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The pursuit of lower healthcare costs: It’s not a dream

By Drew Hodgson, FSA, MAAA | July 1, 2022

Despite general inflation and increasing demand for better employee benefits, innovation can help control healthcare costs.
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Nearly half the U.S. population, 158 million people, received health insurance from their employers in 2019, compared to just 14% through Medicare, according to a 2019 Kaiser Family Foundation study. This number is projected to grow in a tight labor market in which candidates rank benefits as a major driver of employment selection. In 2021, the cost of employer-sponsored family coverage reached $22,221, up 4% from the prior year, and this number is expected to increase in the current inflationary environment. Yet as the healthcare industry continues to rapidly change, we have the opportunity for innovation to drive efficiencies in the coming years.

Let’s first look at the pandemic-induced pressure we see on healthcare costs. During the first 12 to 18 months of the pandemic, health systems suffered significant losses, especially those that had not embraced value-based care. Fee-for-service payments dried up, and providers were left scrambling to increase revenue. The overdue turn to virtual care was a welcome change, but it did not solve all the problems. Cost and utilization challenges remain front and center.

We expect to continue to see costs trending higher trend in the coming years. Underlying inflation is a concern across the entire economy. However, the problem goes even deeper when it comes to healthcare.

Health systems are trying to recoup lost revenue and are feeling emboldened to challenge the major health insurance carriers through significant unit cost increases and the reopening of value-based care contracts. A number of these are happening early, or off-cycle, from expected contract negotiation timelines. The health systems were unofficially knighted as heroes during the pandemic, and health insurers are now reluctant to get into a public fight with them. We have seen this play out in a number of markets, and we expect this to continue as contracts expire. Add the accelerated consolidation in the market and unit costs will continue their short-term climb.

If we turn to utilization, there are many factors threatening to drive up total spend. First, we have pent-up demand driven by the forgone services throughout the pandemic. This incremental cost is already materializing, and the increase in demand is impacting health systems significantly, with strains on resources and the workforce as they seek to recoup lost income. We already know that unnecessary procedures, fraud and low-quality care causes 40% to 50% of spend to be waste. The increase in unchecked virtual care and the need for additional revenue could increase such waste over the next few years.

Opportunities to control costs

Despite these cost pressures, there are opportunities to drive costs down over the next seven to 10 years. Employers have the power to make changes, and with strategic initiatives and partnerships they can truly shape the market in the future. The key to success will be a focus on quality and changing the underlying claim distribution. There are three basic steps to begin that process:

  1. Master data. Data is essential. It is critical to understand what is driving cost in each individual market, and more importantly, where care is being delivered. This will be the foundation to identify opportunities.
  2. Evaluate quality and cost metrics. Assessing quality outcomes and unit costs enables us to pinpoint areas of concern. With very little correlation between cost and quality, identifying providers that provide high quality care at a reasonable price is important. It is also critical to identify inefficient providers. Once we understand where we want care to be delivered, we can work through solutions to achieve that goal.
  3. Identify and implement solutions. There are many solutions in the market to address specific concerns. Clinically integrated networks and centers of excellence are valuable in addressing immediate concerns, but we can also look at navigation, clinics, virtual care and many point solutions to address gaps in the data.

Many breakthroughs are also just around the corner. Wonder drugs that can control or cure high-cost diseases, simple blood tests that identify cancer at early stages and the huge potential in genomics can lower costs significantly. Taken together – harnessing the value of these advancements, eliminating inefficient and wasteful care, and taking the three actions above – we have the opportunity to turn the dream of lower healthcare costs into reality.


Senior Director, Health and Benefits
Health Care Delivery National Practice Leader
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