Rethinking the Economics of Employer Health Benefits

00:20, Chris T

Hi, everybody, and welcome back to William Blair Thinking Presents. Today is Tuesday, September 29th, 2026, and we are discussing one of the more important forces reshaping the healthcare landscape: the rapid rise in employer healthcare costs and the growing shift towards alternative healthcare funding models.

So I'm joined by Ryan Daniels. He's William Blair's group head of healthcare technology and services. Ryan and his team, they just recently published their latest Health Care Mosaic. He's been on a few times now to go through these great reports. This one's called Rethinking Employer Health Benefits: Cost Pressures and the Rise of Alternative Healthcare Funding Models, and it examines why healthcare costs are reaching levels that many employers view as unsustainable, and then also how businesses are increasingly rethinking the way they purchase, finance, and manage healthcare benefits.

Ryan, thanks for joining us.

01:09, Ryan D

Yeah, thanks for having me, Chris. I always enjoy doing these sessions after a mosaic, so I appreciate you having me on the podcast today.

01:15, Chris T

Yeah, absolutely. So let's start at the highest level. Healthcare costs have been rising for years. Your report argues that something fundamentally changed over the last few years. Why are employers paying so much more attention to healthcare costs today, and what makes this moment different from previous cycles? Would you say?

01:35, Ryan D

Yeah, Chris, it's a great question to start our conversation today, and it's really one of the key theses in our report. More specific, that healthcare costs have finally reached a tipping point, if you will, where the status quo is no longer sustainable. And because of this, it's actually forcing employers to really rethink how they contract for and pay for health and wellness benefits.

And there are actually a few answers to your questions that are quite important. The first simply relates to the absolute spend on healthcare after years of excessive cost inflation. So it's projected that the year-over-year increase in employer health insurance costs could be as much as 10% in 2027, which would be the highest year-over-year increase in about 25 years.

And what's even more important is this comes off record healthcare spending each of the past five years. So there's this compounding effect, if you will, that's really created the most challenging healthcare cost environment that employers have seen in 20 or 30 years. And because of this, what we're now seeing is healthcare move from an HR department issue at most employers to the C-suite, meaning it's now a CEO and CFO issue versus being isolated to HR managers in the past.

For example, there's data in our report from Mercer that shows that health and wellness benefits now rank as a top-three business concern for about a third of all CFOs in the United States.

In a similar report from the Business Group on Health, which we also referenced in the report, it was printed just this September, indicated that 88% of senior leaders are now paying attention to health benefit costs and 44% report that the CEO is now playing a major role in benefit decisions, which is really a key change from a year or two ago.

And as you know, I've followed the healthcare space for William Blair for more than 25 years, and it's literally the first time I've seen CEOs starting to focus on health and wellness benefits as a direct job mandate. And I think what's really noteworthy is they need to do so as healthcare benefits have become such a large expense that it's really impacting other strategic decisions on areas like, you know, their product and service pricing, wage rates, investments they're making.

So it really has hit a key inflection point entering 2027. And then, not to be too wordy, but the second answer, and this is probably something we'll dig into a bit more as we continue,  is that these underlying cost trends impacting yearly rate growth show no signs of abating, whatsoever. So not only is this a pressing near-term issue, but one that's unlikely to subside going forward. So it's something they have to address.

So again, I characterize 2027 as a tipping point for what really could be a major shift in the industry related to how healthcare is paid for and delivered.

04:19, Chris T

One of the more surprising findings of the report is that healthcare inflation today is not being driven by pricing, or primarily by pricing; instead, utilization, and then the mix of care, are becoming increasingly important. So, walk us through what's happening beneath the surface.

04:35, Ryan D

Yeah, and that's the exact follow-up question I was hoping you would ask. There are a number of underlying drivers that do make this a longer-term trend. But first, a bit of background. I would note that historically, about 75% of year-over-year cost increases in health benefits could be explained by pricing, meaning healthcare providers and acute care health systems raise their rates.

