Why is employer healthcare spending rising so fast?
Employer coverage keeps getting more expensive. KFF’s 2025 Employer Health Benefits Survey put the average annual premium for family coverage at $26,993, 6% higher than the year before. Costs have been compounding at that kind of rate for years, well ahead of general inflation for most of the last decade, though KFF notes that medical prices grew more slowly than the wider economy during the recent inflationary period.
Healthcare spending reflects both the amount of care members receive and the payment for that care. Different carriers can pay different negotiated rates for the same procedure at the same hospital. Comparing those rates helps an employer assess whether a change in purchasing arrangements could reduce spending.
Federal disclosure requirements made those comparisons more feasible. Hospital reporting began in January 2021 under CMS Hospital Price Transparency, followed by health plan file enforcement in July 2022 under Transparency in Coverage. The files require substantial processing before they can support a plan decision. Our guide to what price transparency means for employers explains the requirements and limitations.
What is healthcare cost containment?
Healthcare cost containment means taking steps to manage spending through the price, volume or intensity of care. An employer should assess the effects on access and quality alongside the expected financial result. This guide focuses on purchasing strategies that use negotiated-rate comparisons.
At renewal, an employer may absorb higher costs or increase employee premiums and deductibles. Increasing the employee share changes who pays. It does not by itself reduce the total cost of care.
A cost review should examine the plan’s actual payments and compare them with relevant alternatives. The files published under Transparency in Coverage and the Hospital Price Transparency rule provide negotiated rates for that comparison. Our guide to machine-readable files explains how to assess the data before using them.
What are the main levers employers use to reduce healthcare costs?
The strategies below address different sources of spending. They sit alongside pharmacy management, high-cost claimant support and other benefit decisions. Evaluate each healthcare cost containment strategy against the plan’s claims, implementation costs and effects on members.
| Lever | What changes | The question to ask first |
|---|---|---|
| Switch carrier or network | The plan moves to a carrier whose negotiated rates are lower for the providers members actually use. | Which members lose a provider they are seeing today, and what is the dollar difference on our own claims? |
| Negotiate what you have | The plan uses an independent price file to ask the current carrier or TPA for better terms. | Where are we paying above the market for the same provider, and by how much? |
| Direct contracting | The employer contracts with a health system or practice for a bundled or fixed price. | What should this episode of care cost, and does the offer beat it? |
| Reference-based pricing | The plan sets a maximum it will pay for a service and members choose within it. | Which services have wide price spread and enough volume to matter? |
| Site of service | Care that is safe in an outpatient or ambulatory setting is steered there instead of a hospital. | Which episodes are being done in high-cost settings, and where else could they go? |
How should employers estimate potential savings?
Estimate savings using the plan’s claims and rates for the providers members use. Results from other employers can suggest where to look, but they cannot establish the opportunity for a different plan.
- A carrier change is useful when alternative rates and provider access justify the transition. Where the current network is competitively priced, renegotiation or changes in the site of care may deserve closer review.
- Site-of-service comparisons can identify payment differences between hospital outpatient departments and ambulatory surgery centers. Employers should assess those differences for specific procedures and members, including whether an alternative setting is clinically appropriate and accessible.
- In a small number of Simple Healthcare engagements, presenting independent rate comparisons to a carrier or TPA supported concessions of roughly 1% to 3% of medical spending without a network change. That is our experience with those plans, rather than a published estimate of what another employer should expect.
- In our analysis of four self-insured plans with $426 million in combined annual spending, we identified potential savings equal to 13% of spending while retaining the provider network. These were modeled opportunities on anonymized claims. They were not realized savings, and the four-plan sample limits how broadly the result can be applied.
The amount ultimately saved depends on the terms negotiated, member participation, implementation costs and the care that can be redirected.
How should employers use healthcare benchmarks?
A benchmark is a reference value chosen for a specific comparison. Price, cost, utilization and quality are measures; a value of one of those measures becomes a benchmark when it is selected as a reference for a defined question. There is no single standard commercial price benchmark that establishes the right price for every plan.
For example, an employer might compare its payment for a named service at a named provider with another payer’s negotiated rate, a defined local median, or a Medicare-based amount. State the service, provider, setting, geography, period and payment terms, and explain why the reference fits the decision.
For utilization, HCCI’s 2022 methodology, section 3.1.3, calculates rates by service category per 1,000 insured people using claims and enrollment data. That defines a measure; a chosen comparison population’s rate can serve as a benchmark, rather than a universal target for every employer.
How do you read a price benchmark?
Before using a price benchmark, review the comparison group, the rate distribution, the plan’s service volume and the underlying data.
