Manage medical inflation in a high-cost era

Medical inflation remains elevated. Across many markets, health care prices and total spending are growing faster than general inflation and wage growth, putting upward pressure on employer plan renewals and cost sharing with employees.

What is medical inflation?

Medical inflation refers to the growth in health care spending driven by a combination of interconnected factors. These include price levels — what providers are paid for their services — and utilization, or how much care patients actually use. Treatment intensity also plays a role, encompassing both the site of care and the acuity, or seriousness, of a patient’s condition. Finally, pharmaceutical innovation, particularly the rise of specialty drugs, continues to exert significant upward pressure on overall health care costs.

Currently, hospital prices remain high across many markets, the use of healthcare services continues to climb, particularly in behavioral health, and prescription drug spending is growing quickly due to increased use of GLP‑1 medications and other specialty therapies. Staffing shortages continue to drive up operating costs across many health systems. At the same time, demographic shifts are increasing both the intensity and complexity of the care patients need.

The challenge is not any single factor, but the way these forces interact. Rising utilization magnifies the impact of elevated hospital prices, and persistent workforce shortages make care increasingly expensive to deliver. The cumulative effect moves through the system and ultimately surfaces in health insurance premiums — contributing to the sustained cost pressure that employers and employees are navigating today.

Signals to watch

As employers plan for the months ahead, market indicators give insight into where underlying pressures are building and what that may mean for future health plan premium renewals.

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Taken together, these forces define the landscape employers must navigate. The sections that follow break down each underlying driver, translate what the data means for your organization, and outline practical steps you can take now to get ahead of rising costs.

Reasons for medical inflation

Current medical inflation reflects the combined impact of general economic conditions, workforce pressures, utilization patterns, pharmaceutical innovation, and long‑term demographic trends.

01. General inflation

National projections show that overall health spending will continue rising faster than the broader economy. The Centers for Medicare and Medicaid Services (CMS) estimates that national health expenditures will outpace GDP through 2033, growing an average of 5.8% annually compared with 4.3% GDP growth.[3]

Part of what fuels this long‑term growth is the way cost pressures feed into the system. Typically, general inflation reaches the healthcare sector with a delay. Because hospitals and physician groups operate under multi‑year contracts, rising expenses, such as labor, supplies, rent, and financing, do not immediately show up in prices. Instead, these higher costs are incorporated into commercial reimbursement rates during the next contract renewal cycle.

In 2025, health care costs continued to rise as overall prices increased at a steady pace and privately insured services outpaced price growth in Medicare and Medicaid. At the same time, increased utilization, not just rising prices, remained a major driver of total spending growth.

This widening gap between underlying cost pressures and slower‑growing public program payments is creating more strain. When Medicare and Medicaid reimbursement fails to keep pace, healthcare providers often turn to commercial plans to help close the shortfall, and, in turn, make things more expensive for both employers and employees.

Separately, the new and proposed U.S. tariff policies covering medical technology (and some pharmaceuticals) inflated input costs that providers ultimately try to recover in reimbursement. A report from Price Waterhouse Coopers, estimates total tariff measures affecting pharmaceuticals, life sciences, and medical devices could rise from $0.5B to nearly $63B annually under certain scenarios, with device supply chains particularly exposed.[5]

02. Workforce and labor issues

Labor remains the number‑one margin pressure for hospitals and physician groups. Hospitals and health systems continue to report that workforce issues, more than any other factor, are driving cost escalation and operational strain.

Recent industry research from the Healthcare Financial Management Association underscores this point:

Persistent vacancies, continued burnout, and an aging clinician workforce are making it harder for hospitals and practices to staff consistently. A major contributor is the “physician retirement cliff,”[7] with a significant share of practicing physicians nearing retirement age over the next decade. At the same time, many nurses are leaving the profession entirely, citing workload, stress, and limited recovery time following the pandemic.

