Many threats affect America’s healthcare system but few are as widespread as inflation. Inflation is defined as a reduction in purchasing power of a given currency that occurs over time, resulting in an increase in the cost of goods and services. In the healthcare industry, the biggest concern is rising medical care expenses.
The US has the most expensive health care system in the world. Healthcare spending grew 9.7% in 2020, according to the Centers for Medicare & Medicaid Services (CMS), reaching an astonishing $4.1 trillion, equating to approximately $12,530 per person.
Americans are currently spending a large amount of money on healthcare each year due to high deductibles, high insurance premiums, co-pays, and other out-of-pocket costs. There are many causes of increasing healthcare costs, such as an increase in population, an aging population, and changes in disease incidence and prevalence.
For many companies, the impact of inflation on health insurance plans has had a noticeable impact on their return of investment and their business as a whole. To account for these changes, employers must review their budget and determine how best to compensate for rising health insurance costs.
Feeling The Pressure Of Inflation
Inflation is continuing to affect the healthcare industry in unprecedented ways. With the annual increase in health benefits costs generally outpacing inflation, companies face ongoing challenges when planning for employee healthcare. The extent to which rising medical services affect employers is dependent on their insurance model.
- Fully Insured Group Health Plans – With a fully insured group health plan, premiums are set by the insurance company before the year begins. However, employees are often required to pay certain healthcare expenses that are below the plan deductible out-of-pocket. They may also be charged co-pays once they reach their deductibles.
- Self-Insured Group Health Plans – With a self-insured group health plan, the employer is responsible for all healthcare claims that exceed what an employee pays under the plan. For unexpected “catastrophic” claims, most employers have reinsurance coverage.
With inflation soaring and prices rising across nearly all sectors, it is no surprise that companies are feeling the pressure. Healthcare facilities are forced to pay more for supplies, employee costs, and utilities; therefore, insurers and patients are charged more for services. In turn, prescription drug costs and health insurance premiums are rising.
Rising Healthcare Costs
People remain affected by inflated prices on consumer products like food, utilities, gasoline, and household products. Businesses are also directly impacted, starting with a shortage of certain products and services. When these shortages occur, companies are often forced to increase their prices, an adjustment that can trigger a detrimental cycle of rising costs. This process makes it more difficult for companies to reach their margins and achieve adequate profitability.
The price of medical care remains the single largest factor behind healthcare costs, accounting for approximately 90% of spending, according to BlueCross BlueShield. This spending includes the cost of caring for an aging population, those with long-term or chronic medical conditions, and the rising costs of new medications, technologies and procedures. Before inflation started to set in, the healthcare market had already entered a labor crisis. A record number of workers had either changed careers or left the workforce due to burnout, pandemic stress, and the steep cost of living. With inflation continuing to add pressure to companies’ bottom line, everyone is feeling the effects.
Industry data sources are forecasting increases in certain healthcare plans, such as preferred provider organization (PPO) plans. According to the 2021 Milliman Medical Index, PPO plan costs for individual coverage are expected to reach $6,516 by year-end, up from $6,052 the year before. PPO costs for the average family of four are projected to reach $28,256, up from the previous year’s $26,078. The cost of healthcare plans is expected to continue rising.
Other Cost Factors
Rising healthcare costs have many contributing factors outside of inflation. A combination of long-term factors has driven healthcare costs in an upwards progression and these costs are likely to continue increasing over the next several years. Healthcare trends are complex and consist of multiple components that have a direct or indirect impact on health insurance plans.
Some of the biggest cost factors affecting health insurance plans include:
- Growing US Population of Unhealthy Residents – According to the Center for Disease Control and Prevention (CDC), at least half of the country’s population suffers from at least one chronic health condition, such as diabetes, heart disease, or asthma. Residents becoming more overweight and unhealthy has been accompanied by a significant increase in the cost of annual health insurance premiums. Data published by the Kaiser Family Foundation (KFF) showed an increase in average premiums for family coverage from $15,073 to $22,221 between 2011 and 2021.
