[This article is the second in a three-part series. Part one focuses on inflation and compensation. Part three discusses inflation and retirement savings.]
As inflation takes hold, employers will need to revise how they budget for both compensation and benefits. Planning for employee health care poses particular challenges, given that the annual increase in health benefits costs routinely outpaces general inflation, as medical services are subject to unique cost factors.
Who Pays as Prices Rise?
Higher prices for medical services affect employers differently based on their insurance model:
- For fully insured group health plans, insurance companies set plan premiums before the start of the year. Employees, however, pay many health costs below the plan deductible out of pocket, and often are charged co-payments after reaching their deductibles, making them susceptible to inflation's bite.
- For self-insured group plans, employers are responsible for all costs for health claims beyond what employees pay under the plan, although reinsurance coverage typically protects employers against unexpected "catastrophic" costs.
Health Care Inflation
Advisory firm Milliman's 2021 Milliman Medical Index, an actuarial analysis derived from a variety of Milliman and industry data sources, forecasts that health care costs for a typical employer-sponsored preferred provider organization (PPO) plan will rise on average this year as follows:
- For individual coverage, PPO plan costs are projected to be $6,516 by year-end 2021, up from $6,052 in 2020.
- For an average family of four, PPO costs are projected to be $28,256, up from $26,078.
"So far in 2021, small-group health insurance is averaging a renewal increase of 7.66 percent" year-to-date as of June 1, said Marcus Newman, vice president for benefits consulting at GCG Financial, an Alera Group company. "Using the 'Rule of 72,' that means the cost will double in less than 10 years."
Newman said many of the firms he works with reported a loss of revenue over the past year, and that "for many of these groups, their health insurance bill is the second- or third-largest expense after payroll and facility [costs]. How long can this go on, with revenues down and the cost of health insurance going up?" he wondered.
Consultancy PwC's Medical cost trend: Behind the Numbers 2022 report, based on information from health plan actuaries and health care executives, found that U.S. health care costs last year increased by 6 percent, while PwC projects 7 percent growth this year. The rate of increase could moderate slightly in 2022, "taking into account the pandemic-rooted inflators and deflators of cost."
[Want to learn more about health care benefits? Join us at the SHRM Annual Conference & Expo 2021, taking place Sept. 9-12 in Las Vegas and virtually.]
Delayed Care Resumes
The current situation for health care costs is atypical, as health care spending in 2020 fell as many Americans delayed care during the pandemic.
Much of the deferred care "will have either been delivered by the end of this year, or will be forgone," said Jeff Levin-Scherz, population health leader at consultancy Willis Towers Watson, although cancers and other conditions that were not diagnosed and treated early could lead to higher costs "further down the road."
Other Cost Drivers
According to Perry Braun, executive director at Benefit Advisors Network (BAN), a consortium of health and welfare benefits brokers, long-term factors likely to drive up health care costs include "a shortage of nurses that will cause an increase in salaries to health systems to attract and retain nurses, pharmaceutical costs that will continue to rise as newer therapeutics enter the marketplace, and medical device and medical technology that are dependent on chips and semi-conductors to power the device, and which will increase in price due to supply shortages."
Levin-Scherz also expects health care benefit costs to increase over the next two years "in part because of increased provider consolidation, which generally leads to higher medical care unit costs."
[Related SHRM article: Study Stokes Fresh Scrutiny of Wellness Programs' Value]
Limits to Cost-Shifting
Traditionally, small businesses would manage the rising cost of health insurance by altering their plan designs, Newman said. "In the past, raising deductibles, co-pays and out-of-pocket limits would reduce the renewal increase, but that is not always the case anymore," he noted. "Employees are already dealing with high financial exposures on their current health insurance plans, and they are all pressed for money as well. How much more risk can we ask them to shoulder?"
He suggested that employers explore strategies such as partially self-funded plans for small businesses, which, depending on workforce demographics, may be more cost effective than a fully insured plan, and making use of health reimbursement arrangements or health savings accounts to encourage plan participants to make cost-conscious spending choices, when they are able to do so.
Most employers will try to avoid passing on increased costs to employees, Levin-Scherz expects, "because of the tight labor market and the desire to keep health care affordable for employees." Still, there is a limit to employers' total rewards budgets, so increased health care spending could put a crimp in funds available to pay other benefit costs, and for pay raises.
Lack of Price Transparency
Prescription drug prices are rising faster than any other medical good or service, pharmaceutical discount company GoodRx reported in September. Drug prices have increased by 33 percent since 2014, while costs for inpatient hospital services increased by 30 percent during the same period, wrote Tori Marsh, a member of the firm's research team.
One culprit is opaque health care prices. "Patients at both the pharmacy counter and in the hospital rarely know the cost of their medication or procedure until after the fact," Marsh noted, so they can't comparison shop for lower-cost services or ask their doctor about similar but lower-cost medications.
According to Paul Bradley, chief medical officer at health IT firm Scripta Insights, "People trust their doctors and want to take the medicine their doctor prescribes, but affordability has a major impact on adherence." Most doctors, he added, "don't know the cost of a drug or what the member co-pay is on your insurance plan when they write your prescription."
Price Disclosure Initiatives
Under a Transparency in Coverage final rule—issued by federal agencies last November—insurance companies and self-insured group health must provide plan enrollees with estimates of their out-of-pocket expenses for services from different health care providers, through an online self-service tool, so enrollees can shop and compare costs for services before receiving care. The rule will begin to take effect in January 2022 but will not take full effect until 2024.
The transparency rule will require plans and issuers to disclose in-network provider negotiated rates, historical out-of-network allowed amounts, and drug pricing information.
The Consolidated Appropriations Act, 2021 (CAA) also requires group health plans to report certain information related to health care and prescription drug costs to the secretaries of the departments of Health and Human Services, Labor, and the Treasury. The first report is due by Dec. 27, 2021, which is one year after enactment of the CAA.
The agencies will use the reported information to analyze trends in overall spending by group health plans, to help insurers and self-insured plans to negotiate fairer rates and, ultimately, lower costs for plan participants.
[The other parts of this series are Inflation's Return Will Affect Compensation and Inflation Could Bite into Retirement Savings.]