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$100B of Inflation-Driven Insurance Premiums Are Coming

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Published On: May 11, 2022

Inflation is surging as you know, and it has not hit your employee’s medical costs–yet. After averaging just 1.7% each year from 2010 to 2020, inflation now registers at a staggering 8% just 17 months later. 

That kind of inflation cannot easily go unnoticed: It’s on the news, it’s at the store, and in your paycheck.  

Driven by massive amounts of money pumped into the economy throughout much of the pandemic via business grants and unemployment relief, the problem has been compounded by the endless stress testing across the global supply chain. Of course, this is now further exacerbated by the Russian invasion of Ukraine and an increasingly uncertain global order amid murky U.S.-China relations.  

Healthcare costs and benefits expenses are not immune to these inflationary pressures, and–as many C-suite and HR leaders are aware–employee healthcare and benefits are likely the second-leading expense item on their P&L statement.   

Most companies may not have felt this impact on their healthcare expenses–yet–but it is coming.   

I had blood drawn recently for an annual physical, and it was interesting talking to the nurse. She said jobs offering remote positions working from home, as well as now higher-paying jobs in different industries, made hiring at the physician practice difficult. While their hourly rates have gone up to compete and retain employees, reimbursement for care has not.  

Since 1945, medical inflation, or price increases, and general inflation have had a correlation of 0.7, which is quite high and indicates a strong relationship. But medical inflation lags inflation overall.  

The question then becomes, “What do the next 24 months look like for employer healthcare costs?”  

The answer, to an extent, is that it’s up to the insurance carrier.  

Why Does Medical Inflation Lag Overall Inflation?  

Insurance carriers and healthcare providers negotiate long-term contracts to avoid the time and expense of having to renegotiate rates each year. As a result, most contract rates for 2022 and 2023 were negotiated prior to onset of sharply climbing inflation and were based on inflation expectations derived in 2020 and 2021 when inflation was much lower. As a result, even though healthcare cost increases may have risen by 10%, the charges to the insurance carrier remain flat in the short-term.  

Although there is an escalator typically built into these contracts to adjust and offset for inflation and cost-of-living increases, the calculation is usually a multi-year average; this further dilutes the inflationary increase and spreads out the impact over time. 

In fact, Weller Emmons, our VP of Operations, spoke on a recent episode of Mployer Advisor’s “This Week in Benefits” podcast about the impacts of medical inflation when it began to rear its head weeks ago.   

From the Insurance Carrier’s Perspective  

Given the insulation from inflation that these long-term contracts provide, insurance carriers potentially have an opportunity here.  

In reviewing April’s Q1 investor calls from Anthem, United, and others, consistency insurance carrier leadership was asked about these very issues–sometimes more than once and in different ways. It is clear that the major decision-makers at large insurance carriers are aware of the large positive short-term financial position they are in and the cards they hold.   

A good corollary to this is Southwest Airlines’ famous oil hedging strategies that lock in low prices during production booms, which then provides a competitive advantage over other airlines when oil prices surge. The same thing is happening here.   

In Southwest’s case, the company passes on much of the benefit that results from their locked-in rates by lowering prices to attract passengers and increase volume and market share. Southwest, however, wields these advantages against other competitors operating within the same industry who do not have similar locked-in rates.   

So, what happens when the whole industry is experiencing this de facto hedge phenomenon at the same time? Will the insurance carriers choose to pass along the benefits to employers and their employees? Will they help to offset provider costs? Both or neither?  

We will see more cards unfold over the next six to 12 months. As an employer, and the employer community in aggregate, who sponsors health benefits for 150M+ Americans, you need to ask your broker and your carrier.  

What Happens Next?  

One possibility is that employers coming into enrollment for 2023 are going to experience worse sticker shock than anything they have encountered recently.  

To that end, it’s worth noting that just because insurance companies should not need to dramatically increase prices–and/or pass along any increased costs–does not mean that they are not going to.  

And if the carriers were to implement such coverage rate hikes for employers and employees, the relevant question from an industry standpoint would then become whether the insurance companies would pass on any of those increases down the pipeline for healthcare providers who are feeling the impact in supply chain and personnel costs.  

While the yet unknown answers to some of these questions will undoubtedly reverberate across bottom lines well beyond the healthcare sphere, the big picture is that there is a $100 billion dollars of medical inflation coming into play soon.   

What remains to be seen, however, is who will ultimately pay for those costs and where they will settle.

Be on the lookout for how this plays out over the next 180 days.

Looking for more exclusive content? Check out what’s trending over on the Mployer Advisor blog, and be sure to read our guide on how to express employee appreciation year-round.  

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Brian Freeman

CEO & Founder, Mployer Advisor

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