Soaring Healthcare Costs Crimp Pay Raises: Fastest Climb in Two Decades

Companies' health benefit costs are surging at their fastest rate in two decades, putting significant pressure on employee pay raises. This trend is leading many workers to feel their salary increases are insufficient and prompting employers to plan more modest wage adjustments for 2027.

According to recent quarterly data from the Bureau of Labor Statistics, health benefit costs for private-sector employers rose by 6% year-over-year, while wages and salaries climbed by only 3.1%. This acceleration in health benefit costs has been observed since the second half of 2025. Research by the Federal Reserve Bank of New York indicates that businesses would have allocated 5% more towards wages last year if healthcare costs had remained flat, but instead, they paid almost 4% extra to wages. Data from KFF (formerly Kaiser Family Foundation) shows that employers paid nearly $20,000 for a worker's family-plan coverage in 2025, with employees contributing almost $7,000 for premiums, marking a 6% increase from 2024.

A key driver of this cost increase is the rise in prescription drug spending, including GLP-1 medications for weight loss. Other contributing factors include rising wages within the healthcare sector, consolidation among healthcare providers, and the adoption of AI-enabled revenue optimization tools. Wages and salaries account for approximately 70% of total worker compensation, with benefits making up the remaining 30%.

The escalation in healthcare costs has significant implications for the broader economy. Employers are projecting smaller pay raises for 2027 to offset these rising benefit expenses. This situation could further strain household budgets, potentially dampening overall consumer spending and economic growth. Lower and middle-income workers, in particular, may face increased financial burdens as their share of premiums and out-of-pocket costs rises.

Analysts and market experts anticipate that this upward trend in healthcare costs will persist. Mercer projects an average increase of 6.5% in total health benefit costs per employee for 2026. Similarly, PwC forecasts that the commercial healthcare cost trend will rise to 9% in 2027. This ongoing pressure suggests that employers may increasingly resort to measures such as higher deductibles and other cost-sharing mechanisms to manage expenses. For employees, the erosion of disposable income due to rising health insurance premiums, rather than higher wages, could have long-term effects on overall financial well-being.