Healthcare is now your second or third largest operating expense. Most employers accept rising costs as inevitable. They are not. Here is what is actually driving the increases — and the approach that changes the trajectory.
Warren Buffett once said, "GM is a health and benefits company with an auto company attached." He was not joking. For most mid-size and large employers today, healthcare has quietly become the second or third largest line item on the balance sheet — trailing only payroll.
And yet most companies apply almost none of the financial discipline to healthcare that they apply everywhere else. They accept the renewal. They shift costs to employees. They try a higher deductible. Then they repeat the cycle next year.
This is not a resources problem. It is a strategy problem.
The Three Reasons Costs Keep Rising
Understanding why costs rise is the first step toward doing something about it. In my experience working with employers across California and beyond, the same three dynamics show up repeatedly.
1. Most of the system has misaligned incentives
The traditional healthcare supply chain — carriers, pharmacy benefit managers, and many brokers — is structured so that when your costs go up, they make more money. Since the Affordable Care Act passed, major health carriers' stock prices have more than doubled the S&P 500's performance. That is not a coincidence. It is a business model.
The Medical Loss Ratio rules require that carriers spend 80–85 cents of every premium dollar on claims. This actually disincentivized them from aggressively managing claims costs. Higher claims mean higher premiums, which means larger absolute revenue — even at the same margin percentage.
When your broker and your carrier both benefit from higher spend, you are the only one in the room who wants costs to go down.
2. There is no visibility into the actual claims data
In most traditional, fully-insured plans, employers have virtually no access to their own claims data. They get a renewal letter telling them rates are going up 12–18%, with no meaningful explanation of what drove it.
This would never happen in any other area of operations. Imagine a manufacturing company sending $100,000 to a parts supplier with no expectation of knowing how many parts arrived, what the price per part was, or how the money was allocated. It does not happen — because it would be absurd.
Yet that is exactly how most employer health plans work. You cannot manage what you cannot see.
3. The cost-shift trap
Since employers cannot see the data and do not know how to address the actual cost drivers, they reach for the only lever they understand: shift costs to employees. Higher deductibles. Reduced benefits. Increased premium contributions.
As of recent data, over 55% of working Americans are now enrolled in high-deductible health plans — an 83% increase from 2013. The Health Savings Account was supposed to soften the blow, but most employers have never adequately funded them. And the employees who are hit hardest by high deductibles are typically those who can least afford them.
The result: you have shifted financial risk and frustration onto your workforce while doing nothing to address the underlying cost of care.
What Strategic Employers Do Differently
The employers who break this cycle do not have a secret. They just apply the same financial discipline to healthcare that they apply to every other major expense.
They demand data access
Strategic employers move away from fully-insured arrangements — where the carrier owns the data — toward structures that give them real-time visibility into their own claims. This is not just about control. It is about the ability to act. If you know that 30% of your claims cost is driven by three chronic conditions, you can do something about it. If you find out at renewal, you cannot.
They align vendor incentives
Every vendor in your healthcare supply chain should have one thing in common: they make more money when your costs go down, not when they go up. This means working with a transparent pharmacy benefit manager that charges a flat per-script fee rather than one that takes spread pricing on every prescription. It means partnering with a benefits advisor who charges a flat fee rather than one who earns a commission tied to premium volume.
Misaligned incentives are not a character flaw — they are a structural problem. The fix is structural too.
They manage the supply chain
Consider prescription drugs, which are the fastest-growing segment of most employer health plans and are likely to double in cost over the next four to five years. A commonly prescribed insulin — Humalog — is often billed at approximately $550 through traditional pharmacy benefit arrangements. The actual cost to support the full supply chain — manufacturer, wholesaler, pharmacy — is closer to $220. The $330 difference goes to undisclosed revenue streams buried inside the PBM arrangement.
A fiduciary PBM with full transparency and a flat per-script fee eliminates that spread. For most employers, this single change reduces total pharmacy spend by 30–50% — with no visible change to the employee experience. Same medications, same pharmacies, dramatically lower cost.
The same logic applies to hospital and outpatient care. A CT scan in an outpatient facility averages around $525. The same scan at a hospital averages closer to $4,750. Guiding employees toward smarter, data-informed choices on high-cost procedures — without restricting access — can produce significant savings.
They shift from reactive to predictive
With real-time data access, employers can identify emerging cost trends mid-year rather than discovering them at renewal. If a specialist category is spiking, you can address it before it compounds. If a chronic condition is being mismanaged, you can intervene with better support programs. This is what every other major business decision looks like — proactive, informed, strategic.
The Bottom Line
Healthcare costs are not inevitable. They are the predictable result of a system built to extract value from employers who are not paying close attention.
The employers who get better outcomes are not spending more time or effort. They are applying different thinking — treating healthcare as the financial and people strategy it actually is, rather than an annual line item they hope someone else will figure out.
If your organization is ready to stop reacting and start managing, the first step is simply understanding what is happening inside your current plan. Everything else follows from there.
Tyson has specialized in employee benefits since 2010, helping C-suite executives and HR leaders build custom health plans that reduce costs and improve employee access to quality care.
Skyler partners with Utah employers to design strategic, data-driven employee benefits programs that align financial outcomes with workforce wellbeing — bringing the same boardroom-level thinking featured in Healthcare's C-Suite Solution to every engagement.