Healthcare costs are breaking the system

Healthcare costs are growing at double digits, compounding year over year, and nothing else in most businesses is growing like it. The impact is no longer staying inside the benefits budget lines. When renewal rates climb the way they have, HR leaders are forced into tradeoffs. Raises get delayed, additional benefits like 401k matches are reconsidered, and training and wellbeing programs shrink. Beyond that, these escalating costs are starting to impact companies’ ability to expand inside of their own core business.

5 and 6% increases were already untenable. Now 10 and 11%? That’s near impossible. It’s brought more eyes into the room, HR alongside CFOs, because these costs are now hitting margins directly. The bar for what constitutes a worthwhile investment has been raised significantly. When costs start crowding out real business decisions, the standard changes.  The question shifts from whether something works to whether it bends the trend in a meaningful, durable way.

 

The cost driver hiding in plain sight

Most of the cost containment energy in the market right now goes toward the categories that are easiest to see. Cancer is a leading driver for 88% of employers, musculoskeletal (MSK) shows up clearly in claims, and diabetes is visible through ICD-10 codes and pharmacy data. These expenses are visible, measurable, and actionable, so that’s where the attention goes. And rightfully so. 

48.5 million Americans are living with a substance use disorder, even more are undiagnosed, and it doesn’t show up the same way. It shows up as recurring ER visits, cardiovascular events, MSK claims, and a lack of adherence to medication management. These costs are very real, but they’re scattered across every other category. You have to be willing to make the investment in your claims data to unpack it. 

Once the time is taken to truly understand it, something important emerges. Substance use isn’t a moral failing or choice. It’s a disease that requires treatment, and a chronic condition with effects on other chronic conditions. So the question worth sitting with now becomes, what if the cost driver that’s not being addressed is making every other cost driver worse?

 

Treating substance use as the root cause

We’ve known for years that treating substance use at the root reduces costs well beyond behavioral health. Recently Aon, a global professional services firm, put our data through their Cost Efficiency Measurement methodology, which is a rigorous, member-level matched cohort analysis covering three years of medical claims. They matched over a thousand Pelago members against a multi-employer control group on geography, demographics, and health, and the rigor that team brought to the process is something we really value. 

The findings went further than we expected. Pelago participants showed a significant cost reduction of $11,829 per member per year, delivering a return on investment of more than 5 to 1. But what matters most in these results is where the savings showed up. 

Members with cardiovascular conditions saw over $44,000 in cost reductions, diabetes $29,000, and MSK $19,000. These are the categories that sit at the top of every benefits leader’s priority list, and they were being driven, in part, by an underlying condition most organizations weren’t even looking at. 

Even further, the impact was most pronounced at the top of the spend curve, which is really where it matters most. The highest-cost 10% of members showed $88,000 in cost reduction vs. controls. If you think about the 80/20 rule, the members who are most expensive, most complex, and hardest to manage are the ones who responded the most when the root cause was finally treated. These savings are real, they’re persistent, and they align with everything we’ve seen in our own previously published research, which gives us tremendous confidence in the direction.

 

What we got wrong, and what’s changing

15 years in digital health and I’ve seen the constant attempt to stem runaway costs. It’s largely been a failure. We wouldn’t be at 10% annual growth if we’d gotten it right. 

But failure is only a dead end if you don’t learn from it, and what’s happening now is genuinely different. Employers are demanding better validation, moving toward outcomes-based pricing, and holding every vendor to a higher standard. This scrutiny is long overdue, and it’s exactly the environment where results separate from everything else. 

The employers who were early adopters of specialty substance use care were the ones with the strongest benefit leaders and the sharpest actuarial support. They took the time to understand the root cause, and once they did, it was a straightforward decision and an easy renewal. Those customers, now multiple years in, are talking about this publicly and bringing the rest of the market along. What we’re seeing is the early framing of a category that has always mattered but is finally getting the attention it deserves. 

 

The opportunity ahead

The market is shifting. Employers and health plans alike are starting to parse behavioral health into subsections rather than lumping everything together. Healthcare pricing is becoming more transparent, individuals are investing more time and effort in their own healthcare, and employers are holding the vendor community to higher standards. If we can bring together smart cost management, better routing of patients to the right modality of care, and accountability tied to outcomes, we can slow down this expense while increasing access and getting better results. All of this points to progress and reason for hope and optimism that we’re headed in the right direction. One where more people get the right care, at the right time, and at the right price.