Skip to main content
main content, press tab to continue

Will general inflation spread to healthcare costs?

By Elodie Olsen, FSA MAAA | May 24, 2023

The COVID-19 pandemic kept healthcare use and costs down, but as use rebounds and general inflation continues, healthcare costs are set to rise.
Health and Benefits

Healthcare is complex and unique. As a result, it does not always follow the rest of the economy. For example, the COVID-19 pandemic led to high general inflation because of supply chain disruptions and pent-up demand from deferred purchases. In contrast, deferred healthcare during the pandemic led to cost suppression. With demand for care returning to normal and sustained general inflation, healthcare costs may increase.

Following our recent health actuarial article, Will healthcare costs continue to rise even if widespread inflation eases?, we now will take a deeper dive into healthcare trends over the last several years to understand how they could impact employers through the end of this year and beyond.

To answer these questions, it’s important to understand recent cost depression and how this may impact future costs in the context of high inflation.

Consumer goods inflation was more than double medical inflation in 2022

Historically, medical care prices have grown faster than overall consumer prices. However, starting in March 2021, medical care price increases lagged increases for other consumer goods. In 2022, the average Consumer Price Index for All Urban Consumers (CPI-U) was 8.3% compared to medical care price increases of 4.05%.

The COVID-19 pandemic reduced healthcare use resulting in lower inflation. Additionally, prices for healthcare services are negotiated and locked in via multi-year contracts, further resulting in low healthcare cost inflation. Meanwhile, the pandemic created supply chain shortages and pent-up demand leading to a surge in inflation in the broader economy not seen since the 1980s.

Current trends in healthcare

Reviewing 2022 data, we observe that most deferred care and use returned to pre-COVID levels as pent-up demand that accrued in 2020 has now stabilized.

During the pandemic, there were significant changes in healthcare use:

  • Elective surgeries were postponed
  • Preventive care screenings declined significantly
  • Virtual care use increased
  • Anxiety and depression increased significantly

These changes resulted in 2020 medical and prescription drug costs that were 7% lower than we projected for clients, and 2% lower than 2019. Annualized medical and pharmacy costs increased 4.8% since 2019. The use of higher cost drugs is the main driver.

What are some clues to future changes in healthcare costs?

  • Deferred cancer screenings. Will deferred care in 2020 lead to larger claims further down the road?

A key concern is deferred preventive cancer screenings during the pandemic. Cancer drives roughly 30% of medical costs. Many cancers can be prevented or treated through timely screenings.

There were significant reductions in cancer screening rates in 2020. According to WTW data shown below, screenings have returned to historic levels in 2021 and 2022 but did not recapture the lost screenings from 2020. One exception is cervical cancer screenings, which decreased in 2022, likely due to changes in cancer screening recommendations by the American Cancer Society.

As a result, it’s not surprising that while cancer diagnoses decreased in 2020, high-cost cancer prevalence has increased 30% in 2022 relative to 2019. This is an area that may continue to drive increased costs so employers should monitor it.

  • Provider lost revenue. Will we see significant unit cost inflation as providers and hospital systems attempt to recoup lost revenue?

Current economic inflation and decreased competition in healthcare is likely to lead to higher future costs. However, these unit cost increases so far are not higher than they were pre-pandemic. Overall medical use has increased a total of 7% since 2019, driven by professional services, but average unit cost has only increased by 1%. Nevertheless, as provider contracts renew and general inflation remains high, unit costs can still increase in 2023 and beyond.

  • Duration of COVID. How will long COVID impact employer-sponsored plans?

Employer COVID spending related to testing and hospitalizations decreased by close to 50% in 2022 relative to 2021. But employers are questioning the impact of long COVID on future costs. So far, the data indicates that direct COVID costs are not expected to be a material future cost driver for employer-sponsored plans.

According to the Kaiser Family Foundation, as of January 16, 2023, 15% of U.S. adults reported having had long COVID symptoms. The percentage of people reporting that they currently have long COVID has been decreasing over the last several months. A review of WTW data revealed that 2% of all members with confirmed COVID diagnoses also had long COVID diagnoses. The impact on medical spending for those individuals with long COVID diagnoses was minimal.

  • Ongoing mental health needs and comorbidities. Should employers worry about deteriorating mental health in their employees?

The prevalence of anxiety and depression is rising nationwide. According to our 2022 Global Benefits Attitudes Survey, about four in 10 high risk employees in the U.S. saw a deterioration in their wellbeing in the past year. Employer behavioral health costs have been increasing an average of 14% annually since 2019.

One study reported that people with depression had total per member per year medical costs $3,115 higher in 2022 than people not having depression, meaning that increased rates of depression and deterioration in mental health lead to higher employer healthcare costs.

  • Prescription drugs. What’s happening with drug costs?

Drug costs continue to drive employer healthcare spending higher with annual trend of 11%* since 2019. Expensive pipeline drugs, diabetes treatments (including new GLP-1s), obesity and specialty cancer drugs are providing needed treatment for individuals but also increase the cost of healthcare for employers. Employers should monitor and manage drug costs as they are likely to continue to drive healthcare costs higher.

Additionally, drug pricing and pharmacy benefit management legislation are key areas of focus for various states across the country with dozens of bills under review. Should these regulations pass, they could have significant cost impacts on plan sponsors and members and may require the need to comply with different laws for different states related to pharmacy benefit design.

Prescription drugs and pharmacy will continue to drive trend going forward, and employers should monitor and manage their programs.

  • Redistribution of care delivery. What factors might offset potential cost increases?

The COVID-19 pandemic had a notable impact on healthcare use in 2020, as evidenced by a 15% reduction in emergency room (ER) visits and a corresponding 19% increase in the use of urgent care facilities. Furthermore, virtual care use increased significantly during this period. At the time, many questioned whether these shifts to lower cost services would have a lasting impact and reduce costs. Thus far, this has not turned out to be the case.

  • As of 2022, ER use rates have returned to pre-pandemic levels, while both urgent care and virtual care continue to sustain heightened levels of use.
  • Virtual care visits increased from less 0.5% before COVID to 13% of all provider visits in 2022.

This trend is leveling off with the return of in-person care and changes in regulations across states.

Use of total professional services (virtual care, office visits and urgent care) increased by 1.5% in 2022 relative to the same time period in 2019. The increase is mostly driven by increased use of virtual care.

What employers can do

In addition to the specific actions covered to manage healthcare utilization in our previous article, employers should measure and monitor current claims experience and understand cost drivers.

Know your data. Data is power. By using data and analytics, employers can gain insights into employee health trends, risk factors, and healthcare use patterns. Employers can use these analyses to make informed decisions about healthcare benefits, employee wellness programs, and other initiatives that can improve employee health outcomes and reduce healthcare costs.

*Before pharmacy rebates


Unless otherwise noted, analysis is based on:

  • WTW employer data: National Data Cooperative, with ~1.45M lives, $10B medical and pharmacy paid claims in 2022
  • Comparison periods for 2019-2022: Incurred and Paid January-December

North America Health Analytics Leader
email Email

Related content tags, list of links Article Health and Benefits United States
Contact us