So, in turn, insurers, in order to protect their margins, pass this along to employers, and the other 25% is utilization-driven. And this is important, as it's actually easier to combat rising costs when it's driven by price or inflation, as employers or their brokers can work with payers to negotiate better rates to help offset this. But today, data indicates it's reversed.

More specific recent reports show that healthcare costs are now being impacted much more by utilization, to the tune of about 60% or so of the cost trend. And this is much harder to control than pricing. So, in turn, it does require a novel approach to attack the issue. And to dig a bit deeper here, what's really going on is there are a ton of novel medical breakthroughs that are driving costs, and that's one key area we focus on in the report.

For example, specialty drugs have seen a boom over the last decade. And it's fascinating, as these drugs are really great medical breakthroughs, but they come at huge costs. In fact, there's dozens and dozens of drugs that cost $500,000 or $1 million a year to treat things like cancer and autoimmune diseases.

And what's really incredible here is specialty drugs, and this is according to FTC data, account for about 40% to 50% of pharma spending today, despite the fact that they account for only 2% to 3% of prescription volume. So it shows you just how impactful this has become on cost.

And then maybe another tangible, or more tangible, example that's probably top of mind for most investors and employers, and everyone on the call, is GLP-1 medications. That's been an enormous cost for employers across the US, so much so that many are simply eliminating coverage of the drug, as the near-term costs are so high and the near term benefits really are not there.

And in our report, we actually have data from the Kaiser Family Foundation, or KFF, that shows that about two-thirds of employers actually call this out as being a major factor driving up health benefit costs in 2026. And about 60% said it was much higher than they anticipated. So it's even pressuring them above their original expectations.

And there are larger organizations, a great example is Bank of America, their CEO said that they spend nearly a quarter of a billion dollars annually just to provide their team members with GLP-1 therapies. So, again, it's an enormous cost.

And then, on top of this, you have things like an aging US workforce, you have more chronic conditions, and that's driving up utilization and the cost of claims as well. So, again, I think the key point here is there really are myriad factors driving this, but the commonality is that they are all longer-term in nature, and therefore they do require a different approach to address the issue than what we've seen in the past. And I think that's what's key.

07:40, Chris T

So I think you spoke a little bit about this, but when employers talk about healthcare spending today, GLP-1 drugs tend to dominate the conversation. But your report suggests that's only part of the story. So, what are the biggest contributors to rising costs today? And I know you listed off a few.

But moving on that topic, which of these trends do you think investors may be underestimating?

08:02, Ryan D

Yeah. Great question. As I mentioned, GLP-1 adoption is key. You're exactly right, as it's growing.

But as I mentioned, many employers are actually taking the blunt approach of just eliminating coverage. Even large insurers themselves, like Cigna, indicated they canceled coverage for their workforce. And the largest hospital chain in the US, HCA, they dropped coverage in 2026.

And you've got large retailers like Lowe's that are pulling back and dropping coverage. So, you know, that's a big trend, but it's one they're really trying to abate. So, I would say the biggest thing is just specialty drugs.

Again, the data on these drugs indicates they're only 2% of prescription volume, but they're 50% of spending. So, it shows you just how pricey they are.

And to be completely honest, you know, despite spending a lot of time in the space, that was a statistic that even surprised me a bit when we were doing our due diligence on the topic. So, I think it's, you know, chronic conditions, higher claims value, and really the specialty drug innovations and cost are driving the trends here.

08:58, Chris T

The title of the report centers on alternative healthcare funding models. For listeners who may not spend a lot of time in the healthcare benefits world, what does that actually mean, and why are employers increasingly exploring alternatives?

09:11, Ryan D

Yeah. And this really ties into how employers need to attack the issue going forward. So it's an important question, and maybe just a level set here, and everyone should be familiar with this, but the annual open enrollment process around health and wellness benefits is usually a process dictated by, or maybe better said, characterized by, inertia, meaning you get your rate increase from your insurer, you negotiate it down a bit, you pay more as an employer, or you increase employee cost sharing, or maybe both, and you keep all your benefit options the same. And most of your employees just all roll over the same benefit choices year after year without much thought.

