If you’re like a lot of employers right now, you’re looking for ways to reduce employee benefits costs. Rising health care and pharmacy spending continue to put pressure on employer benefits budgets. To protect their bottom line, some employers may consider reducing coverage, increasing employee contributions or raising deductibles. These measures can reduce employer spending in the short term, but they can also shift costs to employees, diminish the value of the benefits package and undermine recruitment, retention and employee satisfaction.
Instead of simply cutting benefits, employers can focus on ways to obtain greater value from what they’re already spending. Here are seven strategies employers can use to reduce employee benefits costs while protecting the value of their program.
1. Understand What’s Actually Driving Your Costs
Before you take steps to reduce benefits spending, it’s useful to know where your money is currently going. If you have access to claims data, review the numbers to identify key cost drivers and spending trends. It’s useful to look at:
- Medical versus pharmacy spending
- Year-over-year claims increases
- High-cost claims
- Chronic-condition prevalence
- Emergency and urgent care utilization
- Prescription drug utilization, including GLP-1s and specialty drugs
If your premiums are increasing at renewal, it may be the result of these trends.
Work with your broker, carrier, pharmacy benefits manager, third-party administrator or other health care partners to understand the factors contributing to plan costs. Once you understand the main drivers, you’ll be in a better position to determine whether your current benefits spending is actually providing good value.
2. Revisit Your Plan Design
You may be able to restructure benefits instead of simply eliminating them.
Review your plan design, including the deductibles, copays, network options and employee contribution strategies. Could changes to these elements help in controlling costs, and how would different employee groups be affected by any plan design changes?
Also consider the options you’re providing. For example, do you offer a single plan, or do you offer multiple plan options? Do you offer HSA-compatible plan options with or without employer contributions? What about voluntary benefit options that could help employees manage costs, such as critical illness insurance? Once again, consider whether changes to your strategies could help in controlling costs, and how employees would be affected.
As you review your plan design and benefits strategy, don’t just look for elements that you can cut or costs that you can shift to employees. Instead, focus on ways to restructure the plan to improve the balance between cost, coverage and employee value. The right plan design should reflect your workforce demographics, recruiting needs and retention priorities, not just your budget.
Learn more about how to structure a benefits plan your employees will value.
3. Take a Closer Look at Prescription Drug Costs
Pharmacy spending now accounts for 29.5% of total employer spending, according to the 2026 State of Employee Benefits Report from Benefitfocus. Rising costs mean that pharmacy benefits can no longer be treated as just another line item; they deserve their own review.
Similar to how you assessed claims trends, take a closer look at pharmacy spending trends to identify your cost drivers. Pay close attention to specialty drug spending, GLP-1 utilization and brand-name utilization.
Once you know where your pharmacy benefit dollars are going, you can consider plan design changes that could help control costs. These changes could involve:
- Formulary design adjustments
- Generic and biosimilar opportunities
- Rebates and discounts
- Pharmacy benefit management (PBM) relationships
- Prior authorization strategies
You’re not necessarily trying to restrict access to medication. Instead, your goal is to understand what the plan is paying, why it’s paying it and whether it’s possible to obtain greater value from your current spending.
Read more about how GLP-1 medications are affecting employer health plans.
4. Evaluate Your Network and Care-Delivery Options
A report from Trilliant Health found that the same medical service can have very different prices depending on the hospital or surgery center used. For example, one hospital charged $22,011 for an ankle replacement surgery, while a different hospital charged more than $197,000.
Where employees receive care can have a significant impact on health care spending. With this in mind, employers can review their benefits for opportunities to encourage cost-effective care options. Pay attention to:
- Networks
- Telehealth services
- Emergency care alternatives
- Ambulatory surgery center options
More expensive care options do not necessarily provide better quality. Likewise, lower-cost care options won’t necessarily provide better value. The key is to balance access to care with quality and cost-effectiveness.