- Providers Focus on Quantity Over Quality – Most insurers, including Medicare, use a fee-for-service system to reimburse hospitals, doctors, and other medical professionals for each procedure, test, or visit. This means that medical providers earn more when they see more patients in a day. In addition, the US medical system is not integrated, meaning providers and support teams do not communicate with one another regarding a patient’s care. This lack of communication and collaboration can result in a patient paying for more tests and procedures than they actually need.
- New and Improved Technology – A study published in the Journal of the American Medical Association (JAMA) revealed that Americans often associate newer procedures and advanced technology with better care. This widespread assumption has resulted in many providers and patients demanding new and innovative technologies and treatments. Of course, new and improved technology comes at a cost that contributes to the cost of health insurance.
- Lack of Healthcare Cost Knowledge – When it comes to many areas in life, such as buying a car, the cost is often analyzed very closely. However, in healthcare, most patients do not research or even consider the cost of a visit, procedure, or treatment before seeing their provider. This lack of healthcare cost knowledge has resulted in an increase in surprise medical bills. In January 2022, Congress passed the No Surprises Act which aims to decrease the occurrence of surprise medical bills under both individual and group health insurance plans, resulting in greater transparency and an improved patient experience.
- Abundance of Concentrated Markets – Today, many medical providers and hospitals are in a position to demand higher prices. An increase in provider consolidation has resulted in a decrease in individual market competition. When there is low competition, providers are in a better position to drive up prices. According to a study published in the American Journal of Managed Care, hospitals in concentrated markets were able to charge much higher prices for the same or similar procedures performed in hospitals in competitive markets.
- Threats of Medical Malpractice Suits – Lawsuits have become more common in our modern society, causing many healthcare providers to fear medical malpractice suits. In an attempt to satisfy patients, many providers approach patients with a “defensive medicine” approach in which they prescribe medications, tests, or treatments that may be unnecessary simply to avoid a lawsuit.
- Limited Options of Health Insurance Plans – Not everyone has choices when it comes to health insurance plans. According to KFF, more than 49% of US citizens receive health insurance through an employer. This means that these employees are limited when it comes to decisions regarding the cost of their health insurance as it has been predetermined by their employers. Many businesses choose to buy more costly health insurance plans as the coverage is tax-deductible for the company and tax-exempt for employees.
How Companies Should Adjust
With inflation and other factors affecting health insurance plans, employers are trying to keep coverage costs manageable without putting excess strain on their employees’ finances. This involves identifying and implementing certain cost-management strategies in an attempt to keep increases at sustainable levels. Cost-sharing, a cost-management tool that shifts a large share of health services costs onto plan enrollees, is not supported by most employers due to the known financial strain it has on employees.
To help manage rising healthcare costs, employers should consider exploring strategies like self-funded or partially self-funded health insurance plans. Depending on the unique workforce demographics, a self-funded plan may be more cost-effective than a fully insured plan.
There are also other ways that employers can help keep health insurance costs manageable, such as choosing the right plan features. Plan features that can help keep costs manageable include offering telehealth services, requiring preapproval prior to receiving scheduled inpatient services, and contracting directly with cost-competitive, high-quality providers and hospitals for in-network coverage. Costs are generally lower when a patient visits an in-network provider because the insurance company contracts lower rates.
Finally, companies can better adjust to changes in health insurance plan costs by offering employees a wellness plan. Most employers understand that happiness and overall well-being play critical roles in an employee’s health and workplace performance. A quality wellness program can help improve employee engagement and create a positive culture of health and happiness. Healthy employees are also less likely to take time off of work to visit their doctor and more likely to maintain loyalty to the company that appreciates them and cares about their health.
Work With New City To Ensure Your Company Is Set
Inflation is having a serious effect on health insurance plans and employers across the country are feeling the pressure. With help from New City Insurance, businesses can develop custom plans to reduce their insurance expenses and improve employee benefits for their employees. To learn more about how inflation is affecting health insurance plans or to speak with an experienced employee benefits consultant, reach out to the experts at New City Insurance.