For more than a year, inflation has been the subject of concern nationwide. But medical inflation, described as the increasing cost of medical services over a period of time, is outpacing general inflation at nearly every turn. However, because premiums are contracted a year in advance, the impact of general economic conditions on medical costs often lag by six to twelve months.
Due to the uptick in medical costs, employers, insurance companies and brokers alike are strategizing how to minimize the impact healthcare renewals are directly impacted by medical inflation.
Understanding the drivers of medical inflation is a good start in analyzing how to minimize its effect on yearly renewals. The main drivers of medical inflation are increasing population growth, age, disease, utilization, the cost of services, and the intensity of care. Technology also plays a large role in driving up medical inflation costs. According to Forbes, it is estimated that new medical technology is responsible for as much as 40-50% of annual cost increases.
Specifically, there are five major services experiencing significant inflation trends: inpatient, emergency room, outpatient surgery, specialty Rx medications, and PCP office visits. These charges have increased 3:1 between the period of 2018 to 2022. Of the five major inflation drivers, outpatient care and prescription drug costs have grown from 17-23% of overall healthcare costs to 19-27%.
It is also worth noting that COVID costs, both direct and indirect, have contributed to this upward trend. Telehealth, long COVID, and lack of preventive care during quarantine are some examples of direct costs. Traveling nurses, consolidation of physician practices and supply chain issues are instances of indirect costs.
As employers grapple with the impact of medical inflation to their benefits budget, here are six cost-saving measures to consider:
1. Employee Cost Share | Increasing employee cost share (i.e., higher employee contributions) can help employers manage higher costs without changing benefits.
2. Plan Changes | Higher deductibles and/or prescription drug copays can bring down overall plan costs by transferring a greater share of the responsibility to those who use the plan.
3. Change of Carrier | It’s possible a different insurance carrier might offer alternative price points or multi-year pricing to help save now and in the future.
4. Spouse Carveout or Spousal Surcharge | When employees pay additional fees to add coverage for a spouse with the option to obtain coverage elsewhere, the annual premiums and risk exposures are lowered.
5. Self-Funding | By assuming the risk of paying employee health care costs, self-insured organizations have more access to data, more plan design control, and often cost savings.
6. Pharmacy Benefit Manager (PBM) Carveout | Often used by self-insured organizations, the employer can contract directly with a PBM to provide lower drug costsand greater transparency.
So, how can brokers help? Brokers provide critical assistance to employers by providing guidance and data to employers who are considering implementing the cost-saving strategies listed above. Similarly, discussing multi-year cost-saving strategies go a long way in the fight to keep medical and prescription costs low.
Also, brokers can partner with employers to provide communication, education, and support to employees during open enrollment and throughout the plan year. They can implement quarterly campaigns on the cost-saving strategies, such as the benefits of free-standing clinics versus hospital services, urgent care versus emergency room visits, and generic versus name brand prescriptions.
Patterns related to the pandemic – including deferral of care, industry consolidation, and telemedicine – will have impacts that are still emerging. With all signs indicating that medical inflation is a trend that will continue into 2024, having a valued partnership with your broker to help meet financial and business needs is key.