Forecasters Revise Outlook for Higher Health Plan Costs

COVID-19 may unexpectedly reduce self-insured employers’ costs due to deferred care

Stephen Miller, CEBS By Stephen Miller, CEBS May 22, 2020
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The coronavirus may end up lowering health care costs for self-insured employers this year, as medical treatment for noninfected patients declines during the pandemic, according to new reports. Health care actuaries who in April predicted a spike in group health plan costs now have reservations about those earlier forecasts, and they are uncertain about the outlook for plan premiums in 2021.

Delayed Care

COVID-19 could reduce employer health care costs for self-insured employers by as much as 4 percent in 2020, according to a May study by HR consultancy Willis Towers Watson that analyzed estimates of infection levels in the U.S. In April, a similar study conducted by the firm projected that costs for large employers could rise by as much as 7 percent due to COVID-19 testing and treatment, echoing forecasts by other consultancies and health industry groups.

In a self-funded (or self-insured) group health plan, the employer assumes the financial risk of paying for employees' health care claims under the cost-sharing terms of the plan.

"With treatment for COVID-19 top of mind, people have been putting off nonemergency medical care, including routine office visits and elective procedures at hospitals," said Trevis Parson, chief actuary at Willis Towers Watson. "Given this reduction in use of medical services, we expect cost reductions due to care deferral to more than offset projected cost increases associated with COVID-19 infections."

According to Willis Towers Watson's analysis:

  • In regions with a 1 percent infection level (for instance, rural areas), employer costs could decline between 1 percent and 4 percent, depending on how much medical care is deferred.
  • At a 15 percent infection level (as in some metropolitan areas), employer costs could rise or fall by roughly 1 percent, depending on care deferral.

In the most severe scenario—a 20 percent infection level—costs could rise between 1 percent and 3 percent, still below increase projections from Willis Towers Watson's April analysis.

"While continued adherence to social distancing and other public mitigation efforts are likely to reduce costs associated with COVID-19, these initiatives may also help to reduce exposure to other communicable diseases, such as the flu, and significantly lower the rate of certain injuries, such as those caused by sports accidents," Parson said.

He added that "the ultimate financial impact of COVID-19 on employer health care plan costs in 2020 will depend on other factors, including the rate at which the virus spreads and the severity of illness of those infected."

Other health care plan costs, such as dental and vision care, will likely also see lower costs in 2020 for self-insured employers, Parson said.

Gallagher, a Chicago-based benefit broker, now predicts that a self-funded U.S. factory with approximately 4,000 employees will have a 15 percent decrease in 2020 medical expenses compared to last year. As a result, "we estimate that in most typical scenarios, this short-term reduction in cost and utilization will offset self-funded employers' increased direct COVID-19 claim and testing expense," said Christopher Nadeau, Gallagher's regional executive vice president of the HR consulting division.

[SHRM members-only toolkit: Managing Health Care Costs]

Claims Are Down, but for How Long?

In evaluating the effect of COVID-19 on future health plan costs, employers will need to balance new costs for testing and treating employees and covered dependents who need hospitalization against the savings from deferred elective care, said Sunit Patel, a partner and chief actuary at HR consultancy Mercer. "While many estimates envision some scenarios leading to 2020 costs [being lower than employers budgeted for], there are secondary consequences that could impact costs in 2021 and beyond," he noted.

Looking ahead to 2021, "additional financial risks come from the potential adverse consequences from missed wellness visits, immunizations and services that otherwise would have been delivered," Patel said. "It is not unreasonable to assume that we'll see an increase in case complexity due to these missed services, and though the extent is debatable, it will likely be dependent on how long people continue to avoid care."

Undiagnosed and untreated diseases, including cancers, may have advanced to stages requiring more extensive, and expensive, treatment, for instance.

"A rebound in costs is likely later this year as delayed care returns and, longer term, as the secondary impacts kick in to drive up costs," Patel added.

While he still expects to see long-term savings due to increased use of telehealth services, that cost reduction could be offset by health care providers' negotiating higher prices with health plans to make up for the cash-flow and revenue challenges that doctors and hospitals have experienced so far in 2020.

"Especially in smaller practices, upward pressure on reimbursement rates is likely, [and] constrained Medicare and Medicaid budgets may exacerbate cost-shifting to private sector health plans," Patel said.


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Coronavirus and COVID-19

'Pent-Up' Demand?

While some analysts expect that patients who delayed doctor visits and elective procedures will drive up demand for health services once they feel it's safe to again schedule health care appointments, others aren't so sure.

While actuarial analyses of similar crises, such as natural disasters, show that the lack of access to doctors and hospitals resulted in short-term claim reductions for nonurgent care, "surprisingly," Gallagher's Nadeau said, "our analysis has consistently shown that close to 50 percent of those variable claims never show up back in the health care system. There is not a dollar-for-dollar, pent-up need for care that will emerge once the U.S. gets back to business as usual."

Cloudy Outlook for 2021 Premiums

While the decline in filed claims for non-COVID-19 care "is offsetting many insurers' costs associated with the pandemic, the future is far more fraught," Kaiser Health News (KHN) reported. "Costs could remain modest or quickly outstrip savings. A recession could drive revenue down. Or the coronavirus could resurge next winter and spike treatment expenses."

This uncertainly could lead insurers to raise health plan premiums for next year "if insurers hedge their bets," KHN reported. "Then again, the current savings insurers are seeing … might result in minimal premium increases."

Mike Kreidler, Washington state's insurance commissioner, told KHN, "Insurers are nervous, to be sure. But so far they are telling me they are in good shape. Coronavirus claims have not been that high—yet."


Health Care Costs for an Average Family Hit $28,653

On May 21, global consulting and actuarial firm Milliman released the 2020 Milliman Medical Index (MMI), which measures health care costs in the U.S. for individuals and families receiving coverage from an employer-sponsored preferred provider organization (PPO) plan. "This year, health care costs grew by approximately 4.1 percent, which is consistent with recent years but still outpaces growth in gross domestic product," said MMI co-author Chris Girod, a principal and consulting actuary at Milliman in the firm's San Diego office. 

In 2020, health care costs for a hypothetical family of four reached $28,653. Health care costs for the average person rose to $6,553.

"Employers and employees are equally absorbing this year's 4.1 percent cost increase," said Dave Liner, an MMI co-author and principal and consulting actuary in Milliman's Hartford, Conn., office. "Over time, economic changes and other forces tend to create an ebb and flow in how cost increases are shared by employers and employees."

"Hospital costs have stolen the show in recent years, increasing faster than other components," said MMI co-author Scott Weltz, a principal and consulting actuary with the firm's Milwaukee office. "Hospital costs have increased by approximately 15 percent in the past three years, with other services growing 10 percent in that time."

The COVID-19 pandemic introduces tremendous uncertainty to any estimate of 2020 health care costs, with major variables including the duration of the pandemic, the amount of care that may be deferred as a result of it, and the possibility of people losing their employer-sponsored coverage, the co-authors said. Thus, they noted, the 2020 MMI does not include an explicit adjustment for COVID-19.

Average Health Care Cost for Individual Coverage in a PPO Plan

MMI health costs.jpg

Source: 2020 Milliman Medical Index.



Related SHRM Articles

Expert Q&A: How Is COVID-19 Changing Employer-Sponsored Health Care?, SHRM Online, May 2020

Pandemic Could Drive Health Plans to Adopt Reference-Based Pricing, SHRM Online, May 2020

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