Health Benefit Costs Are Now a Capital Allocation Decision
Open enrollment season puts plan choices in front of your employees. It should also put a harder question in front of you. Marsh, whose Mercer business is adopting the Marsh brand, projects that total health benefit cost per employee will rise 8.2% on average in 2027, according to its article Survey: Health benefit costs expected to jump 8.2% in 2027, the biggest increase since 2003. That would be the largest annual increase since 2003, and the projection already counts the cost-reduction steps employers plan to take. Employers told Marsh that their current plans would cost 11% more if they did nothing.
These are preliminary results from more than 1,800 U.S. employers surveyed through August 10. Final results from more than 2,000 employers are due later this year, so plan against the number and expect it to move.
The framing deserves more attention than the figure. Treating health benefits as an HR line item no longer holds. Growth like this follows a decade of more moderate increases, and 2027 would be the fifth consecutive year of elevated growth after a projected 6.7% rise in 2026. Every point of increase draws on the same pool of money that pays for raises, new hires, and equipment. That is a capital allocation decision, whether or not anyone in your company has named it one.
Every Point of Increase Has a Competing Use
The Marsh authors are blunt about it. An increase that runs well ahead of inflation forces a choice, and the choices on offer are thinner benefits, slower hiring and pay growth, or higher prices for customers.
Look at that list through a capital lens. A capital project faces a hurdle rate, a named owner, and a review after the money is spent. Does your benefit spend face any of those tests? When health benefit costs grow faster than revenue, the gap gets funded from somewhere, and the source gets decided by default unless someone decides it on purpose.
Why This Line Is Harder to Forecast Than It Looks
The projection rests on a mix of old and new pressure. Advances in cancer treatment and other therapies often cost more than the care they replace. Provider consolidation gives larger health systems more bargaining power with insurers. Those forces keep medical cost trends above general inflation year after year.
Three newer drivers pushed 2027 to a level not seen in decades, according to Marsh actuaries. Rising use of GLP-1 medications for weight management accounts for 1 percentage point of the growth, even though some employers dropped that coverage to get relief. AI-enabled software that helps physicians submit claims has produced more claims, and higher-level claims, than before, and the actuaries put its effect at as much as 1 percentage point. Payment disputes between providers and insurers under the No Surprises Act, a U.S. law meant to protect patients from surprise bills, are running well above forecast in volume and in amounts awarded to providers. The actuaries say that adds as much as another 1 percentage point.
None of those three drivers starts with a decision your company made.
Treat the projection as a planning input, not a certainty. KFF reports in its 2026 Employer Health Benefits Survey that forecasts of cost growth can run above the premium increases employers end up seeing, because employers change plan designs, networks, and vendors to offset them. KFF recorded a 5% rise in the average family premium in 2026. Marsh had projected a 6.7% rise in total cost per employee. The two measure different things, but the gap is a reminder to hold the 8.2% loosely.
Volatility adds a second problem. Extremely expensive therapies for cancer and rare diseases have made very large claims more common, and Marsh warns that the swings can disrupt budgets and quarterly earnings, particularly at smaller employers. A single-point forecast hides that risk. Build the 2027 budget as a range, and decide now how much reserve you hold for a large claim.
How the U.S. Employer Coverage Model Puts This on Your Income Statement
Name the system, because it explains the exposure. The United States built its health coverage around employer-sponsored insurance, which KFF estimates covers almost 157 million people under age 65. Jonathan Gruber, an economist at MIT, writes in the working paper The Tax Exclusion for Employer-Sponsored Health Insurance that the country has long relied on the employer as its main pooling device. He traces the model's growth to World War II wage and price controls, which employers could sidestep by offering untaxed benefits. The tax exclusion itself was codified several years later.
Many employers also carry the claims risk directly. In the KFF survey, 71% of covered workers, including 85% of those at larger firms, are enrolled in self-funded plans, where the employer pays claims from its own funds.
Other systems put the bill elsewhere, and none removes it from employers entirely. In England, the Commonwealth Fund reports in International Health Care System Profiles: England that care is paid for by general taxation and is free at the point of use, with private insurance supplementary and covering a minority of the population. In Germany, according to International Health Care System Profiles: Germany, insurance is mandatory and the sickness funds are financed by compulsory wage contributions of 14.6% of gross wages, shared equally by employer and employee. Canada's 13 provincial and territorial plans are financed mainly through taxes and federal funding, yet International Health Care System Profiles: Canada reports that about 69% of Canadians hold private insurance, and 90% of those plans are group policies bought by employers, largely to cover gaps such as prescription drugs, eye care, and dental care.
