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.
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.
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.
Employers have significant opportunity to influence utilization in their population:
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:
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.