Inflation Hits Your Insurance Premiums in 100 Days

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Preliminary insurance rate filings are coming in and–for small groups and individuals–they are double what they were last year, with 2023 preliminary rates +8% year-over-year compared to just +4% at this time last year. Although to a lesser degree, the same proportional increases hold true for large groups as well.  

In fact, a recent Aon study that focused on larger employers found that employer healthcare costs are projected to increase 6.5% in 2023. No matter which way you look, it is not positive.

As noted in previous posts, there are several factors that have shielded employers and consumers from health insurance costs and inflationary pressures over the past year. Some of those factors include the cyclicality of annual insurance enrollment, as well as the built-in contractual mechanisms for addressing cost increases. That normal negotiation process and rate settings mean that insurers are unable to react quickly, to their benefit, and grapple with a mid-year inflationary spike to the magnitude that we have been seeing.

In the graph below, you can see that those factors have been effective per the gap between medical inflation and CPI/inflation, which has grown larger during the current inflationary bubble than at any point in the past 20 years.

General Inflation vs. Medical Inflation

As the graph also illustrates, that gap is closing fast, with medical inflation set to meet and likely surpass general inflation on January 1, 2023. Brace yourselves as the sticker shock will be more than jarring for those who haven’t been paying attention. Shockwaves will reverberate through companies and individuals alike.

This is not conjecture, these rates have been posted. Although the size of annual rate increases in any given state is fairly baked-in at this point (see the map below), what is less certain is exactly how each industry/company/employee will respond to this changing environment. That said, based on historical precedent and behavioral patterns, we do have some idea about how these new costs are likely to be borne across various stakeholders when this increase finally hits at the start of the new year.  

Impact by Key Stakeholders

Employee Impact: Negative

Employees will likely bear a large share of the additional cost burden. Increases will be absorbed by the following:

• Increased employee costs per month
• Reductions in annual salary increases
• Decrease in other company programs  

Employer Impact: Negative  

Employers do not have much left to give financially. Ten percent increases on something that, on average, equates to 10% to 20% of your spend equates to further compressed margins and free cash flow to invest into employees and growth. Given the dynamics of the current labor market (with demand generally outpacing supply), it is less obvious exactly how effective the move to keep employees on the hook for these rising costs will be given the current employment market’s strength.

As such, you will likely see:

• Benefit plans curtailed and less generous, forcing more cost onto the employee
• An increased reliance on part-time labor where employers are not required to provide benefits at the same level
• Scaling back in other employee investment initiatives

Insurance Carrier Impact: Positive  

Insurance carriers expect a net positive outcome as a result of the coming rate increase. Although they have yet to feel the impact of inflation or bear the brunt of it–that cost has only been partially passed from the provider to the carrier.

To illustrate, see this quote from a top five health insurance carrier from a recent earnings call:

“As you know, the majority of our contracts are three years in duration, so we negotiate roughly a third of those each year. And yes, there is more pressure on the system. But at this point, we're not seeing incremental rate pressure. … Carriers are not feeling the pressure, providers are. They will have to acquiesce coming into 2023 or the system topples on itself."

Broker Impact: Net Positive

Based on today’s healthcare model, brokers are paid on a percentage of employer spend or commissions–higher employer costs mean higher commissions. For consultants that work on a fee basis, the same general premise still applies. Here is another quote from a recent earnings call of a top five brokerage firm about the impact of inflation:

“So we think the [broker] model is resilient. We think that inflation is going to help us on the top line when it comes to revenues for the business that’s there. … I don’t see it [inflation] as a headwind. I see it as a tailwind to our organic growth.”

Messaging From Your Carrier or Advisor

Focus on the bottom-line rate increase and what tactics are being done by your advisor or carrier for you. The messaging will likely be, “Increases are high but good news–I got you X rate, which is below the average.”  

Focus on what tactics you are doing that are better than the market. You may have a great insurance advisor or consultant–work with them and utilize that wisdom and experience.  

It was interesting to see this messaging approach, even from a state. Take a look at these recent headlines from New York:

• As Health Care Costs Return to Pre-Pandemic Levels, DFS Protects Consumers Against Significant Rate Increases and Approves Historically Low Insurer Profit Margins
• Individual Plan Rates Reduced by 48% from Insurers’ Requested Rates, Saving Consumers $167.1 Million
• Small Group Rates Reduced by 52% from Insurers’ Requested Rates, Saving Small Businesses $632.4 Million

To paraphrase, each contained messaging to the effect of: “Good news! After this strong accomplishment, New York rates have been filed and are now set to increase at just 10%.”

Again, don't fall for it; focus on the bottom-line rate increase and what tactics and strategies you can implement.

Impact at the State Level

As mentioned above, not all states will be equally affected by the carrier rate increases, which can be influenced by a large number of factors, including state employee payroll size, coverage types, each state’s internal processes, and each state’s integration with and application of federal programs.  

Per the graphic below, the degree of variance in rate increase among states is instantly clear. The first graphic depicts the small group and individual preliminary rates for 2023 (large group increases are negotiated separately but tend to follow small group increases), whereas the second graphic shows 2023 preliminary filing rate increases compared to 2022 preliminary filing rate increases.

To be clear, final rates will ultimately settle below the preliminary rates but very much within the relative range of increases displayed in these graphics.  

For context, the preliminary filings in 2022 were at plus 4.1% before finally settling at 3.5%. Preliminary rates this year are running at approximately 8%.

Small Group & Employee Filed Increases

(Source: FRED and the Bureau of the Labor Statistics) State-by-state small group and individual filing rate increases.

Of particular note is the significant rate reduction shown in Virginia, which is the result of a 2021 law establishing a state reinsurance program to reimburse carriers in individual health insurance markets for a proportion of the claims made by covered individuals with high annual costs. It just so happens that this law formally takes effect on January 1, 2023, just when these massive rate increases are scheduled to land.  

The particular program is designed to increase affordability in the individual market with a statutory goal of decreasing premiums by up to 20%. Simply put, the state is now picking up the tab for higher-cost claimants, which brings down the cost for most of the population.  

The Clock is Ticking

In 100 days you will be hit with the single largest employer premium increase you have seen in 20 years (unless you’re in Virginia or Idaho), but you are not helpless in the face of forces beyond your control. There are specific cost avoidance strategies that you can proactively work toward implementing and, as it happens, you already pay a consultant to mitigate issues just like this and to minimize the impact to and disruption of your business.  

Make sure you have the right partner going into 2023–you’re going to need it.

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