The Looming Threat: A Critical Moment for U.S. Employers
Over the next decade, CFOs in the U.S. will confront a defining challenge: structural uncompetitiveness driven by rising healthcare costs. Escalating healthcare expenses threaten to overwhelm businesses, erode profitability, and weaken their global competitiveness. Without a fundamental shift in how businesses purchase healthcare, many companies could face a new financial crisis. Yet, embedded within this challenge is a significant opportunity: companies that adopt a value-driven approach to their health benefits can increase profits by an average of 13% in the first year.
To illustrate the likely storm that is brewing, it is useful to review the case of General Motors in 2008. At this time, General Motors faced the grim reality of a pension fund that had become a financial albatross. Between 1950 and 2008, the company provided generous pension and healthcare benefits to retirees, but these obligations eventually overwhelmed the company. As Warren Buffett famously remarked, GM became "a huge annuity and health insurance company with a major auto company attached.” GM was forced to restructure, lay off tens of thousands of workers, and take a government bailout.
Why is this relevant? Today, most U.S. companies are on a similar trajectory—on average, healthcare costs as a percentage of revenue are nearing the levels of GM's pension liabilities in 2008. Before restructuring, GM’s pension costs represented 9% of its revenue. By comparison, the average U.S. company spends 6.5% of its revenue on healthcare benefits and is projected to surpass GM’s 9% threshold by the year 2031. This would leave most US companies in a similar position to GM: facing an existential threat to profitability driven by unsustainable employee benefit programs.
Figure 1: GM pension costs as a % of revenue vs. US employer healthcare costs as a % of revenue
The Cause: An Antiquated Purchasing Process
The root of the problem lies in how most companies purchase healthcare: few employers apply the same rigorous cost-control measures to healthcare that they do to other expenditures. Consider the example of corporate travel: many companies set a fixed per-meal allowance, with employees covering any overages out of pocket. This process gives the employer control of its expenses and gives the employee flexibility to spend more based on personal preference. Unfortunately, employers do not take this approach when purchasing healthcare: healthcare plans typically cover employee expenses regardless of the cost of the service.
Below we show the average price of dinner at a New York City restaurant against the average price of a knee replacement at a New York City hospital. You can see the difference: most employers cover roughly 15% of the cost of a dinner at the most expensive restaurants, but their insurance plans cover 100% of the most expensive knee replacement surgery, regardless of the price, quality, or necessity of the procedure.
Figure 2: GM pension costs as a % of revenue vs. Cost of total knee replacement in NYC by doctor
Of course, many employers do this intentionally: they are willing to cover a greater percentage of employee healthcare bills because they want to ensure employees get the best possible healthcare in a time of need. However, as we will show, this is based on the flawed assumption that you need to pay more to get higher quality in healthcare.
In Healthcare, Top Quality is Not More Expensive
A paradox lies at the heart of the healthcare crisis: there is nearly no relationship between cost and quality in healthcare. In fact, data consistently shows that higher-quality care often correlates with lower costs. This is because (a) the price per procedure is not correlated to quality, and (b) the utilization of healthcare services declines with increased quality due to fewer complications and better health outcomes.
For example, the scatter chart below comparing the cost and quality of knee replacements by doctor in New York City shows a slight negative correlation (i.e. higher cost = lower quality). As you can see, there are many Top Providers who have below average cost and much higher quality than average.
Figure 3: Cost and complication rates of a total knee replacement in NYC
This is not just a one-off example, this pattern holds true across specialties and geographies: it is possible to get the very best healthcare at a significantly lower cost if you have the data to guide you. This means that employers can restructure their benefits to only cover the cost of a Top Provider and then allow employees to decide whether they want to pay additional to see other providers. In this way, employers can now guarantee that their employees can access the highest quality care without paying for unneeded extras. We expect most companies to begin aligning their healthcare purchasing strategies with the same principles they apply to other goods and services.
The Significant Opportunity in Rethinking Healthcare Purchasing
For businesses willing to rethink how they purchase healthcare, the potential savings are enormous. By incentivizing employees to seek care from high-quality, lower-cost providers, companies can significantly reduce healthcare expenses while improving employee health outcomes. On average, U.S. companies could boost profitability by 13%—roughly $1,200 saved per employee annually—by restructuring benefits in this way.
The table below illustrates the potential impact on the average U.S. company’s income statement. The average US company spends almost as much on benefits as they make in profit. With health benefit expenses reduced, companies can redirect savings toward strategic investments, ultimately enhancing competitiveness.
Figure 4: Average US Company income statement, excluding Fortune 50 technology companies. Health benefit expenses reduced according to average cost reductions experienced by Garner clients. Source: US Federal Reserve, Kaiser Family Foundation, and Garner data.
Conclusion: A Strategic Shift for a Sustainable Future
The lesson from GM’s 2008 crisis is clear: structural inefficiencies can cripple even the largest businesses. As healthcare costs continue to rise, U.S. companies must take bold action to rethink their benefits strategy. The old model—where employers cover healthcare costs without assessing value—must be replaced with a data-driven approach that encourages smarter employee choices.
Companies that fail to act will face a dual disadvantage: rising costs and shrinking profitability, alongside an inability to attract talent due to poor benefits. Those who embrace a strategic shift in healthcare purchasing will see significant rewards: healthier employees, lower costs, and a more competitive business.