U.S. companies and consumers are facing a health care problem that nearly all are woefully unprepared for. While employers have been focused on near-term mitigation of COVID-19 impacts on their workforces and businesses, many CFOs haven’t considered the longer-term ramifications the pandemic will have on their organizations’ health care costs.
Americans have been getting significantly less health care in the first half of 2020 than anyone could have anticipated — even including COVID-19 treatment. That has caused a severe drop in spending in several categories of health care services.
According the Bureau of Economic Analysis, expenditures were down an astounding 12% in March 2020 relative to last year, signaling an abrupt change in health care utilization during the pandemic. Further, the Commerce Department reported that the single biggest source of the gross domestic product decline in the first quarter was the fall in health care spending.
Unfortunately, as the economy reopens and providers resume normal operations, this backlog in unaddressed care will cause a surge in demand that will hit the health care system quickly and inefficiently. It will therefore drive people into more expensive care settings.
Based on the level of disruption that’s already occurred, the expanded future costs will likely be larger than the initial decrease currently being realized. That will force employers to reevaluate their budgeting over the next couple of years.
Alight estimates health care costs to surge by as much as 14% in 2021 for Fortune 500 companies. This equates to approximately $52 billion across the Fortune 500 — or $104 million per company.
Even before the pandemic hit, health care costs were a rising tide. In late 2019, many health care analysts projected 2020 cost increases to once again exceed the rate of inflation, due in large part to high claims and specialty prescriptions. According to the National Business Group on Health, in 2019 large U.S. employers expected an approximate 5% increase in healthcare costs. It estimated that the cost per employee would reach a staggering $15,375 in 2020. Now that the pandemic has caused a substantial reduction in elective and non-critical care, delayed treatment and care will cause a late rush and limited access to affordable care. This, in turn, will drive up costs for individuals and employers alike.
After payroll, health benefits are employers’ largest expense, and finance chiefs cannot afford to be disconnected from benefits decisions. These are not typical times and CFOs and chief human resources officers should resolve to take bolder steps together to change the economics of health care and spearhead cost initiatives.
To change the cost trajectory for 2021 and beyond, we suggest the following three strategies:
1. Influence employee choices. Many employers underestimate the costs associated with employees making ineffective, uninformed healthcare decisions. Assisting employees through the plan selection process can help shift costs, and steering them to the right providers can help reduce spend within the plan.
2. Impact the number of services utilized. Our research shows that employees are becoming increasingly comfortable sharing personal health information with their employers in return for personalized guidance in managing their health. By catering to employees’ unique situations and communications preferences, employers can guide them to preventative care and help them utilize outside solutions like telemedicine or condition-specific programs.
3. Manage the demand for care. Employers unknowingly spend millions of dollars each year on dependents who aren’t even eligible for the benefits offered. An annual audit can ensure the population is being managed in a transparent way and employees and their families are receiving the care they need commensurate with employer offerings.
Lately, we’ve seen employers making big bets to control downstream costs — from narrower networks, navigation, clinical interventions, and fairly radical plan design; those trends should continue. But CFOs and CHROs must partner closely to optimize human capital-related expenses and mitigate risk. As we face recovery from the pandemic, now is the time to strategize, examine models, consider benefits programs that are tailored to talent, and keep people healthy, informed, and educated.
Regardless of how the pandemic-related upward and downward cost pressures will balance out this year, this collaboration between CFOs and CHROs will help employees use the healthcare system effectively and efficiently and employers to get a good return on that investment over the long-term.
Katie Rooney is the chief financial officer at Alight Solutions ([email protected]). Adam Johnson is a vice president at Alight where he leads healthcare navigation strategy and delivery ([email protected]).