When it comes to health plan cost calculations for firms over the next year, consider these four major coronavirus-related factors.
- How demographics of the specific employee pool may affect cost.
- Which types of treatments for elective-deferral-related illnesses employees are likely to pursue now that they feel comfortable going back to doctors.
- How risk-takers are planning for the rising medical cost trend.
- Why employers probably should think twice about cutting their employee benefits too much during an economic recovery.
My perspective on risk management may be somewhat different than most experts, because of my 26 years of carrier and consulting experience in health insurance underwriting. But employers do need to be mindful of these employee benefits factors as they pertain to the U.S. entering the return to normalcy phase of the COVID-19 pandemic.
Understanding the Employee Pool
Any advice on employer health plan costs depends greatly on the nature of the company, such as whether a significant amount of employees do strenuous physical labor, are in close proximity regularly, are located in parts of the country with a prevalence of significant illnesses, and have rich or lean benefits. The company’s sector or subsector, as well as the average age and gender mix of employees, also is crucial. This is why underwriting must begin with demographics.
Since employee pools are not uniform, a firm needs to segment most of these data sets, determine the proportion of employees in each segment, and then decide which sub-segments of employees are most relevant to costs. Accurate data analysis requires understanding the current employee pool, as well as how the employee pool may change over the next year.
The near-future is especially pertinent if a firm expects to hire or fire a lot of employees, conduct mergers and acquisitions, or sell off a part of its business. Companies with more than 100 employees may find it useful to seek the guidance of an independent expert that specializes in such analysis.
Beginning in March 2020, when state and local governments began ordering business closures and imposing stay-at-home and social distancing rules to fight the spread of COVID-19, many U.S. workers began postponing doctor’s visits for non-emergency medical treatments. These elective deferrals resulted in fewer health plan expenditures and lowered the overall cost to employers. Now that over half of the U.S. population is at least partially vaccinated, health claims will rise for some employers — but by no means all employers.
Many employers that I have sampled for variation in month-to-month overall claim activity reveal light up or down changes for 2020; those groups may not experience significant upticks for 2021. Conversely, groups that had 30% or 40% drops in claims activity for 2020 are much more likely to see claims activity rise. It’s similar to watching a wave hit the beach. You can see the water recede before the wave comes ashore. The less the water recedes, the smaller the wave will be.
While the type and amount of additional healthcare costs an employer could incur depends on its employee-pool demographics, firms should anticipate a rise in musculoskeletal treatment. People tend to avoid seeing doctors for problems with bones, muscles, tendons, ligaments, and soft tissues until the pain becomes unbearable. Employees who worked in an office until the pandemic hit may not have created optimal ergonomic environments at home. And millions of Americans who reduced their physical activity while spending so much time indoors are engaging in athletic and recreational activities for the first time in perhaps a year.
New injuries are bound to occur, and many more employees than did so over the past 18 months will finally address old ones, such as hip replacements and shoulder surgeries. Even so, it is important to recognize that different parts of the U.S. have had extremely different stages of recovery from the pandemic. By June 2021, infection rates were moderate to low in northeastern and upper Midwestern states, according to the CDC. Meanwhile, infection rates remained high in several Southern and Western states. Therefore, increases in non-COVID-19 related health claims may become more prevalent in areas where infection rates are dropping fastest.
Medical Cost Trend
Last year, many carriers implemented either cost-sharing waivers or premium relief for members who received treatment related to COVID-19. These voluntary measures coincided with carriers experiencing large profits and low medical loss ratios throughout 2020. Carriers have widely divergent forecasts on cost expectations, in part due to unclear data but also because of unique issues with what part of the country the risk resides.
In general, this year employers will see medical cost trends rise from the 5.5% to 6.0% range that prevailed between 2017 and 2020, according to PwC. Medical cost trends will range from 6% to 8% during the next year, based on what carriers are using to calculate fully insured premium renewals and self-funded claims projections. As early as October 2020, carriers expected health costs to rise in 2021 on pent-up demand, COVID-19 testing and treatment, and vaccinations, according to the Kaiser Family Foundation.
The rate at which members access health care services depends on the particular dynamics of each group, as described earlier. Forecasting utilization increase may also be complicated by uncertainty around both the rate at which a firm’s employees are vaccinated and the rate at which employees who have contracted COVID-19 will access health services due to lingering or related symptoms.
The other catalyst for the medical cost trend is the macroeconomic inflation occurring in the United States, which applies to almost all employers. Between May 2020 and May 2021, the consumer price index rose 5%, the largest 12-month increase since 2008. The cost of medical care services increased 1.5% in the year through May. The Federal Reserve has forecast that the personal consumption expenditures price index (PCEPI) could reach 2.8% by December, which would be the highest rate since 2007.
Employers have considerable incentives to reduce unnecessary costs tied to employee benefits. However, firms should be careful about what to cut and by how much. For purely competitive reasons, firms that want to attract and retain talent will need to offer health plans on par with what workers could receive elsewhere. The civilian unemployment rate fell from 13.3% in May 2020 to 5.8% in May 2021. In February 2020, just before the onset of the pandemic, the unemployment rate was 3.5%.
Yet allowing health costs to run unchecked is not a viable option. For example, pharmaceutical spending is poised to rise and employers have been covering more of that increase, according to PwC. In addition to the potential for annual COVID-19 vaccinations, drug manufacturers have a strong pipeline of new cell and gene therapies, as well as biosimilars, set to come to market in the next couple of years.
Employers should explore methods for offsetting costs while remaining competitive as the country prepares to move past the pandemic. One way to accomplish this is through advanced underwriting strategies to evaluate and forecast the risk of health claims. This entails appropriately assigning fully insured premiums or self-funded premium equivalent components to the anticipated risk. While far from simple, this could help employers anticipate future spend as well as positively influence their negotiations with health plan carriers, administrators, and reinsurers.
Pete Edgmon is an underwriting consultant, employee benefits at Stephens Insurance.