- Position within the range. Compare the plan’s rate with other negotiated rates for the same provider and service. Identify whether higher payments are concentrated at providers members use frequently.
- Size of the difference. A wide range of rates can justify further review of carrier options or contract terms. If rates are similar, compare other providers and settings before assuming that renegotiation will produce substantial savings.
- Service volume. Weight rate differences by how often members receive the service. A modest payment difference for common care may matter more than a large difference for a rare procedure.
- Observed and estimated rates. Identify which values come from published files and which were modeled or left unpriced. Report how much of the projected result depends on estimates.
Together, these checks show where the plan’s payments differ from the selected reference and how much confidence to place in the result. Retain the provider, service, source and date behind each comparison.
What does a good analysis look like?
A committee should be able to review four parts of the analysis before making a decision.
- Plan-specific claims. Use the services and providers members actually use. Explain any adjustment to the claims period or population.
- Traceable rates. Record the carrier or hospital source and distinguish published rates from estimates. Published data also require validation: research on ghost rates shows that a listed rate may apply to a service the provider does not perform.
- Consistent episode definitions. Include the facility, professional services and relevant follow-up when evaluating a change that affects an entire episode. The healthcare benchmarks section above explains how to define the comparison.
- Effects on member access. Report how many members could lose access to a current provider under each option. Consider that information alongside the projected financial result.
What are the common mistakes?
Several choices can make a cost comparison misleading. Review these before relying on the projected savings.
- Deciding on premium alone. Premium is an important factor, especially for a fully insured plan, but it is not the only one. Compare total expected spending, benefits, member costs and access. For a self-insured plan, include medical and pharmacy claims, administration, stop-loss coverage and program fees. Two carriers with similar fees can differ by a large margin on the claims underneath.
- Applying a national average to the plan. An estimate based on another population may reflect different providers, rates and service use. Check whether those assumptions fit the employer’s members.
- Reviewing provider access too late. Lower rates may require members to change providers. Count affected members and assess continuity of care before selecting the network.
- Comparing incomplete episodes. A lower facility rate can be offset by other services in the episode. Use consistent components and follow-up periods across options.
- Leaving interests undisclosed. A carrier or vendor may benefit from the option being evaluated. Record those interests and review the assumptions with an independent source where appropriate.
- Overlooking the analyst’s fee structure. Compensation tied to identified savings can influence incentives. Understand how the analyst is paid and whether the analysis can conclude that no change is warranted.
An independent comparison gives the employer and its advisor another basis for evaluating the proposal. It is most useful when the sources and assumptions are available for review.
What should a cost containment plan include?
A practical cost containment plan should identify the opportunity, the expected effect on members and who is responsible for acting. It should answer five questions.
- Where does our spend go today, by provider, by site, and by episode?
- Where are we paying above the market for the same care?
- Which levers move that gap, and what is each worth in dollars?
- What is the member disruption for each lever?
- Who executes: our advisor, our carrier, or a specialist vendor?
Keep the sources and assumptions with those answers. The committee should be able to explain both the expected savings and the reasons for choosing a particular strategy.
How does a cost containment program fit into the plan year?
Schedule analysis around the decisions it needs to inform. A network comparison is useful before renewal; member communication needs to be ready before enrollment and before care is arranged.
| Moment | Decision | What the committee needs in hand |
|---|---|---|
| Strategy meeting, first half of the year | Which levers to pursue this cycle | Where spend goes today by provider, site and episode, and the ranked list of levers in dollars |
| Network RFP or renewal | Which carrier or network | A side-by-side comparison of each carrier’s rates for the providers members use, with disruption counts |
| Budget conversation between finance and HR | What to plan for | One chart that explains the trend and which levers move it |
| Fiduciary committee review | Whether the process was prudent | The documented methodology, sources and assumptions behind each decision |
| Open enrollment | How members will act on the strategy | Member-facing price and quality information for the point of care |
Keep the analysis current and assign responsibility for implementation.
- Update the comparison. Insurer files are updated monthly, while hospital files are updated at least annually. Record the dates used and refresh material comparisons when new rates become available.
- Assign the work. Identify who will negotiate terms, change benefit arrangements, select vendors and support members. Review any financial interests where the same party supplies analysis and implementation services.
Retain the analysis, assumptions and reasons for each decision with the committee’s records. That creates a record of what was known when the option was selected.
How Simple Healthcare helps
Roadmap joins a plan’s anonymized claims with published negotiated rates to compare purchasing options. The analysis includes projected dollar differences, changes in provider access and the share of spending priced from observed rates. Our methodology and data sources are published. We charge a fixed fee per enrolled employee and receive no share of identified savings. Employers can also request a free market read to compare published carrier rates in their metro before undertaking a claims-based review.