The difference lies in who carries the swing. Gruber notes that national health insurance, as in Canada, creates a single national pool. Where a single pool exists, the cost of financing it sits mainly in public budgets. Under the U.S. model, a rise in medical prices reaches the employer's income statement first and the employee's paycheck second.
One boundary matters if you operate across borders. The Marsh survey covers U.S. employers, and a U.S. cost trend tells you little about your plans in other countries. The same benefits line carries a different exposure in every market where you employ people.
Who Absorbs Rising Health Benefit Costs Is a Strategy Choice
The company can absorb the increase and fund it from margin, hiring plans, pay growth, or price. Or it can pass more to employees. The KFF survey puts numbers on that choice. The average family premium rose $1,310 to $28,303, and workers absorbed $621 of the increase. Employers absorbed about $689. Workers pay 27% of the premium but took roughly 47% of the increase, and their average family contribution rose 9% to $7,471 while wages rose 3.7%.
Cost shifting is already under way. In the same survey, 44% of large firms raised the worker share of premiums in response to projected increases, and 21% raised deductibles or other cost sharing. Marsh found that 59% of employers plan cost-cutting changes to health benefits in 2027, including higher deductibles. An earlier Marsh survey found that most large employers, meaning those with 500 or more employees, expect to raise the employee share of premium costs. For many workers, deductions will rise faster than the 8.2% average. A larger deduction works like a smaller raise, and employees will read it that way. Cost shifting is not cost elimination. It decides who bears the burden.
The third path is redesign. Marsh reports that 12% of large employers plan to offer variable copay plans in 2027, and 18% of those with 20,000 or more employees. These plans charge members less when they choose top-performing providers. Guiding members to higher-quality care now ranks among the top three health program priorities for large employers, up from fifth place a year earlier, and 58% call it important or very important.
Each path has a price. Redesign needs data and employee trust, shifting costs strains pay competitiveness, and absorbing health benefit costs strains margin. The right mix varies with your margins, your labor market, and your workforce, and no single answer fits every company. What does not work is leaving the choice to the renewal calendar.
Benefits and Pay Reach Employees as One Package
Finance books benefits as an expense apart from wages. Employees experience the combined value of both. That difference in perspective is a management risk. A raise can look like continued investment in people while a larger deduction takes back much of it, leaving take-home pay close to where it was. The reverse also happens. An employer that holds coverage steady through fast cost growth delivers real economic value that employees may never recognize.
This is why benefits cannot be judged apart from total rewards, which cover direct pay, health coverage, retirement benefits, paid leave, and development.
Put the CFO and CHRO in the Same Plan Before the Budget Locks
Finance sees the cost. People leaders see how employees react to it. Neither view is complete alone. A cut that looks attractive on the income statement can create hiring and retention costs larger than the savings, and a package built without financial discipline can weaken the company's ability to keep employing and investing. Joint planning between your CFO and your CHRO treats wages, benefits, and hiring as one compensation envelope, and it designs total rewards against the money the business can fund. Three questions make a good starting point:
What does each point of benefit cost growth displace in the hiring and wage plan, and how much reserve covers a large claim without forcing a mid-year cut?
Which benefits do employees value most per dollar, and how would a cost-sharing change land on different parts of the workforce?
Which alternatives to cost shifting deserve a hard look before the plan is final?
These questions call for shared accountability, not sequential approval. HR should not finish a redesign and then ask Finance to fund it. Finance should not set a savings target and leave HR to absorb the fallout.
You cannot control provider consolidation or the price of new therapies. You can control how deliberately your company decides who absorbs them. Employees face an enrollment deadline. You face a budget deadline, and the 2027 increase will land somewhere whether you choose where or not.
When One Cost Line Pulls on Every Budget
Aspirations Consulting Group (ACG) works with executive teams at the moments when a single pressure, such as a health benefits increase, pulls on hiring, pay, margin, and investment at once. ACG helps CFOs and CHROs plan together, design total rewards the business can fund and employees value, and make the trade-offs deliberately. Learn how ACG works with executive teams.
Bring Sharper Numbers to Your Next Planning Cycle
Every weekday, ACG Strategic Insights™ delivers analysis on finance, leadership, and strategy to more than 10 million current and aspiring executives, and you can request your complimentary subscription to bring that analysis into your next planning cycle.
Thanks for reading!
~ Jerry Justice
Living to Serve, Serving to Lead™
Comments