These staffing gaps have direct and measurable cost implications. To maintain operations, hospitals often rely on overtime, premium pay, and temporary contract labor, options that are significantly more expensive than employing full‑time staff. During peak demand periods, temporary nursing rates can rise to several multiples of standard wages, creating cost pressures that can take years for hospitals to unwind from their budgets.

The impact, however, doesn’t stop at expenses. Labor shortages can also reduce capacity, extend wait times, and shift more care into higher‑acuity or hospital‑based settings, all of which tend to increase both the number and cost of claims in employer‑sponsored plans. These operational strains are mirrored in broader price trends. According to Federal Reserve Bank of St. Louis, medical care services consumer price index increased steadily through 2024–2025 and reached a new high in January of this year, reflecting how rising labor‑driven expenses flow into overall service prices.

03. Escalating hospital prices and thin margins

Medical costs continue to rise across both inpatient and outpatient settings, and these pressures are especially visible in hospital care. Commercial prices remain well above public‑program benchmarks, and recent industry studies show how this gap continues to shape overall spending trends. RAND’s latest employer transparency analysis found that employers and private insurers paid, on average, 254% of Medicare rates in 2022 for hospital and related services[8], underscoring the magnitude of commercial pricing relative to government benchmarks.

These elevated price levels coincide with financial pressures inside hospitals. Even though margins improved slightly from late 2024 into early 2025, year‑end 2024 operating margins were a mere 2.1%[9] and rising operating costs continue to push commercial rates higher. In other words, hospitals are operating on thin margins at the same time labor, supply, and capital costs keep increasing, conditions that naturally translate into higher contracted rates for private plans.

Another major factor behind rising spending is persistent price variation, even within the same metropolitan markets. A 2025 RAND analysis highlights wide differences in what different hospitals charge for identical procedures, reinforcing how local market leverage and negotiated rates, rather than the underlying cost of care, can drive pricing. For example:

04. Increasing utilization

Utilization of health care services has continued to increase, especially for mental and behavioral health services. In fact, this category has become one of the most significant drivers of claims activity for employer‑sponsored plans. In 2024, behavioral health visits among commercially insured individuals surpassed primary care visits for the first time, totaling 66.4 million, compared with 62.8 million primary care visits.[11] Behavioral health also continued to represent the majority of virtual care visits, underscoring the sustained demand for mental health care as well as reflecting changing employee needs and a broader rebalancing of utilization patterns.

Analyses from the nonprofit, Altarum, indicate that utilization, not just prices, was a major driver of the acceleration in national health spending, with physician, clinical, and home health services all posting year‑over‑year increases. This pattern aligns with what many employers are seeing in their own claims: higher visit volumes across primary care, specialty care, and supportive services as patients return more fully to the system.[13]

Rising rates of chronic conditions are also pushing utilization higher. Obesity, diabetes, and cancer continue to generate sustained demand for services, screenings, and specialty treatments. Industry reports document persistent growth in diabetes and obesity therapies, as well as ongoing expansion in oncology regimens, creating long‑term pressure on plan costs. These conditions often require continuous management, which contribute to higher‑than‑baseline service use.

At the same time, virtual care utilization remains elevated. While total telehealth volume has moderated since the pandemic peak, demand for behavioral‑health‑focused virtual care is still strong. For employers, this means there’s an ongoing need for flexible, convenient access options, especially for mental health, where digital delivery consistently fills gaps in brick‑and‑mortar capacity.

Finally, the system is still absorbing a rebound in deferred care. Routine screenings, chronic disease follow‑ups, and postponed elective procedures have continued to cycle back into the system, keeping patient volumes high relative to pre‑pandemic baselines. As more employees re-engage, chronic condition management and catch‑up appointments are driving a near‑term rise in claims frequency.

05. Rapid growth in drug spending and high‑cost therapies

Prescription drug costs are rising faster than overall medical inflation, with pharmacy spend a leading driver of higher employer health plan costs. In 2024, net U.S. drug spending rose 11.4% to $487 billion[14], a jump that outpaced recent years and reflects both higher utilization and the shift toward newer, high‑impact therapies.

