Why group health insurance costs keep rising faster than inflation

For decades, employer-sponsored plans have grown more expensive much faster than inflation and wages. What was once a predictable benefit is now one of the fastest-rising costs for employers, and an increasing financial burden for employees.

In this article, we'll explain what's driving the rise in insurance premiums and what employers can offer instead of group coverage.

In this blog post, you'll learn:

• The factors that determine group plan premiums
• How specialty prescription drugs are fueling higher premiums.
• How to offer an affordable health benefit through Remodel Health.

The gap between health insurance costs and inflation

Group health insurance premiums rise faster than inflation. According to KFF¹, the average employer-sponsored family premium increased by 6% in 2025, while overall inflation remained under 3%. Family coverage was about $27,000 per year, with employers covering most, but not all, of the out-of-pocket costs.

Over the long term, the trend is even more striking. A study published in the Journal of the American Medical Association (JAMA) Network Open² found that from 1999 to 2024:

• Family premiums increased by 342%
• Worker contributions toward family premiums increased by 308%
• Inflation increased by 64%
• Worker wages grew by 119%

In other words, healthcare costs have grown roughly three times faster than wages and five times faster than inflation.

What determines premium costs for large group plans?

For applicable large employers (ALEs) with 50 or more full-time equivalent (FTE) employees, insurance companies evaluate several factors when setting large group plan premiums.

Common pricing considerations include:

• Employee demographics, including the age and family size of covered employees
• Participation levels, or how many employees enroll in the group plan
• Geographic location, such as your company’s ZIP code, which affects local healthcare costs
• Plan design, including the type of plan, network types, and level of coverage offered
• Claims history, based on your organization’s past medical utilization
• Expected claims costs, or the total amount the insurer expects to pay in claims during the plan year
• Industry risk factors, particularly for industries like manufacturing, with higher rates of workplace injury or health risk
• Additional benefits, such as dental, vision, or supplemental coverage included with the medical plan

What drives the sharp increase?

There isn’t just one reason premiums keep rising. Costs build up across the healthcare system and eventually flow down to employers and employees. Here are five key reasons health insurance premiums continue to increase.

1. Hospital care

In 2024, hospital expenses grew by 5.1%, with labor costs accounting for the bulk of the increase. Due to workforce shortages, hospital systems boost wages to retain staff. Data collected by the American Hospital Association³ (AHA) shows advertised nurse salaries have risen 26.6% faster than inflation over the past four years. Rising healthcare wages are reflected as higher healthcare costs, which insurers pass on to employers in the form of higher premiums.

2. Utilization

After the COVID-19 pandemic, the demand for telehealth and mental health services increased. According to research from the RAND Corporation and Castlight Health⁴, mental health spending rose by 53% between March 2020 and August 2022 among people with employer-sponsored insurance. Over that same period, the number of people using mental health services increased by 39%. Increased utilization increases total claims paid by insurance companies. This, in turn, leads to higher premiums.

3. Specialty prescription drugs

Speaking of utilization, a KFF poll⁵ found that one in eight adults is taking GLP-1 drugs⁶ for weight loss. These high-cost specialty medications now represent a disproportionate share of total healthcare spending. These prescription drug costs are built directly into premium increases.

4. Tariffs

With the rising popularity of GLP-1 drugs in mind, President Donald Trump imposed tariffs⁷ on imported pharmaceuticals and medical supplies. Insurers cite these tariffs as a potential impact on healthcare costs. This adds to the trickle-down effect.

5. Group risk pool volatility

Traditional group insurance pricing is based on the health and claims experience of a relatively small population. A single high-cost claimant can significantly affect renewal rates, leading to unpredictable premium increases.

Imagine an employer with 40 employees enrolled in a traditional group health plan. For years, claims have remained stable, and premiums have increased predictably. Then, one employee experiences a serious medical event that results in substantial claims.

At renewal, the insurer prices the plan based on the group’s recent claims experience. Despite most employees having low healthcare utilization, the claims from a single high-cost individual significantly increase the group’s overall risk. The result is a steep, unexpected premium increase for the entire workforce.

Why employers turn to ICHRAs instead of group plans

In response to these pressures, a growing number of employers are replacing traditional group health insurance with an individual coverage health reimbursement arrangement (ICHRA). According to the HRA Council, there was a 34% increase in ICHRA adoption among ALEs between 2024 and 2025.

Introduced in 2020, an ICHRA allows employers to provide employees with tax-free contributions they can use to purchase individual health insurance, instead of sponsoring a traditional group plan.

Here's how ICHRA addresses cost concerns:

• Predictability. Employers set a fixed monthly contribution for the plan year. When compared to experience-rated plans, individual health insurance premium increases tend to be more modest. Employers don't have to worry about unpredictable premium increases.
• No group risk pooling. Employees move to the individual market, where risk is spread across all enrollees in the community rather than a single employer. In fact, Affordable Care Act (ACA) Marketplace enrollment reached 22.8 million in 2026⁸.
• Lower overall spend. Individual market premiums are often significantly lower than group premiums, especially for younger or single employees.
• More employee choice. Employees purchase individual marketplace plans, giving them control over premiums, medical providers, and coverage options that align with their personal needs, instead of a one-size-fits-all group policy.

Break the cycle with Remodel Health

ICHRA works best when it’s implemented by a partner with real experience at scale. As the nation's largest ICHRA provider, Remodel Health specializes in helping large employers replace traditional group health insurance with benefit strategies that are compliant, cost-effective, and employee-friendly.

That scale matters. It means we have proven processes, reliable automatic premium payments, and teams ready to solve your biggest challenges. From plan design and compliance to employee education and ongoing support, Remodel Health guides organizations through every step of the transition.

If rising premiums are putting pressure on your organization, it may be time to stop managing increases and switch to our ICHRA+ platform. We offer a safer path forward.

Conclusion

As healthcare costs continue to rise faster than inflation, many employers are realizing their health benefit strategies need to change. For employers seeking predictable budgets, employee choice, and long-term sustainability, ICHRA is emerging as a powerful alternative to traditional group coverage.

References

1. KFF
2. JAMA Network
3. American Hospital Association
4. RAND
5. KFF
6. KFF
7. KFF
8. Centers for Medicare & Medicaid Services