Healthcare spending in the U.S. has increased at a higher rate than the consumer price index (CPI) for decades even as health outcomes have slowly declined. Eventually, the U.S. health economy must face the reality that Herb Stein succinctly summarized: “If something cannot go on forever, it will stop.”
Employers, which fund the most profitable share of the U.S. health economy, have always had but infrequently leveraged their latent power to influence cost containment. With more employers adopting self-insured health benefit models and price transparency enabling greater insight into the variation in rates and the lack of correlation between rate and quality, employers are better positioned than ever to demand value for and on behalf of their employees (Trend 8).
Rising healthcare costs affect every health economy stakeholder, with the 121.3% increase in medical care prices since 2000 outpacing the 86.1% rise in prices for all other consumer goods and services over the same period.3 However, employer healthcare costs have risen more sharply, with the percentage growth in employer expenditures for health insurance premiums outpacing growth in total U.S. health expenditures (Figure 1). This trend, driven partly by higher rates paid by commercial payers compared to government payers, has led to increasingly high costs for both employers and employees. From 2012 to 2024, the average annual contribution for family coverage increased by 45.3% for employees and 68.7% for employers.
As costs rise, employers are increasingly adopting self-funded health plan models (i.e., employers pay for beneficiary claims and outsource health benefits administration). In 2024, 63% of covered workers were enrolled in self-insured plans, a 10-percentage point increase from 2000 (Figure 2). This shift was particularly significant among large firms, where enrollment in self-insured plans grew by 13 percentage points. Because of the financial risk inherent in self-funded health plans, self-insured employers have a clear financial incentive to demand greater value from their spending (i.e., better outcomes at equivalent costs or equivalent outcomes at lower costs or better outcomes at lower costs).
With growing levels of self-funded employers and price transparency enabling greater insight into the variation in rates and the lack of correlation between rate and quality, employers are better positioned than ever to demand value. Health plan price transparency reveals differences in commercial reimbursement rates from the same payer for the same service in the same market. Across a basket of three common orthopedic surgical procedures, the hospital-level median negotiated rate ranged from $17.9K in St. Louis to $103.2K in New York City (Figure 3). Even within the same market, there is significant variation, which is indicative of a lack of value, if not outright waste. In Dallas-Fort Worth, for example, rates vary by more than 6X, ranging from $9.4K to $63.2K.
Price and quality for common inpatient medical services in competitive markets are not correlated. While the median negotiated rate for MS-DRG 190 (chronic obstructive pulmonary disease (COPD)) in Chicago is $14.1K, the provider receiving the highest rate ($21.7K) has a higher mortality rate than 66.7% of all other hospitals (Figure 4). The correlation coefficient between negotiated rate and 30-day COPD mortality (a proxy for quality) is -0.15, reflective of a weak negative correlation between price and quality.