As Inflation Drives Medical Rates Higher, Employers Look to Control Health Plan Costs
November 16, 2022
Overview
Amid significant extreme economic volatility and record rates of inflation around the world, employers will also have to tackle a sharp increase in costs for their sponsored medical plans in 2023, according to Aon’s 2023 Global Medical Rates Trends Report.
The global weighted average medical trend rate — representing the percentage increases in medical plan (insured and self-insured) unit costs — is expected to be 9.2 percent next year. That’s up from 7.4 percent in 2022, and it’s the highest rate since 2015.
Inflation is a major factor behind the spike in the medical trend rate. Currency fluctuations, local regulatory requirements and insurers’ claims expectations also shape the trend upwards in various countries.
As the rates increase, employers providing employee medical plans must take steps to cope.
“A budget is one part of the process,” says Rui Silva, vice president of global benefits at Aon. “The other part of the process is mitigating the increasing costs.”
In Depth
Driving the average global medical trend rate are notably different increases from the various regions across the globe. Europe faces a 9.1 percent trend rate, up from 5.6 percent last year, and the trend rate in the Middle East and Africa stands at 14.5 percent, up from 11.1 percent a year ago.
The rate in North America held steady at 6.6 percent, due to the delayed impact of inflation on U.S. medical trends.
“In some markets, it takes more time to reflect inflationary pressures in the insurance market or in private medical insurance plans,” says Silva. “In the U.S., costs with medical providers are negotiated less frequently than in some other markets, so the impact of the current inflationary environment will be phased-in over the next couple of years, further accelerating the cost and affordability challenges already present in that country.”
Inflation was a significant factor in the trend rate increase in Europe. While in past years Europe has typically had a low average medical trend rate, it also previously experienced low inflation. That changed this year.
“There are big jumps in some markets,” says Silva. “Belgium, for instance, is a good example. A market that has traditionally had a medical trend number between 2 and 3 percent is now jumping to double digits.”
The key medical conditions driving medical plan costs remained consistent with last year’s, with the top conditions fueling increased costs being cardiovascular disease, cancer and tumor growth and high blood pressure and hypertension. Physical inactivity and poor stress management remain the leading risk factors contributing to the increase in medical costs.
Focusing on Wellbeing
Wellbeing initiatives remain a top strategy in efforts to contain medical costs. Aon’s 2023 Global Medical Rates Trends Report found that wellbeing programs are a top cost-saving initiative across all markets.
Wellbeing programs could reduce medical plan costs in several ways. By encouraging employees’ use of preventative care, they could reduce more expensive medical costs later. And engaging employees in their wellness could help reduce stresses that can contribute to other health conditions.
“The impact of wellbeing in mitigating the risks and reducing the claims exposure can be difficult to measure,” says Silva. “But wellbeing is still something that companies feel is the way to go and that’s why it’s showing up as the top mitigation initiatives globally.”
Controlling Medical Plan Costs
As employers around the world look for ways to control medical plan costs, many are expected to increase deductibles and copays, says Silva. “The cost of the service has increased, so deductibles and copays are expected to increase,” Silva says. “If they remain the same, then the burden on claims will be higher. Adjusting the copays and deductibles has to happen in many of these markets.”
In some cases, particularly in Europe, employers are expected to make major plan design changes such as reducing limits or downsizing on benefits such as prescription drug or dental coverage.
“In Europe, plan design changes have been identified as a top three initiative for next year,” Silva says. “I would expect this as a result of this year’s very high medical trend rate number. The challenge in many European markets though is the presence of unions, works councils and other employee representative groups that will make plan reductions difficult to implement. In addition, many state medical systems in Europe are looking to reduce their coverage which will actually further increase the costs of private health plans.”
Some employers are also considering introducing flexible benefit plans, which essentially convert traditional benefit plans to defined contribution structures. Such plans provide employees with flex credits that allows them to structure a benefit plan they feel best fits their needs. If the company contribution is not sufficient to pay for the benefit, the employee can pay for the difference.
“Flexible benefit plans have been an easy way to introduce cost sharing in certain markets,” says Silva. “That leads to employees understanding the actual cost of the benefits.” However, their application is often nuanced; it can be difficult to achieve a consistent, global approach and many organizations often need support in rolling these out efficiently.
Considering Alternative Financing Tools
Multinational employers are actively considering using captive insurance companies to finance employee benefits, namely their locally sponsored medical plans. That’s a particularly attractive option for large companies that already have captives in place to address property and casualty exposures.
A captive can provide greater control over plan pricing and better link wellbeing initiatives with healthcare spending. In addition, underwriting profits from the captive can be reinvested into additional wellbeing and healthcare initiatives.
“A captive might also be a tool human resources can leverage to provide ancillary benefits not generally offered in local markets,” Carl Redondo, consulting lead of global benefits at Aon says. He cited examples such as coverage for transgender health, fertility and mental health, as well as using the captive to waive pre-existing condition or other relevant macro exclusions
Confronting Inflation
Employers are finding it necessary to respond to inflation’s impact on various aspects of their operations. The increase in medical trend rates is just one more area they must address.
To do so, employers must accurately forecast and manage their medical plan costs. Finding ways to adjust plans to manage those costs, pursuing innovative approaches to covering benefits and increasing the focus on employee wellbeing initiatives all have a part to play in successful medical cost control efforts.