February 10, 2026

A Small Portion of Claims Can Drive the Majority of Costs

Self-funded health plans offer employers flexibility, transparency, and control but they also require vigilance. While many organizations focus on headline costs like premiums or annual renewals, the biggest threats to plan sustainability often come from less visible drivers that quietly inflate Per Employee, Per Month (PEPM) spend over time.

Industry data consistently shows that a relatively small portion of claims and utilization drives the majority of health plan costs. Understanding where those costs originate and addressing them proactively can make the difference between a stable plan and one that consistently misses its financial targets.

Why Hidden Costs Matter

In a self-funded plan, every dollar spent comes directly from the employer. That means small inefficiencies, unmanaged conditions, or delayed interventions can quickly add up, especially when they repeat month after month.

In fact, research across the self-funded market regularly finds that 1–5% of members can account for 30–50% of total plan spend in a given year. Without early identification and support, these costs tend to recur and compound.

The most successful self-funded plans aren’t just reactive. They anticipate risk, identify trends early, and rely on data-driven medical management to guide both care and cost.

The Cost Drivers Beneath the Surface

1. High-Cost Claimants

High-cost claimants often emerge suddenly, but their impact can be long-lasting. These members may be experiencing:

• Complex or catastrophic conditions
• Serious injuries or prolonged hospitalizations
• Multiple chronic conditions requiring coordinated care

Industry benchmarks consistently show that the top 10% of claimants typically drive 70% or more of total health care costs, with the top 1% alone accounting for a significant share, according to the Peterson-KFF Health System Tracker.

What helps: Early identification, nurse-led case management, and care coordination help ensure members receive appropriate treatment, avoid duplication, and reduce preventable complications, supporting both outcomes and cost control.

2. Specialty Pharmacy Spend

Specialty pharmacy continues to be one of the fastest-growing cost categories in health care. While specialty medications represent a small percentage of prescriptions filled, they often account for 50% or more of total pharmacy spend in employer-sponsored plans, according to health care research organization the Commonwealth Fund.

Contributing factors include:

• High-cost biologics and gene therapies
• Site-of-care variation (infusion center vs. hospital)
• Limited member awareness of alternatives or adherence challenges

What helps: Clinical pharmacy oversight, utilization review, and ongoing monitoring help ensure medications are medically necessary, evidence-based, and delivered in the most cost-effective setting without compromising care.

3. Chronic Conditions

Chronic conditions may not grab attention individually, but collectively they are among the most persistent drivers of PEPM spend.

According to the National Institute for Health Care Management Foundation:

• Roughly 6 in 10 adults live with at least one chronic condition
• Nearly 90% of health care spending is tied to chronic and mental health conditions

When chronic conditions are poorly managed, costs rise through:

• Frequent emergency department visits
• Repeated diagnostics and procedures
• Preventable disease progression and complications

What helps: Disease management programs, nurse outreach, and preventive care engagement help members manage conditions more effectively leading to better quality of life and fewer avoidable high-cost events.

4. Unnecessary or Inefficient Utilization

Not all utilization improves outcomes. Industry estimates suggest that a meaningful percentage of health care spending is tied to services that are unnecessary, duplicative, or delivered in high-cost settings without added clinical value.

Common examples include:

• Emergency room visits for non-emergent issues
• Hospital-based imaging when freestanding options are available
• Inpatient admissions that could have been avoided with earlier intervention

What helps: Utilization management, medical necessity review, and site-of-care optimization guide members to the right care at the right time and in the right setting, improving efficiency without limiting access.

The Role of Proactive Medical Management

Hidden cost drivers don’t correct themselves. They require intentional, coordinated medical management focused on both clinical quality and financial stewardship.

Effective medical management includes:

• Early identification of rising-risk and high-cost members
• Nurse-led case and disease management
• Evidence-based utilization and medical necessity review
• Ongoing claims and utilization analysis to identify trends early

Employers that actively leverage medical management consistently see improved cost predictability, better member experiences, and more sustainable PEPM trends.

Why PEPM Is the Metric That Matters

Viewing spend through a PEPM lens allows employers to move beyond one-time claims and focus on long-term sustainability. PEPM analysis helps:

• Identify recurring utilization patterns
• Measure the impact of clinical interventions over time
• Inform smarter plan design and benefit strategy decisions

Controlling PEPM isn’t about restricting care; it’s about ensuring care is appropriate, effective, and aligned with member needs.

Turning Insight Into Action

Self-funded plans are strongest when employers partner with TPAs that go beyond claims processing. The right partner brings clinical expertise, actionable data, and a proactive approach to identifying and managing the cost drivers that matter most.

At Nova, our in-house medical management programs are designed to uncover hidden cost drivers early, support members through complex care journeys, and help employers manage PEPM spend in a sustainable way, without losing sight of the human side of health care.

When employers shine a light on these hidden drivers and address them strategically, self-funded plans are better positioned to deliver better outcomes and long-term value. Want to learn more about Understanding a PEPM? Check out this quick explainer video.