This Year’s Premium Increases Aren’t Tied to Medicaid Cuts—But the Impact Is Coming
This year’s health plan renewal rates have been released—and for the optimists hoping for a health trend reprieve, the news isn’t good. Once again, healthcare costs are projected to increase by 8.5% on average.
At Carrum we’ve seen firsthand how this news is impacting employers. In the last few months, a number of prospective clients have requested follow-on conversions to implement Carrum as soon as possible. Why? Because the renewal rates from their payers are higher than expected, and now they have a budget shortfall of $5 million, $10 million, or even $15 million. And they know they can save money without sacrificing care quality by partnering with us.
You may be thinking, “But aren’t these plan renewal increases due to the federal Medicaid spending reductions enacted in the One Big Beautiful Bill Act (OBBBA)?” Unfortunately, the answer is no, not at all. But the OBBBA will further impact rate increases—to the tune of several percent per year over the next ten years.
Let’s break down just why that is.
If the federal government reduces its contribution to Medicaid spend, already-strapped state budgets are unlikely to be able to cover the full dollar gap. More people will become under- or uninsured. Providers—who are also facing budgetary limitations—will then have to deliver more under- or uncompensated care. Providers can’t afford much more free care (hospitals, for example, operate with sub 2% margins). Providers can’t control Medicare rates (set by CMS) or Medicaid rates (set by the state), so they will have no choice but to raise commercial insurance prices. Those will, in turn, be passed on to plan sponsors.
How much, exactly, could be passed onto plan sponsors? This topic is quite complex and nuanced, but we want to share some (very) high-level math to provide an example of the way things could go if action isn’t taken. Again, the below is somewhat simplified, but we believe it provides a good teaser of the significant financial impact this could have on the commercial market.
Of the approximately $900 billion spent on Medicaid last year, roughly 65% comes from the federal government, and the remaining 35% comes from state governments. The OBBBA plans to reduce the federal contribution by about $900 billion over 10 years, with the vast majority of those cuts occurring in 2030 and beyond.
Kaiser Family Foundation (KFF) projects that only $17 billion in federal cuts will occur in 2026. Let’s assume states can cover 50% (or $8.5 billion) of the federal spend reduction on short notice. With about 178 million lives on commercial insurance (CMS projection), that $8.5 billion spread out (i.e., the amount the states can’t cover) is $48 per life on top of the $8,974 spent per commercial life already. That’s an additional 0.5%.
But remember, most Medicaid spending cuts are set to occur in 2030 and beyond. If we follow the same math for 2030, that 0.5% grows to 2.9%. And again, that’s on top of existing projections.
Even if states can cover 80% of the gap by 2030, the estimated commercial spend per life increase is still 1.2%.
The reality is, each state will approach filling the federal spend gap differently. Some might cover 80% of the gap, but others might only be able to cover 20% of it. In a pessimistic world where states on average can only cover 20% of the gap, the estimated commercial spend per life increase is an additional 4.7% on top of existing projections.
What does this mean for you?
Well, health spend was already on an upward run for commercial plans, and the impact from the OBBBA is only going to make those increases greater. The question isn’t whether the OBBBA will impact you—the question is by how much, and how far out in the future.
The good news is you can start making plan design changes now to contain cost increases by partnering with Carrum.
We are here to help your plan save money spent on specialty care and high-cost claimants without sacrificing quality of care and health outcomes. Carrum only works with the very best providers; over the past decade-plus, we have curated a highly vetted network of top-quality providers, so you can rest assured your members are getting the best (most appropriate) care, even while the plan saves money. From day one, members are paired with a dedicated care navigator who supports them every step of the way. And one of the best parts? Members pay little to nothing for this high-quality care.
