Few things stay constant in the world of employee benefits, so it comes as no surprise that employers may need to rethink their 2022 salary and benefits budgets as global inflation gains traction. There are several reasons for the latest round of cost bumps – some similar to what we have experienced in the past, and some as a result of long-term pandemic effects.
We are expecting inflation to impact every aspect of employee benefits, such as the price of healthcare, prescription drugs, services, and more. Unpleasant yes, however, not unexpected. The carry-over effects of the COVID-19 pandemic will create secondary triggers, directly and indirectly impacting medical inflation, especially for employer groups with 100+ participants. As an example, we see insurance carriers planning rate increases of 7 to 10%, on top of medical inflation, to compensate for reduced plan utilization, the cost of COVID testing and vaccinations, as well as delayed care. This has become known as the “COVID adjustment.”
How did the COVID adjustment come to exist, and how else will it affect pricing in 2022? Two main factors are at play – people opted out of elective medical services in 2020, and concerns over the potential for a more severe pandemic resurgence.
According to the PwC Health Research Institute, the pandemic’s most dramatic impact on medical spending came in 2020 as 40% of American adults chose to delay preventative and emergency medical care during the height of lockdowns.¹ What we’re seeing in 2021 and will continue to see in 2022 is those policyholders who postponed medical visits resuming service utilization, which is expected to return to pre-pandemic levels.
The second inflationary factor comes from insurers who are investing to guard against US health system weaknesses that came to light during the worst days of the pandemic. Carriers will be investing in new forecasting tools, supply chain improvements, improved salaries for employees, personal protective equipment (PPE), and infrastructure modifications – which will all drive costs higher. If the ICU and staff shortages that we’re seeing as the Delta variant rolls through the U.S. are any indication, the healthcare system has not eliminated all of its weaknesses.
The reality for benefits professionals is that, historically, their employee health insurance costs have been their third most significant expenditure,² after payroll and real estate liabilities. It’s an annual challenge to rein in expenses, attempting to mitigate the routine, yet wide ranging 5.5% - 8.5% cost increases.
Plan administrators must crunch numbers, evaluate data and make a best estimate on how to alter their existing healthcare plans. However, as we head into 2022, making changes to existing plans may not be enough to offset coming inflation without creative thinking and strongly negotiating with carriers – a method we’ve used to keep clients’ renewal rates under medical inflation. Additionally, employers will have to explore alternative cost-saving options such as health reimbursement arrangements, partially self-funded plans, and health savings accounts.
You may ask, “but didn’t we hear about record profits for carriers? And what about rebates for lower-than-expected utilization?” Yes, and yes. Insurance providers reported unprecedented profits for 2020 due to lower spending on healthcare expenses.³ Carriers will attempt to maintain this profit growth to meet investor expectations – the penalty of success, it seems. On the topic of rebates, the Federal Medical Loss Ratio (MLR) mandates rebates to large employer groups that do not meet the utilization threshold of 85%. In 2020, the lower-than-expected spending resulted in premium rebates for 2021. The Kaiser Family Foundation estimates rebates for small and large US group employers of $618 million for 2021, or approximately $100 per member.⁴ However, the law grants insurers up to three years to calculate premium rebates and account for unexpected expenses. For example, if another outbreak were to occur, healthcare utilization rates could rise, offsetting these results.
For 2022, PwC estimates 6.5% national medical inflation. The justification for this increase is deferred care and ongoing COVID expenses, such as vaccinations and hospitalizations. Another consideration is worsening health as many adults report decreased exercise and self-care. More alarming is the continuing mental health crisis and substance abuse issues which will factor heavily in 2022 rates. Adults reporting anxiety or depressive disorders rose from 11% in January, 2019 to 42% in January 2021.⁵ Alcohol and substance abuse is up 12%, attributed to pandemic stress.
These overall declines in the US population’s health could likely cause utilization rates to spike and put massive strain on some sectors of healthcare. For instance, 27% of mental health needs are currently unmet.⁶ There will undoubtedly be a domino effect that further fuels medical inflation.
Another factor, and one that we’ve written about recently, is the unintended cost implications of telehealth. Sure, it offers the potential for cost savings, but only with cost-corrected reimbursement for providers. The issue at the moment is that carriers and employers are paying in-office rates for what we see as abridged or reduced service. Those reimbursement rates are likely to be adjusted, but we see another risk from incomplete care. If a provider doesn’t accurately identify symptoms or spot a worsening condition because of the limitations of treatment-by-Zoom, we risk compounded health issues and potentially greater costs down the road.
Despite our warning about telehealth, we do see it as an option to help control costs if applied judiciously. It’s simple math; now that more Americans are open to virtual doctor visits, these savings can add up significantly over the long term.
In 2020, emergency room volumes decreased by over 40%. Was it all because of telehealth availability? That’s difficult to say, but we can confidently assume some of it was. According to the PwC study, before COVID as many as one-third of emergency room visits were for non-emergencies because a primary care physician’s office was closed.
So, for employers sponsoring employee health insurance plans, even a 10% decrease in emergency room visits could add up to $900 million in annual savings.
There are several ways employers can lower their healthcare costs in 2022. For example, depending on the carrier, employees can take advantage of insurers’ wellness incentive programs. Employers in some programs can save through a billing credit when they offer rewards programs, for a minimal fee.
Another option to help lower costs for employers with hospital plans is to promote low-cost healthcare service alternatives. Check with your carrier to see what tools and resources are available that can quickly direct employees to more affordable care options. If you’re an Innovo client, you’ve likely already heard from us proactively on cost-savings options, but don’t hesitate to reach out if you have questions.
No matter what steps you take, it’s crucial to communicate openly with employees. Make healthcare information as transparent as possible, including explanations of loss ratios, marketing processes, alternative plan designs, company contribution strategies, financial solvency, and your company’s benefits philosophy. Even making benchmark data public to support rate increases can help employees understand why coverage costs are on the rise.
Medical inflation is inevitable, however the complexity of it does not have to be. Our chief focus is simplifying HR decision making, and that includes helping Innovo clients routinely secure renewal rates significantly below medical inflation. Our average renewal rate is just 5.6% for groups of 50+, without changing plan design or method of funding, even in a year with medical catch up and inflation. We publish the data for complete transparency – find it here.
We believe the success we achieve on renewals is thanks to our independence: we work with a wide array of carriers and are not influenced by broker bonuses or insurance provider panels. To learn how you can provide quality health coverage while reducing the impact of medical inflation, call or email our office: 978-213-8481, email@example.com.