GLP‑1s and other specialty drugs remain the outsized contributors. IQVIA attributes a large share of the increase to GLP‑1 medicines for diabetes and obesity, alongside oncology and immunology therapies. GLP‑1s alone accounted for about 29% of spending growth[15], and specialty categories now represent the majority of drug spending.

Chronic‑condition drug costs continue to trend higher. The cost of maintenance drugs for chronic conditions continues to climb, creating financial pressure for employer-sponsored health plans. For example, a cardiovascular drug that cost $100 in 2002 cost about $455 in 2025, while antidiabetic drugs have risen to $442 over the same period.[16] Not only does this price escalation outpace general inflation, but it also highlights the growing burden on employers.

In KFF’s 2025 Employer Health Benefits Survey, large employers increasingly identified rising drug prices, high‑cost new therapies, and greater utilization as key drivers of premium growth, especially as GLP‑1s and other specialty treatments gain traction.

Among large employers:

• 36% say prescription drug prices contributed “a great deal” to higher premiums
• 22% say the same about coverage for new prescription drugs[18]

Even with these rising pressures, there are early signs of potential cost mitigation:

Policy changes could reshape pharmacy economics over the next few years. The Consolidated Appropriations Act enacted landmark PBM reforms, delinking PBM compensation from list prices in Medicare Part D and requiring 100% passthrough of manufacturer rebates and fees to plan sponsors, with expanded reporting and audit rights. While these provisions phase in through 2028–2029, they signal a shift toward greater transparency and may influence health plan contracts and employer fiduciary oversight.

New market channels may also affect member behavior. The recently launched TrumpRx platform aggregates direct‑to‑consumer cash‑pay discounts from manufacturers, including for GLP‑1s and other high‑cost brands, which could steer members outside their employer plan when coverage is excluded or tightly managed.[19] Going forward, employers should monitor how these easily accessible cash‑pay options interact with plan designs, since off‑plan purchasing can impact care coordination, disrupt drug safety and adherence oversight, and erode a health plan’s ability to manage total cost of care.

06. Long-term demographic trends

Demographic patterns across the U.S. are creating steady, long‑term pressure on health care utilization and employer plan costs. These trends reflect shifts in who is using care, at what ages, and for which conditions.

The U.S. population is aging, and the workforce is aging with it, which can naturally increase the need for more frequent and more complex medical services. As more people work later into life, employers are seeing higher use of cardiac care services, specialty treatments, and ongoing management for chronic conditions that become more common with age.

At the same time, chronic diseases are growing more prevalent among younger adults. Recent CDC data show that nearly 6 in 10 young adults, aged 18 to 34, now report at least one chronic condition, up from just over half a decade earlier, with rates of multiple conditions also increasing.[20] Employers are likewise reporting rising obesity, diabetes, and metabolic‑related risks among younger workers and dependents. These conditions typically require long‑term therapies and ongoing follow‑up care, meaning many individuals are entering higher‑utilization patterns earlier in life.

Compounding matters further, more people are managing multiple chronic conditions at once. This increases the number of appointments, medications, and interventions required over time, increasing utilization year after year.

Behavioral and mental health needs are also growing among children, teens, and young adults. As more dependents use mental and behavioral health benefits, they contribute to higher outpatient visit volumes and greater demand for virtual and in‑person therapy, adding to the overall mix of care services employers must support.

These demographic shifts collectively support a clear conclusion: health care spending is on a sustained upward trajectory. An aging workforce, increasing rates of multiple chronic conditions, and earlier onset of chronic disease among younger adults are all converging to drive higher utilization, greater care complexity, and long-term cost pressure on employer-sponsored health plans.

Recommendations for employers

By working with benefits advisors, employers can take practical steps that can help stem rising medical costs and make a meaningful impact on renewal discussions and ongoing benefits planning. 

01. Stabilize high‑growth pharmacy categories

Employers can take a more structured approach to managing the fastest‑growing areas of pharmacy spending.

