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Will healthcare costs continue to rise even if widespread inflation eases?

By Tim Stawicki, FSA, MAAA | April 4, 2023

Employers that act now to contain healthcare costs will reap rewards and competitive advantage.
Health and Benefits

In June 2022, the Consumer Price Index (CPI) peaked at 9.1% – higher than it had been since the 1980s. While CPI increases have trended downward since then, we may not have yet seen the peak of healthcare trend.

Right now, there is reason to believe that both key trend factors affecting commercial healthcare costs – unit cost per service and the utilization of healthcare services – will rise through 2023, 2024 and beyond.

Keep an eye on unit costs

Unit cost in healthcare is not a simple matter. It has been the leading culprit behind periods of high trend over the last 20 years. Unit cost is based on negotiations between medical carriers (that develop networks and pay claims) and healthcare providers like hospitals and physicians.

Providers currently face the same inflationary pressures that have impacted the rest of the economy – higher labor, technology, construction and supply costs. Unlike other areas in the economy, healthcare providers can’t immediately raise prices on their commercial customers. This is because they typically sign multiyear contracts with the medical carriers that last an average of three years.

As contracts approach renewal, health systems are aggressively pursuing price increases. Between inflation-driven negotiations and post-pandemic consumer demand for healthcare, provider leverage in these contract renewals has never been higher.

How can employers stave off unit cost increases?

  • Start by reviewing the health plans and networks: Are you leveraging the lowest cost networks and vendors based on your geographic footprint? Many employers have different geographical footprints than they did before the pandemic.
  • Review the market and competitively bid your health plan offerings: Have you negotiated your administrative and program fees? Is your pharmacy contract keeping pace with market improvements?
  • Consider implementing more aggressive performance guarantees, focusing on financial performance: Are your vendors providing you meaningful fees at risk for controlling trend? How can you keep them responsible for mitigating claim cost increases and delivering greater value?

Utilization also impacts total spend

Utilization of healthcare services depends on characteristics of an employer’s population and the actions of providers they use. Less healthy populations tend to consume more healthcare, so employers benefit if people maintain and improve their health.

A less obvious driver of utilization is the significant variability in how providers deliver care to patients. Two individuals suffering knee pain may experience very different courses of treatment and overall resulting cost depending on provider quality.

One person may begin with a more conservative course of treatment including physical therapy and could avoid costly and invasive surgery. Another may be encouraged to move quickly to a surgery. Even if the surgery is appropriate, it could have higher levels of complications, ancillary care and readmission depending on the quality of the procedure performed.

The pandemic could increase utilization for years to come. Demand due to the increased need for mental health and deferred surgeries are evident in the data. Delayed or skipped preventive care unfortunately means breast and colon cancer are being identified at later stages, driving higher costs, more complex treatments and worse outcomes for members.

How can employers manage utilization?

Employers have significant opportunity to influence utilization in their population:

  • Review network opportunities to drive quality care: Are high performing provider networks available? Are there conditions or procedures that would benefit from a centers-of-excellence approach? Can you leverage more clinically integrated forms of care (e.g., accountable care organizations, primary care-first arrangements)?
  • Improve the employee experience: How are members supported as they access care with advocacy or navigation guidance? Do employees know where to go for support in times of need?
  • Implement new, cost-effective points of care: Are you supporting virtual care in ways that improve access and reduce costs? Have you considered onsite or near-site clinics to drive wellbeing, vaccines and primary care? How are members supported for behavioral health needs? Are you evaluating your clinical point solutions for cost effectiveness and engagement?

The headwinds affecting each component of healthcare costs mean employers need to prepare for additional cost volatility for the next three years. At a minimum, employers should:

  • Test the risk and variability of your financial projections: Assess the impacts of changes in your underlying costs, size of the enrolled population, stop-loss deductible, and more.
  • Keep the lines of communication between HR and finance open: Finance teams should be educated on the impacts of healthcare trend and the likelihood that trends will be elevated beyond the time of general inflation. A strong working relationship between functions will enable a nimble response to rising costs.
  • Have a ready list of cost management opportunities that can be implemented on short notice: Review available market options and outline the benefits and trade-offs for implementing them. Be prepared with thoughtful options to include in your program so shifting costs to employees isn’t the only option that can be implemented quickly.

While the coming years may prove to be financially challenging, employers that take action now will reap the rewards and competitive advantage of more stable healthcare costs.


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