% of total operating expenses. Even a 20% increase in 4% of total costs is only a 0.8% increase in overall enterprise expenses.
Of course, there will be some industries and employers for which healthcare costs are much more significant factors, and for sure, responsible employers will act to minimize the healthcare damage, mostly through familiar, easily understandable measures that share costs with employees by hiking premiums, deductibles, and copays. These measures, however, are undermining the long-term viability of employer-sponsored insurance and haven’t addressed the fundamental underlying problems of increasing prices and increasing volumes.
To do that, employers would have to take on more politically and technically complicated strategies of joining large purchasing coalitions to negotiate lower prices for care or forcing their employees to use value-based care networks that limit their choice of provider or lobbying against the interests of sister industries (like biopharmaceutical companies and their closely allied private equity and venture investors) to reform the patent system. So far, the threat of healthcare costs has not been sufficient for most employers to take on the management hassle, workforce discontent, or political conflict that these strategies would involve.
There are many reasons that entrusting the stewardship of American healthcare to employers is problematic. Among those reasons may be that most employers just don’t have sufficient “skin in the game” to take on the disruption and risk that would be required to bend the healthcare cost curve significantly or sustainably.