But today, we're seeing employers looking to novel insurance plan options, ones that offer more transparency in pricing and various components of that, insurance that provides more data to employers to help them identify internal cost issues, and offer more solutions that actually afford employers opportunities to bend cost trends and, in turn, offer an ability to actually impact these longer-term healthcare costs.

And there are a ton of new models in the market that are gaining traction. To be fair, many are still fairly nascent, but given the trends we discussed earlier, they're increasingly being entertained as options to help control cost. And we think they're, again, really set to take off in usage going forward, with 2027 likely to be a very big tipping point for this.

10:33, Chris T

Two of the areas you spend the most time discussing in the report are level-funded plans and ICHRAs. Why are those models attracting so much attention, and what do they potentially change for employers and employees?

10:47, Ryan D

Yeah, as you mentioned, we go through a lot, but those are two great examples of these novel plan options that are gaining traction. And I'll start with ICHRA, or ICHRAs, which stand for Individual Health Reimbursement Accounts.

And just as a quick aside here, they actually were just renamed as CHOICE plans, but most employers use the two terms interchangeably, so I'll just stick with ICHRAs or ICHRAs as our nomenclature here.

So, the way these plans work is that rather than offering employees a selection of two to three plan options, so say an HMO, a PPO, and a high-deductible plan from your local Blue Cross Blue Shield, the employer simply provides employees with a monthly stipend that they can use to buy whatever type of health insurance best suits them.

And for employees, this can be attractive, as they can shop on a healthcare exchange platform. They can see dozens of different insurance offerings and then buy the insurance program that best suits their needs or the needs of their family, including spending more than the monthly stipend they get if they so desire, or maybe they have unique care needs.

It's also highly portable, meaning that if someone leaves their employer, they can just continue to purchase the exact same plan going forward, as it's not directly tied to the employer. So, it adds a unique element of portability to health benefits, as well. And again, that's very different than what most organizations have today.

So, at William Blair, I have the choice of three plan options. And if I leave William Blair, I have to exit that program and find new insurance. With this, I've been using funds that are pretax to buy insurance. I can just continue to do that going forward.

And the other big benefit, and this is for employers, it's quite attractive, is they can lock in healthcare benefit inflation levels by setting an annual percentage increase to that stipend that they provide for employees.

Or maybe stated differently, as an example, if the employer gives a stipend of $1,000 a month for family this year, they can simply just increase that by 5% each year going forward, so that effectively becomes the benefit cost trend: 5%. And it's literally now directly in their control, regardless of any external factors. So that becomes very attractive to them.

And, you know, listeners on our podcast today may find this very similar to what took place in retirement benefits in the landscape there several decades ago. So recall, in the past, most large employers offered traditional pension plans that were defined benefits. But in the 1980s, due to some legislative and tax law changes, many organizations began shifting to 401(k) savings plans, which provided specific benefits to employees and allowed them to invest in different retirement accounts, really based on their individual goals and their time until retirement.

And by the mid-90s, defined contributions actually surpassed defined benefits in the market. And again, the goal here was really quite similar to the CHOICE plans or ICHRAs, in that employer contributions could be specified each year rather than providing a lifetime benefit, which added a lot more consistency and certainty to the spend category for employers.

And it's also important that workers could take their accumulated accounts with them when they changed employers. That 401(k) is there. So it's also very similar here.

Again, it's so analogous to what we're seeing with these CHOICE or ICHRA accounts that a lot of industry experts refer to them as the 401(k)s of healthcare.

And not to go on too much here, but it's another really important point that these plans were traditionally, let's say, over the last three or four years, mainly used by small employers in order to offer health insurance coverage to employees for the first time. And again, the reason was these plans offer complete predictability to the small employer.

