The impact of rising prescription drug costs on employers and employees

Employer health care costs are expected to increase by 6.6% in 2024. On top of that, the average price of prescription drugs is also growing. Higher prices are one of the side effects of the rising production and distribution costs by pharmaceutical companies and the proliferation of specialty pharma.

Let’s look at the price of prescription drugs and determine how these changes may impact employers and employees.

The rising costs of prescription drugs

As the price of employee benefits plans rises, patients increasingly struggle to afford their medications. One in three Americans have difficulty affording their prescription drugs, up from one in four in 2019.

Premiums may increase for many reasons, including:

• Catastrophic claims
• Medical provider costs
• Specialty or costly prescription drugs
• Utilization due to chronic health conditions
• Utilization due to delayed preventive and elective care during the COVID-19 pandemic

Nearly three in four employers reported their benefit costs went up in 2023, due in part to increased pharmaceutical expenses and an uptick in physical and mental health care needs.

Here’s how rising prices impact employees:

• Strained budgets
  Rising inflation impacts every area of life, not just pharmaceutical costs. With employees struggling to afford car, home, grocery, and utility payments, financial stress surrounding health care prices adds to the problem. This is especially true for individuals with chronic conditions or high medication needs.
  
  
• Stress and absent-mindedness
  When employees can’t afford medications, it can impact overall workplace performance. Rising drug costs may force employees to forgo or ration their medications. Stress from these conditions can create distractions and absent-mindedness. Workers overwhelmed by their financial situation may not get much done, interact less with co-workers, and lose motivation to do their best work.

Without regular check-ups, consultations, or access to medicine, employees may not be aware of potential health problems until it’s too late or expensive.

Here's how the effects of the rising costs of prescription drugs also affect employers:

• High health insurance premiums
  Ninety-one percent of employers have concerns about rising pharmaceutical trends, according to the Business Group on Health. Increased prescription drug costs can cause employers to pay higher premiums for health insurance. This can strain bottom lines and may impact employers’ ability to offer prospective workers competitive benefits.
  
  
• Cost-sharing
  Employers can save money by passing portions of drug costs to employees through higher deductibles, copayments, or coinsurance. While these strategies can reduce company costs, they also add further financial burden to employees.
  
  
• Retention and recruitment
  Offering competitive benefits is crucial for attracting and retaining top talent. When people search for jobs, holistic health care is generally a top priority. Companies can stand out to employees by tailoring health support offerings.

Comparing drug rate increases to overall health care costs

As pharmaceutical prices rise, so do overall health care costs. Rx costs are growing to nearly twice that of general health benefits at a steady rate of 6.8%. The price of prescription drugs is the fastest-growing part of benefits plans. As innovation grows in the pharmaceutical space, this category will drive overall benefit costs for plan sponsors and employees.

The FDA approves dozens of new drugs annually. However, research and development of pharmaceutical solutions continue to get more expensive, and pharmaceutical manufacturers must also cover the costs of:

• Manufacturing (raw materials and equipment)
• Marketing and advertising
• Operations (salaries and overhead)
• Testing and regulatory requirements
• Transportation

Over the years, the cost of health care per employee has changed significantly. Here is a breakdown of prescription cost increases versus the rising total health care costs:

• 2019
  • Rx: 4.9%
  • Total health care cost: 3%
• 2020
  • Rx: 6.4%
  • Total health care cost: 3.4%
• 2021
  • Rx: 7.1%
  • Total health care cost: 6.3%
• 2022
  • Rx: 6.4%
  • Total health care cost: 3.2%
• 2023
  • Rx: 8.4%
  • Total health care cost: 5.2%

Specialty drugs–also known as specialty pharma–are one of the fastest-growing cost areas of pharmaceutical spending, making them a dominant force against companies’ bottom lines. Specialty pharma drugs are highly complex and come with larger price tags than traditional brand and generic medications. This type of drug is now estimated to account for over 50% of employers’ total prescription spending, according to Forbes. The research and development of the solutions are increasing prices for employers.

Other popular drugs that target a specific health outcome, like off-label GLP-1 obesity treatment and gene therapy, can cost organizations millions. Gene therapies alone can average $1-$2 million per dose. The rate of usage isn’t slowing down either.

In 2023, the market was valued at about $68.3 billion, and it’s expected to reach approximately $1,532.8 billion by 2033, per Market.us. Technological advances, government regulations, and disease prevalence contribute to this growth. It pushes people to investigate non-traditional medications for several public health concerns.

What employers can do to slow cost increases

While employers can’t control the price of pharmaceutical production or the rise in inflation rates, they can internally address issues. Here are strategies for reducing prescription drug spending:

Educate employees on the health care system

Provide training opportunities to team members on benefits offerings, best practices, and coverage specifics so they know what care is available. Knowing more about their health system can empower them to make informed decisions about their medications and lifestyle. Also, encourage individuals to use employer-sponsored tools to track spending and updates.

Limit the use of restrictions

Formulary restrictions put certain limits on covered health care services to control their usage. While they save companies money, this isn’t the only solution to lower costs. Use restrictions only when necessary, as they can exclude or alienate employees with legitimate needs. These restrictions can also infringe on employees' right to health equity.

Research alternative medications

Sometimes, name-brand medications are triple the price of off-brand options. Complete health services research to discover less expensive alternative pharmaceutical solutions. Just ensure selected drugs work as effectively as the costly choices.

Choose a trusted financial advisor

Partner with a benefits consultant who can help build a plan that works for your company and its workforce. To customize a plan, industry professionals can look at an organization’s employee population, spending habits, and historical data.

Take control of your company’s health care costs with Marsh McLennan Agency

Proactivity is key to taking on evolving health care economic trends. The sooner your business understands health care shifts, the quicker you can work to reduce pharmaceutical and health expenses.

Our 2024 Employee Health and Benefits Trends: The Evolving Workplace report examines this year’s three big trends through a generational lens to uncover valuable statistics and trends insights. Your business can use this resource to proactively enhance your health care strategies for the year and beyond 

Ready to make the most of the health care trends of 2024? Download our report today.