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Are you bracing for double digit healthcare trend in 2023 and beyond?

By Tim Stawicki, FSA, MAAA | October 27, 2022

With medical costs expected to be compounded by high inflation, employers need to take action to mitigate cost increases and manage employee affordability.
Health and Benefits
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The medical industry is no exception to the inflation seen across the U.S. economy. It has faced increased cost for supplies and for scarce labor while ongoing provider consolidation drives greater market leverage. As multi-year contracts between medical providers (e.g., hospitals, physicians) and medical carriers (vendors that provide third party administration and network access) approach renewal, we expect inflationary impacts will be incorporated and lead to higher medical trend rates in the coming years. Once rate increases are negotiated into existing contracts, there is little chance of the costs ever coming down. Employers will need to take steps to control medical costs that directly impact how healthcare is used and paid for.

Inflation and the healthcare industry

The days of stable 4% to 5% national average medical trend rates appear to be behind us. For the past decade, other than the impact of COVID-19, employers could count on consistent medical inflation in annual budgeting exercises, forecasting and vendor negotiations. While individual claim experience, plan design updates and workforce changes meant any given year for an employer could deviate from that norm, the underlying cost and utilization increases were consistent.

Health care costs before and after plan changes

Definition of medical and pharmacy benefit expenses:

Your organization’s medical and pharmacy benefit expenses for insured plans include the medical and pharmacy premiums paid by the organization. For self-insured plans, include all medical and pharmacy claims paid by the plan, employer contributions to medical accounts (FSA/HRA/HSA), pharmacy rebates, and value-based provider incentives/penalties and costs of administration. For administration costs, please include claim processing fees, network access fees, utilization review fees, stop loss premiums, and any health management program costs and program participation incentives paid by the plan. Include any carve-out plans for prescription drugs and mental health, but exclude costs for dental benefits and exclude employee point-of-care (or out-of-pocket) costs for the medical and pharmacy plans.

For 2023, employers are projecting trend rates of approximately 6%. This is an increase of one point from the trend of 5% for 2022. Looking to the future, 60% of employers see the risk of trend reaching 10%, while another 11% of employers expect trend to eclipse double digits. Well over half of those forecasting higher costs expect these increases to be sustained over at least the next three years, suggesting that the need for diligent cost management has become critical, according to our Best Practices in Healthcare Survey.

In a volatile trend environment, the risk of not predicting well has greater consequences: Every dollar of conservative budgeting is a dollar that can’t be invested in people and the business and every dollar of aggressive budgeting increases the risk of missing projections and impacting earnings.

On top of managing escalating employer costs, 42% of employers list managing employee affordability as a top priority. These opposing pressures will make it more difficult for employers to balance priorities. To address employee affordability, they will consider approaches such as low deductible designs, salary-banded contributions and greater employer funding, especially among low wage workers. In a tight labor market, making decisions that threaten employee affordability and engagement can have far greater business consequences.

In the face of these headwinds, what should employers do to mitigate the impact of health care cost increases while providing competitive employee benefits?

  • Understand the impacts of the current and future benefit plans on member affordability. Employers should develop plans to measure and manage employee affordability and understand the social determinants of health that drive underlying differences among their populations. Ultimately, organizations bear the cost of employee affordability risks as financial wellbeing, health and productivity are connected. Employees with financial risks and poor health are significantly more likely to be disengaged at work and have greater prevalence of absenteeism and presenteeism, according to our Global Benefits Attitudes Survey.
  • Plan ahead to identify and analyze a range of cost mitigating opportunities using data and market information. Increasing employee contributions and reducing plan value are easy cost-saving measures, but negatively impact employees. After understanding employer-specific cost drivers, you can identify cost management opportunities such as preventive- or virtual-first designs, better clinical models, quality-based networks, centers of excellence, alternative payment models and market-based solutions to prepare for when a CFO asks for a few percentage points to be cut from the benefits budget
  • Finally, knowing that the risk of higher costs is ever greater in the coming years, HR teams should increase interactions with finance teams to understand projections, influence budgeting decisions, and work together. Understand the potential range of cost increases that you can expect based on your population, characteristics, utilization, and designs, and develop plans across multiple scenarios.

Difficult changes are coming to healthcare spend in the next few years, and employers must avoid facing desperate measures. Being prepared, having a strategy and managing plans effectively can go a long way toward meeting organizational goals and driving employee satisfaction.

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