That was never an option before, because, again, they just put a monthly stipend out, give an annual increase, so they don't have to worry about huge claims cost, or massive year-over-year spending increases they couldn't control. So, this was generally an insurance product that was seen as a tool to onboard small employers to provide health and wellness benefits for the first time.

But today, given all the cost pressures we're seeing, even larger employers are starting to look into this and are adopting these plans. So, we've seen massive adoption. We think it's going to be big in 2027, and it's pretty fascinating. Even large insurers are doing this. So Centene is one of the largest insurance companies and employers in the United States, they started switching their team members to this, and the CEO of Centene recently noted she's even on a CHOICE plan. So, it's really become a replacement for traditional insurance, as well, which is really quite a novel inflection point.

And then, second, you also asked about level-funded plans. Those are probably less exciting to talk about. They're a bit nuanced in design, but in effect, they combine the predictability of fully insured plans with the cost savings of being self-insured, such as bronze or a lower market.

And yeah, these plans are really predicated on an employer making a monthly payment to an insurance company to cover their healthcare claims. Then they pair that with something like a stop-loss insurance premium to offset potential high-cost claims. And at the end of the year, if there's any savings left, the employer can share in the savings.

So again, it's a bit of a hybrid design that offers some of the upside of being self-insured without all the risk. But again, I'll leave the details on that to the report, for anyone that really wants to dive into how these work. It's probably a bit too nuanced for our conversation today.

16:07, Chris T

All right. So, one thing that stood out to me is that the report isn't just about changing how healthcare is paid for. It's about changing how healthcare is delivered, as well.

So, where are employers seeing the biggest opportunities to improve outcomes while also lowering costs?

16:24, Ryan D

Yeah, that's a loaded question. And there's a number of these offerings that employers are using, often in tandem together, to address the care delivery part of the solution. And maybe there's a few we can jump deeper into, but the ones we covered in the report are things like advanced primary care and onsite, near-site clinics, so actually putting an onsite primary care office at a large employer.

Another is care navigation solutions that help members access care and use lower-cost care settings. So a surgery center versus an acute care hospital can be markedly less expensive by shifting to that lower-cost surgery center. And then you've got more novel options, like direct contracting between employers and local providers, and Centers of Excellence or Networks of Excellence that have gained a lot of traction.

And I guess what's really noteworthy here is that a lot of these solutions are not only growing rapidly, but they have a ton of traction with employers of all sizes already. So, for example, we have data in our report that indicates that more than 40% of employers already rely on strategies like advanced primary care, site-of-care strategies, so again, pushing individuals to lower-cost points of care, like independent diagnostic testing facilities or surgery centers, versus a hospital, and then Centers of Excellence. So they are well adopted.

But what's maybe even more interesting is that more than 80% of employers expect to add these solutions over the next few years. So again, if you're at 40% today and expect to get to 80% near term, that, in my mind, indicates pretty explosive growth if you look forward a few years.

17:58, Chris T

Another major theme throughout the report is the rise of Centers of Excellence in Specialty Care Networks, which you just briefly mentioned. Why are these programs gaining traction and how do they fit into the broader employer health care strategy?

18:12, Ryan D

Yeah, that's a great one to dig into a bit more. The industry data that I just referenced indicates that Centers of Excellence, or COEs, are already adopted by about 51% of employers, and another 37% are currently looking at this option. So, it's really not unrealistic to expect that this benefit could have 80% to 90% penetration in just a few years.

So, it's an option I would expect most of our listeners to actually have access to in the coming years. And the concept is actually quite simple at its roots. And what it involves is using data on things like care delivery, the cost of care, patient satisfaction, and outcomes to curate a specific network of providers, or maybe even facilities, that deliver the highest value for a specific condition.

