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Volatility in a high-healthcare trend environment: The return of risk management

By Alan Silver, ASA, MAAA, FCA | September 25, 2023

With an expected trend range of 6.0% to 7.5%, employers must actively manage their plan.
Employee Experience|Health and Benefits|Benessere integrato

Healthcare plan sponsors are asking “What can we expect for 2024 costs?”

Looking to 2024, we expect most employers will experience healthcare trend between 6% and 7.5%, with the average trend falling around 6.5%. As more and more trend surveys are published projecting 2024 costs, the industry is seemingly in unanimous agreement that healthcare trend will be at its highest levels in nearly a decade.

Plan sponsors should prepare for increases in healthcare budgets while meeting the need to compete for and retain talent. These surveys almost always provide an estimate of the expected average trend increase, reducing a complex story down to one, fixed number that we can compare across the industry.

Yet from that consensus comes a different, more urgent question – what should companies prepare for when all these fixed number estimates are quite different?

From behavioral economics, we know that people generally prefer an adverse outcome that is certain to an unknown outcome that has a reasonable likelihood of being better. As we project costs over the next 12 to 24 months, we see a broad range of potential outcomes that average out to those higher projected trend numbers.

Based on our review of multiple data sets and market dynamics, we believe where an individual plan sponsor will fall in that range is subject to more volatility than ever. For the employer that is prepared to actively manage their health plan, there are ways to manage this uncertainty and increase the probability of being on the lower end of that healthcare trend range.

Risk identification and risk management

To manage costs, employers tend to think about plan design and delivery features. This is often done in the aggregate, leveraging industry benchmarks, best in class solutions or even giving a new vendor an opportunity if they seem to be leading the market in employee experience.

To manage volatility, we need to go back to basics. It is impossible to manage risk without knowing what is driving your risk. In this environment, it is even more important to have an intentional measurement strategy in place.

You need to identify what disease states are prevalent and indicated within your population data. Whether it is cancer, diabetes, obesity (driven by the explosion of demand for GLP-1 medications), fertility or mental health, you need to know what conditions could lead to claims that will have a significant impact to your specific trend.

You need to be very intentional about managing and transferring risk, as managing individual disease states alone is not enough. We are seeing some of our clients pursuing risk financing structures like stop loss and captive arrangements in increasing numbers. Regardless of the disease states underlying your population, it is crucial for you to identify whether there is a way to cap the liability exposure, and what level of coverage makes sense for the cost.

Health plan design and delivery

Once a risk management strategy is in place, you can focus on health plan design and delivery changes to best manage the exposures your organization retains. Consider changes that can reduce, cap, or even eliminate exposure. It is also important to weigh how these decisions could impact employee experience. Design and delivery changes can directly (and possibly negatively) impact employees in a way that risk management and risk transfer do not.

From a design and delivery point of view, there are ways to use tradeoffs to balance attraction and retention against employee-facing interventions. For example, primary care models and the use of centers of excellence for certain sets of procedures or types of complex care can be interventions that provide out-of-pocket savings for employees. A narrow network approach can steer people away from costly, unrestricted utilization, and an employer can implement one with an enhanced plan design that is very attractive to employees. The employee experience surrounding these types of interventions is also advancing due to technology, data, and new care delivery capabilities. This enhances the opportunity for employers to consider – or reconsider – them and refresh their thinking.

While many employers are looking at cost-shifting, it may be more advantageous to look at benefits eligibility and coverage provisions as ways to mitigate volatility without the significant impact on an employee’s paycheck. This is especially true regarding pharmacy benefits, where employers need to consider how and when to cover the use of anti-obesity medications (like Wegovy) and what they can do to ensure that the most expensive specialty prescriptions are filled and administered at the right locations with the right contractual terms.

Each employer is different

There are many other design and delivery strategies that you can consider. There is no one path for all. Each employer is different, and it is critical to combine many factors, such as business priorities, growth strategies, talent needs, workforce health and the latest in the healthcare market to determine what will work best for your organization. But one thing is clear: In an era of rising healthcare costs and a competitive talent market, keeping health benefit costs in check while offering competitive plans will remain critical.


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