Why Health Insurance Costs Are Swallowing Wage Increases

Mike Smith, president emeritus of The Brokerage Inc., has spent nearly three decades in health insurance, and he says the employer-sponsored system has changed in a way that directly affects workers' pay. Employers once could choose among eight to ten insurers; now many pick from four or five. At the same time, premium increases are often in double digits—10%, 15%, or even 30%—while typical cost-of-living raises are much smaller.

The main driver, Smith says, is prescription drugs. He estimates drugs have risen from under 5% of the premium dollar to about 30% or more, with some injectable treatments costing $5,000 a month. Mental-health services are another growing expense. At his own roughly 100-employee company, the average monthly premium per employee climbed from about $600 to $1,200 over seven years. That forces hard trade-offs: absorb the increases, shrink raises, or redesign benefits.

One alternative Smith wants more workers to know about is an individual coverage health reimbursement arrangement, or ICHRA. Instead of one group health plan, an employer decides how much it can contribute. Employees then shop for individual coverage that includes their doctors and medications and submit the premium for reimbursement. Employers may adjust contributions by age or location, or pay a percentage of each employee's premium. Smith compares the shift to the way 401(k)s replaced many pensions, putting employees more directly in the driver's seat.

His own company recently switched from Blue Cross to Cigna after nearly 20 years and now offers a choice between a PPO copay plan and a high-deductible plan with a health savings account. Those changes saved about $100,000, money he says can now go back to employees. Smith also argues that many workers never knew the company was spending $12,000 a year on their insurance, which is why transparent conversations about health costs matter.

What the ICHRA Shift Would Mean for Employers and Employees

What Is Actually Pushing Premiums Higher

The most striking shift in Smith's account is the drug expense. His estimate that prescriptions have gone from less than 5% to roughly 30% or more of the premium dollar is one company's view, not an audited national figure, but it matches the broader pattern of specialty drug prices and rising mental-health demand increasing employer health spending. If drugs are a third of the premium, even a generous cost-of-living increase can be wiped out before it reaches the paycheck, because health coverage is part of total compensation.

Why ICHRAs Are Being Compared to the 401(k) Shift

Under an ICHRA, the employer sets a contribution workers can use to buy individual plans that cover their own doctors and medications. Contributions can vary by age or location, or be set as a percentage of premium. That changes the employer's role from plan chooser to financial backer, much as defined-contribution retirement plans replaced many pensions. The practical result would be that insurers compete for individual shoppers rather than group accounts, and employees shoulder more comparison work but also gain plans more tailored to their needs.

The Employer's Transparency Gap

Smith argues employers do a poor job explaining the hidden cost of coverage. In his telling, employees who do not know their company is paying $12,000 a year toward insurance may interpret a small raise as stinginess, not as the trade-off between health costs and wages. The remedy he outlines is a direct conversation about what the employer can afford and what employees actually need from a plan.

Where This Could Lead

Smith's forecast of an eventual Medicare expansion is explicitly his own long-term belief, not a near-term policy commitment. But the logic he offers is consistent with the cost pressure he describes: if employers cannot absorb endless increases and households cannot afford them either, the pressure to move toward a more centralized payment system will keep building.

What Workers Can Do When Premiums and Raises Collide

For workers, the useful message is that health coverage is negotiable at the employer level in ways many employees never ask about. The steps below follow directly from the mechanisms and numbers Smith describes.

  • Ask what your employer actually pays. Smith says employees at his firm often did not realize the company was spending $12,000 per year on their insurance. Knowing that number reframes a smaller raise as a health-cost decision rather than an employer being cheap.
  • Check whether your doctors and prescriptions are covered. With Smith estimating that drugs may now be 30% or more of the premium dollar, a plan that does not cover your specific medications or providers is a real financial risk—especially for injectable treatments he cites at $5,000 a month.
  • Ask if an ICHRA is available or possible. Under an ICHRA, your employer sets a defined contribution and you shop for an individual plan that includes your doctors and medications; contributions can vary by age or location. If your employer is facing 10%, 15%, or 30% premium increases, this is a direct alternative to ask about.
  • Compare plan designs yourself. Smith's company switched from Blue Cross to Cigna and offered a PPO copay plan alongside a high-deductible health plan with a health savings account; the change saved about $100,000 that the firm says it can redirect to employees. Ask for the same comparison and see which design fits your medical usage.
  • Use your next benefits discussion to talk about total compensation. If a raise does not materialize, ask how much of the increase went to health premiums and whether a different plan structure could preserve both coverage and future wage growth.