So traditionally, think of things like cancer care or orthopedic surgeries. And then there are companies out there that perform this analysis, and then they work with these leading providers to get bundled, so meaning all-in, fixed pricing for a procedure in return for inclusion in the network. And then employers would sign up to get access to this network for their workforce, and often incent employees to use these providers of excellence in these networks via not charging them deductibles if they do, or maybe even requiring them to go to these providers for certain areas of really acute care.

And, you know, traditionally this is more focused, as I mentioned, on specific high-cost procedures, many of which were perhaps so unique and costly that patients even had to travel to a different market. But these procedures were so expensive that it still made sense, as the cost savings offset all the travel, and lodging, and still delivered better outcomes and savings.

But today, these Centers of Excellence have really morphed into more local networks of excellence, so patients can access even lower levels of care that are needed in their home market, which obviously massively drives up utilization because it's a bigger bundle. More people are willing to get local care versus travel, and it provides, kind of, the relief to what was the big hurdle to these Centers of Excellence. So, kind of moving from that to networks of excellence.

And again, it's a great benefit. Employers get lower costs, they get fixed all-in pricing. Employees get care at lower rates, lower deductibles, and they get access to the best providers for their condition. So, it's really a great option. It probably explains why it's so prevalent in the marketplace today.

20:37, Chris T

The report also highlights a tremendous amount of funding activity, M&A, you know, partnership formation across this entire ecosystem. So as investors think about the implications of these trends, where do you see the most compelling opportunities emerging?

20:52, Ryan D

Yeah, that's a great call-out. And we always look at funding and M&A or partnership activity in the space to see if the trend we're analyzing is really gaining momentum in the market, or maybe stated differently, if we think these plan options and novel care delivery vehicles hold a ton of profit promise and big growth potential, yeah, we should see a lot of novel funding in this space.

And as we outlined in our report, that's exactly what we've witnessed over the last two years. And it was actually coincidental. About two days after we published our report, we saw two of the larger funding announcements ever in the space. So, I think private equity investors are already onto this trend, which, again, is a very good confirmation of our core thesis.

Now, regarding what areas specifically we're seeing the most investment and M&A, I'd highlight novel benefit tech or fintech platforms as perhaps seeing the most recent funding. And then on-site, near-site care: there's been a lot of larger players that have merged together over the past two or so years, really leading to two major players in the space. And they're seeing some great growth.

And then Centers of Excellence and other funding platforms are probably the other areas. But honestly, you know, all the sectors and offerings we review in the report are getting a ton of funding, partnership interest, M&A at present. So, you know, we do believe it's going to remain an active market for funding and activity. But those are probably a few of the ones I would specifically highlight for you.

22:16, Chris T

As we wrap up. You know, if investors remember just one thing from your report, what should it be?

22:21, Ryan D

Yeah, I think the key theme is, again, we're really at this inflection point. We think this is a major trend to watch as we enter the 2027 benefit design and open enrollment season, which is right around the corner. And again, I note that the trends impacting cost are more sustainable than we've seen in the past, so it does require different solutions than in the past.

And that's what's so exciting about all these alternative funding and contracting options today is the focus really turns from simply paying for healthcare to managing spend and driving value for the healthcare dollar more effectively. That's really what's needed. And then, just as a final point, it's a huge market. I mean, put simply, healthcare benefits are a trillion-dollar business.

That's a huge long-term opportunity, frankly, one of the largest addressable markets in all of healthcare. And given the adoption we're seeing in some of these areas, we expect some explosive growth stories to emerge in these markets, really in the near term. So it's a really exciting time to be looking at the space

23:18, Chris T

Well, that's all the time we have for today. But Ryan, appreciate your time and insights.

For those interested in learning more, Ryan's report is titled Rethinking Employer Health Benefits: Cost Pressures and the Rise of Alternative Health Care Funding Models and, once again, it examines the forces driving healthcare inflation, the emergence of alternative funding models, and the growing ecosystem of companies helping employers rethink healthcare benefits.

So, thanks for listening to William Blair Presents. We'll see you next time.

23:45, Ryan D

Thanks, Chris. Thanks, everyone.