3 Trends That Could Impact Benefits Spending for Small Businesses in 2024

JANUARY 9, 2024

Smaller employers already competing for employees and business will face additional challenges in 2024. Here we examine three trends impacting employer benefits spending, and what businesses like yours can do to prepare for challenges ahead.

Rising Pharmacy Costs

Demand for high-cost medications has increased pharmacy claims costs in recent years, resulting in higher premiums for employers. One particular drug class could significantly impact the total cost of small group health plans.

Driven by positive results for patients with Type 2 diabetes, glucagon-like peptide-1 receptor agonist (GLP-1) prescriptions have increased dramatically over the past three years. This has resulted in a 115% increase in GLP-1 spending, and 20.7% higher total cost of care for Type 2 diabetes since 2020.

According to client data from USI 3D, nondiabetic usage has increased 570% since 2020, as GLP-1s like Ozempic and Mounjaro have been approved and prescribed for weight loss. In 2023, GLP-1s cost employer health plans $215 per member per year (PMPY) for Type 2 diabetes, and $45 PMPY for nondiabetic usage. Nondiabetic usage alone represents $63 million, or 3%, of total pharmacy spending. The rapidly increasing utilization and cost of GLP1s could increase pharmacy cost burden for employers by as much as 20% to 40%, depending on levels of engagement within a population.

How Can Health Plans Manage These Costs?

Insurance companies will cover GLP-1s for Type 2 diabetes regardless of plan type, but typically not for weight loss, unless mandated by state. These costs are passed onto fully insured plans in the community-rated market as increasing premium.* Even for level-funded plans not subject to state mandates, rising pharmacy costs could negatively impact an employer’s claims experience and reduce potential return on premium.

Employers should review their options for covering these drugs for weight loss. It may be in some markets that only level funded plans will have the option to exclude GLP-1 for weight loss, thereby increasing the premium differential between community-rated fully insured plans and level-funded plans.

Opportunities to Increase Retirement Readiness

With 46 states now instituting or considering retirement plan mandates, employers may struggle to provide employees with information on where to best save their money.

Helping employees understand the financial impact of their benefits can help them prioritize short- and long-term goals and make informed decisions that best fit their needs. Here is a basic overview of several savings tools and how each can help employees meet their goals.

Health Savings Accounts

Most employees should expect to have higher out-of-pocket (OOP) medical expenses as they age into retirement. When used appropriately, a health savings account (HSA) can provide funds to meet these needs. Paired with a qualified high-deductible health plan, employees can make contributions to an HSA account but will need to cover more healthcare expenses OOP. Employees can use the HSA to cover OOP costs or allow funds to accrue over time. Organizations can make this more attractive by making employer contributions to employee HSA accounts.

401(k) Retirement Plans

A 401(k) retirement plan is a long-term savings vehicle that accrues more value over time and can be used for any expense in retirement. When employers offer a matching contribution, the value of the 401(k) program increases significantly.

Employees can maximize retirement savings by contributing at least the amount required to receive the employer match. For example, if an employer offers a 50% match on a 6% minimum employee contribution, an employee making $83,000 per year should consider contributing a minimum of 6% (or $4,980) in order to access 3% ($2,490) in matching employer contributions.

Employees may delay saving for retirement while paying off student loans. Read more about how the SECURE 2.0 Act of 2022 allows employers to make matching contributions for employees who are paying off qualified student loan debt.

Emergency Savings Accounts

Nearly 1 in 4 U.S. adults don’t have emergency savings, which may lead them to borrow or withdraw from their retirement savings to cover an emergency expense.¹ Effective for plan years beginning after December 31, 2023, employers can offer short-term emergency savings accounts (ESAs) with their 401(k) plans. Employees can fund the ESA with post-tax Roth contributions, and can access the funds when needed without incurring taxes and penalties associated with early 401(k) withdrawals. This can help employees avoid dipping into their retirement savings for emergencies.

More Scrutiny on Fixed Indemnity Products

A recent notice of proposed rulemaking meant to address misleading fixed indemnity sales practices may have unintended consequences for smaller businesses. Meant to provide income replacement and not comprehensive medical coverage, fixed indemnity products are categorized as “excepted benefits” and are not required to include the same coverage as a major medical plan under the Affordable Care Act (ACA). Regulators have taken notice of an increase in products sold as fixed indemnity that more closely resemble traditional health insurance, purporting to avoid ACA reforms and consumer protections as an excepted benefit. Some vendors aggressively push these products, causing confusion for covered members as they believe the coverage to be a major medical plan, when in fact the benefits are limited.

A notice of proposed rulemaking issued in 2023 reinforces that to qualify as an excepted benefit, fixed indemnity coverage must pay benefits as a fixed dollar amount per day/other time period of hospitalization or illness, regardless of the amount of expenses incurred, and affirms that benefits cannot be paid on any other basis. Additionally, indemnity products are not “excepted benefits” when coverage is coordinated with another group health plan maintained by the plan sponsor, such as fixed indemnity paired with a minimum essential coverage (MEC, or “skinny”) plan.

If passed “as is,” employers that include fixed indemnity products as an affordable way to offer attractive benefits to their employees will need to make sure their plans are in compliance, or the organization may be subject to fines. Products that do not meet the “excepted benefit” definition will likely be considered a group health plan that may not comply with the ACA and be subject to a penalty of $100 per individual per day.