It can be frustrating for small and midsize businesses (SMBs) to have to budget for benefits when each year they see significant increases that outpace inflation. So what’s an SMB owner or HR professional to do? Fortunately, there are studies out there that can pull back the curtain to help organizations understand some of the causes for increases in prices and important trends in the medical insurance world. One such report is PricewaterhouseCooper’s (PwC) Medical cost trend: Behind the numbers 2018.
In this post, I’ll take a deeper look at what the PwC annual report identifies as the three inflators and two deflators that are driving health spending increases for 2018. Then I’ll discuss what employers can do to prepare for these increases.
Recurring Drivers of Medical Cost
Before we dive into 2018-specific price increases, let’s take a look at factors that influence medical cost trend increases year after year:
Now, here are the major inflators and deflators from the PwC report:
Inflator #1: Inflation is what it is
One of the reasons your medical costs increase is the same reason you see prices increase at the gas pump, at the movies or the grocery store. Inflation impacts all areas of life and that includes health care.
Inflator #2: High deductible health plan participation
With their high out-of-pocket costs, high deductible health plans (HDHPs) are often viewed by employees as a less-rich health care option. In this way, HDHPs are not a strong draw when trying to recruit top talent. In today’s tight labor market, rich benefit offerings can make you more competitive with other employers. That is why many companies are foregoing lower-cost HDHPs and paying more to offer HMOs and PPOs.
Additionally, the data has shown that individuals with HDHPs tend to have lower plan usage, whereas individuals on other plan designs tend to have higher use. Therefore, lower HDHP enrollment means higher enrollment in more traditional plan designs, which according to the data, are subject to higher usage.
Inflator #3: Fewer drug patents expiring
Medical costs can be broken down into several different categories—pharmacy, inpatient, outpatient, physician and other. Between 2008 and 2018, the portion of overall employer spending for pharmacy costs relative to the other categories of spending is expected to increase the most (by 20%) to account for 18% of overall employer spending. To understand why this happens, it’s important to note that the price of generic drugs within a few years of expiration of a patent are often, on average, 80% to 85% less expensive. Because fewer drug patents are expiring, fewer generic options will be available, resulting in more rapid increases in the drug price growth rate.
It’s not all bad news though. While there are many factors leading to increases in medical cost trend, there are some factors that are preventing cost trend from being higher.
Deflator #1: Scrutiny on drug prices
You may remember recent headlines of outrage and shock related to companies dramatically increasing the cost of prescription drugs. Heightened awareness brings greater scrutiny on drug prices, which means drug manufacturers may be more cautious when considering those increases.
Deflator #2: More efficient treatment
In an effort to minimize waste, plan designs are currently being updated to provide more efficient delivery of care, including targeting the right people with the right treatment. Examples of these efficiencies include everything from traditional strategies (step therapy for drugs, prior authorization for specialty drugs, quantity limits for an initial prescription, etc.) to artificial intelligence and robotics, genetic testing and relocating delivery of medical care from the hospital, where it’s most expensive, to doctor’s offices or even, for the most cost savings, the patient’s home.
Preparing your business for an increase in health care costs
Knowledge is power. If you are now aware of pending health care costs for 2018, here are some tips I share with our SMB clients to help them prepare.
1) Be clear in your messaging to employees
Have a clearly articulated message on hand that explains the benefits portion of your organization’s total compensation philosophy. Be sure to repeat this message often as you get closer to the time that prices increase. Even if their own costs are going up, you still want your employees—both new hires and current employees—to understand the benefits they’re receiving and how much of the cost you are covering.
You don’t want to beat your employees over the head with this messaging, but communicating the value of what they’re receiving can help to hedge the initial shock they may feel if and when they see their own costs go up. While they may have to pay an additional amount out of pocket, if you are funding a portion of their benefits you want them to understand that. Be transparent with them on how much you pay per employee. Share the knowledge in this post so they can see all the factors that influence price increases. Then, quantify what you offer them in terms of dollars. This may be on their pay stub but point it out to them. Additionally, include the employee’s portion of the benefit costs in your open enrollment communications.
In addition to sharing with them the flat dollar amount of what benefits cost, talk about what that amount of money gets them. Explain the richness of your benefits offering. Your benefits provider should be able to help you with this part. Often, when employees take a step back and see the breadth and depth of what they’re receiving, paying a few extra dollars doesn’t seem so terrible.
2) Consider cost-sharing measures
While rich medical plans have proven to be great for recruiting and retaining employees, it’s important to be strategic with how and what benefits you provide. Encourage employees and their families to use their benefits wisely. Having employees pay something—even if it’s minimal—toward the cost of coverage can provide incentives to ensure they use the plan wisely. Here are a few basic recommendations for how you might do this:
3) Consider adding alternative benefits
If higher costs are causing you to need to scale back somewhat on your medical, dental and vision offerings, you may be able to stretch your benefits program dollars further over the long-haul, without sacrificing robustness, by implementing ancillary benefits. Some of these extra perks that I’ve seen clients offer with success include:
Your HR services provider can help you design a plan for your budget.
Finally, recognize that there are factors out of your control that will always influence the costs of health insurance and be sure to budget for these annual increases. Some organizations hold the misconception that costs should remain flat year after year. However, when forecasting your budget year over year, you should be accounting for inflation. Expect that, more often than not, you will have a cost increase to your benefits plan.
This communication is for informational purposes only; it is not legal, tax or accounting advice; and is not an offer to sell, buy or procure insurance.
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