5. Help Employees Use Their Benefits More Effectively
The 2024 State of Employee Financial Wellness Report from Payroll Integrations found that 73% of employees want more education on their company’s benefits.
When employees have trouble navigating their health benefits, they may make mistakes that prevent them from obtaining the full value of the benefits. These mistakes can also lead to higher costs. For example, they may miss out on affordable opportunities for preventive care that can help identify or address health issues before they become more serious and costly, or they may choose higher-cost prescription drugs and sites of care when lower-cost alternatives would provide similar or greater quality.
Employers can make a difference by improving communication around:
- Preventive care
- Telehealth
- Urgent care versus emergency care
- In-network providers
- Prescription options
- HSAs
- Mental and behavioral health benefits
- Benefit concierge services to help members navigate care options
- Other programs already covered in the plan
Employee education isn’t about discouraging employees from seeking care. Instead, it’s about helping employees understand their options so they can make informed decisions.
6. Consider Alternative Funding and Purchasing Strategies
Plan design tweaks can help employers obtain more value from their benefits, but employers who are dissatisfied with their current options may want to consider more significant changes to their benefits strategy.
A fully insured group health plan is not the only option. Alternatives include:
- Self-funded plans
- Level-funded plans
- Captive insurance
- Direct provider contracting
Alternative funding strategies can give employers greater control over their benefits, and this can give them the flexibility they need to manage benefits costs. However, success will depend on a variety of factors, including the employer’s ability to design a sustainable plan and implement long-term cost-control measures. Before embracing an alternative funding strategy, evaluate the potential savings alongside risk, cash flow requirements, administrative burden, compliance responsibilities and employee impact.
7. Start Measuring Benefits ROI, Not Just Benefits Cost
When evaluating any type of investment, it’s important to look at the return as well as the cost. The real question isn’t whether your benefits cost too much. It’s whether you’re getting a good return on your investment. Benefits are an investment in your workforce, not just an expense line. This means that cost alone doesn’t tell you whether your benefits strategy is working.
However, calculating the ROI of benefits is not always straightforward. While it’s easy to track the dollar cost of your employee benefits program, the return is spread across a wide range of direct and indirect impacts. This can make it challenging to quantify the return, but it’s still worth your attention. Consider the following:
- Employee participation
- Benefits utilization
- Employee satisfaction or feedback
- Recruiting competitiveness
- Retention rates and exit interview feedback
- Administrative efficiency
Once you understand your return, you can start to see how changes to your benefits might affect that return. For example, if an existing benefit is a significant expense but also plays a critical role in your recruitment and retention strategies, cutting or reducing that benefit could cost your company more in the long run. On the other hand, another benefit may cost a lot while doing little to support your company’s goals, making it a prime candidate for elimination.
Learn more about measuring the ROI of your benefits strategy.
Ask a Better Question at Your Next Benefits Review
As you prepare for your next benefits review, think about the questions you want to ask. Instead of simply focusing on how much you’ll pay next year and how you can bring that number down, ask questions that help you develop a sustainable benefits strategy that provides real value for both your company and your employees.
- Where are your benefits dollars going?
- Which benefits are employees actually using and valuing?
- Where are you spending without seeing enough value?
- Which cost drivers can you realistically influence?
- Where could better employee education make a difference?
- Are your carrier, network, PBM and vendor arrangements still competitive?
- Could a different plan or funding structure improve your position?
- How should you define and measure the return on your benefits investment?
Focus on Better Benefits Spending, Not Just Less Spending
As health care costs continue to rise, spending more each year isn’t sustainable, but neither is automatically cutting benefits or shifting costs to employees. A more strategic approach focuses on understanding the drivers of health care spending, identifying your organization’s goals and making targeted changes to increase value for both your workers and your organization.
The aim is not just to spend less. It’s to spend more effectively.
Are you achieving the best possible return on your benefits strategy? Learn how to maximize your benefits ROI.