• Strengthen GLP‑1 controls – Set evidence‑based eligibility criteria, incorporate step therapy, include behavioral or nutritional support, and establish adherence checks and discontinuation guardrails to ensure medication is used appropriately.
• Think biosimilars first – Prioritize biosimilars on drug formularies where clinically appropriate, and monitor utilization by channel (pharmacy vs. medical benefit) to ensure cost‑effective adoption.
• Prepare for reforms – Federal pharmacy benefit manager (PBM) changes are set to usher in flat‑fee contracting, requiring full rebate and fee passthroughs, increasing price transparency, and reporting expectations.

02. Prioritize mental and behavioral wellness

Employers can reduce downstream medical costs by expanding access to behavioral health services employees and their families may need.

• Integrate behavioral health into preventative and chronic‑care programs – Embed screening and treatment for mental health into diabetes, cardiac, maternal, and other chronic‑care pathways.
• Expand access – Offer mental‑health support through multiple channels, including virtual visits, digital tools, onsite resources, and EAPs, to meet diverse employee and dependent needs.
• Reinforce a culture that supports mental health – Equip leaders to model healthy behaviors, reduce stigma, and align leave and workload policies with mental‑health goals.

03. Reduce utilization of avoidable, high‑cost settings

Guide employees toward more appropriate and cost‑effective care through proactive navigation and site‑of‑care strategies.

• Provide guidance – Use nurse lines or care navigation tools to direct non‑urgent needs away from emergency departments and toward primary care, urgent care, virtual care, or onsite clinics.
• Use transparency to steer to high‑value care – Apply data-driven price and quality insights to encourage employees to choose lower‑cost, high‑quality providers where clinically appropriate.
• Increase use of ambulatory surgical centers (ASCs). Route eligible outpatient procedures to ASCs, which typically offer significant cost advantages over hospital outpatient settings.
• Monitor access and outcomes – Track utilization patterns, member experience, and realized savings to strengthen the program over time.

Cost comparison for different sites of care

04. Demand transparency

Employers can strengthen oversight and improve purchasing power by requiring clearer reporting from all partners.

• Expect greater reporting from health plans, PBMs, and vendors – Request detailed data about total cost of care drivers, specialty‑drug costs, site‑of‑care patterns, and plan‑sponsor fees.
• Use transparency to improve contracting – Leverage available d
• ata to negotiate better terms, evaluate plan and provider performance, and identify partners that deliver measurable value.

05. Strengthen primary care and early intervention models

Reduce long‑term medical costs by investing in stronger primary care and emphasizing early detection.

• Expand virtual‑first or advanced primary‑care models. Use care teams, longer visits, and proactive outreach to manage chronic and behavioral health needs upstream.
• Promote screenings and early detection. Encourage participation in preventive screenings and close gaps in care through communication, navigation, and culturally aligned outreach.

06. Improve plan performance through analytics

Employers can drive smarter purchasing and better outcomes by using data to understand what’s driving trend.

• Use claims analytics to identify key cost drivers – Pinpoint high‑cost conditions, avoidable variation, gaps in chronic‑condition management, and opportunities to optimize care pathways.
• Adopt value‑based arrangements – Use bundled payments, shared‑savings contracts, or quality‑linked incentives with plans or provider groups to align payment with outcomes.
• Evaluate vendor performance. Define clear success benchmarks, require data sharing, and sunset programs that do not demonstrate impact on cost, outcomes, or engagement.

Outlook for 2026 and beyond

Health spending growth is projected to average about 5.6% in the coming year, slower than the 2024–2025 surge but still ahead of GDP growth.[22] Even so, employers can bend trend with smarter design, stronger primary care, and disciplined, data‑driven execution employers as they move forward.

The Baldwin Group offers a range of capabilities to help employers navigate this landscape with confidence. We’ll help you:

Let’s work together to build a strategy that helps you stay ahead of medical inflation.