Optimizing benefits strategies for 2024: Navigating inflation’s impact
Many organizations are now structuring their 2024 benefits strategies — core to how they manage people risk. This is particularly challenging given current economic circumstances as organizations struggle to address the impact of inflation, and more specifically rising medical costs. To do so, employers will have to articulate and execute on well-planned cost-optimization strategies, consider new ways to advance holistic well-being and put greater focus on vulnerable populations, such as low-paid employees.
Uncertainty has been the name of the game for benefits specialists over the past few years. Although medical plan trend (the annual rate of increase in per-person claims) has stabilized since the pandemic, it’s still higher than pre-pandemic levels according to Health Trends 2024 research. At the same time, benefits managers are trying to cope with a polycrisis of issues impacting benefits — from climate events to misinformation to ongoing economic uncertainty.
As a result of these economic challenges, employees are facing multiple new hardships, from rising interest rates to unaffordable housing. In response, employers are trying to get ahead of what significant inflation means for designing and financing their employee benefits and well-being plans.
Industry concern is high — governance and financial risks featured prominently in our People Risk 2022 research. Among the 25 risks reviewed in our report, three such risks made the top 10: administration/fiduciary; the increasing cost of health, risk protection and well-being benefits; and benefits, policy and reward decision-making and accountability.
In light of ongoing inflation, a key concern among employers is whether the current environment will have a significant impact on medical and insured benefits.
Although employer costs for employee medical coverage are affected by inflation (due to increases in the per-unit costs for medical services and supplies), other factors must also be considered for budgeting and rate-setting. These include:
- Altered treatment mixes (for example, moving to more expensive treatments, like newer high-cost drugs for obesity and diabetes)
- Changes in utilization patterns (for example, people choosing private over public care)
- Rising interest rates (which typically boost the investment returns of insurers and enable them to offset some of the higher claims for which they’re liable)
- Regulatory changes (for example governments prescribing minimum coverage levels)
The upshot is that insurers, advisers and plan sponsors alike face numerous difficult issues when trying to anticipate 2024 claims. Will compensation increases continue for healthcare workers who are in short supply? Will demand for new treatment regimens further drive up claims, or will new developments in areas like at-home patient monitoring and digital triage make managing conditions more cost effective?
According to publicly available economy-wide data (not specifically employer-sponsored), medical cost inflation is now as pronounced as — or even exceeds — general inflation in many countries.
- In Canada, health and personal care prices have increased by 5.8% between September 2022 and August 2023, while the total consumer price index (CPI) has increased by 4.0% in this period. 1
- In the UK, reports through August show an 8.5% increase in health pricing, whereas CPI is 6.3%. 2
- In Brazil, the inflation rate of health and personal care stood at 10.1% in July 2023 compared to the same month of the previous year. This is this highest among all reported categories. 3
- Healthcare has seen an increase of 6.4% in India. This is lower than increases in other sectors in the country, such as fuel and lighting (10.8%) and household goods (7.3%). 4
It is our view that inflation will likely have an impact on 2024 renewals in most markets. Claims experience and the demography of covered individuals will also be strong influencers of employer premium increases.
Top three benefits plan considerations for 2024
Given the current dynamic situation, many insurers will be reluctant to release renewal terms far in advance. However, plan sponsors are advised to get ahead of renewals by developing cost-containment strategies as soon as possible and creating plans to manage change — especially intrusive changes — within the organization.
In our opinion, the next few years will be challenging for those negotiating medical insurance premium rates. Adding to the complexity of this task is the need to balance cost prudence against stiff competition for skills. In the pandemic era, there has been an increased appreciation for the critical role of health and risk protection benefits in protecting employees and businesses. Cutting such benefits — for example, by increasing claims or premium cost-sharing — could disengage key talent. In light of this, advisers and plan sponsors should engage in dialogue early to:
- Make sure renewal negotiations are data driven and transparent. For the most efficient and effective renewal process, engage early in active dialogue with insurers to set expectations. Broker-led discussions should cover the premium-rating methodologies and the assumptions being used.
- Confirm primary renewal objectives, and consider plan design changes before seeking rate quotes. Revisit caps and maximums under life, disability, accident and medical plans to ensure they keep pace with inflation and to check that health services remain affordable. Cost levers like deductibles may also be eroded by inflation, so a similar review of these is recommended.
- Explore alternative financing options. These may be worth implementing if insurer- and market-proposed premiums are inherently conservative. For example, employers could consider surplus-sharing arrangements or midyear premium adjustments.
This raises a number of possibilities and questions: Can you, as an employer, beat inflation with a well-rounded and compelling employee value proposition? If your organization is facing a long-term labour shortage, will compounding year-on-year cash increases be sustainable, or will it be better to divert a portion of this expenditure to health and well-being benefits that will position you as a caring employer?
Employers wary of the future implications of inflation on enhanced defined-benefit medical plans have a unique opportunity to think and act creatively. One key approach is to use the common inflation-control technique of product substitution. Especially in the case of new types of benefits, such as the well-being benefits expected by today’s workforce, there are opportunities to prioritize options that are less exposed to inflation (when compared to traditional medical insurance plans). These options include: defined-contribution health and well-being spending accounts, credits toward the purchase of preventive care or lifestyle supports, and supports to improve financial and mental health.
Another key consideration is to ensure plans provide sufficient flexibility and that they feature affordable employee contributions. This is especially important as employers start to consider expanding plan eligibility to groups of employees not typically covered under medical plans, such as part-time and contract workers and low-wage employees.
This is because their wage adjustments are typically below inflation, and their biggest expense increases are for essential goods, such as energy and food. They also have limited access to credit and higher-yield investments that could limit the impact inflation has on their purchasing power.
In 1990, Brazilian hyperinflation peaked at more than 2,500% for the year.5 Products quickly disappeared from shelves as the population, fearful of scarcity and higher prices, stocked up on food and other household goods. Businesses were repricing products on a daily basis. The purchasing power of those who were not well off evaporated almost overnight. However, the richest sector of society had access to investment vehicles to protect their wealth. Inequalities grew bigger, with some wealthy people even buying additional refrigerators to store the extra food they’d bought. This extraordinary time provides a clear demonstration that it’s the most vulnerable who are hit hardest by inflation.
Benefits specialists seeking to position their organization as responsible employers can learn from places like Brazil that have faced high levels of inflation in the past. They must work to “flip the pyramid” and ensure that the people who need benefits the most can access those benefits via mechanisms like lower co-insurances.
There is already significant cause for concern: Our latest Health on Demand research shows that 22% of the workforce globally (including 26% of women) are not confident they can afford the healthcare their family needs, and 56% of employees are extremely or very concerned about the impact of economic downturns on them or their families.
Conclusion
Even before inflationary pressures hit, employers were in the process of resetting benefits to make them more relevant and to manage people risk more effectively. As businesses have grappled with the ongoing effects of the pandemic, a number of other positive developments have come to the fore. These include advancements in digital access to health benefits, a desire to solve health and benefits inequities, and the acceptance of a broader business case for investment in employee support.
We recommend that employers start to think immediately about how they can support their most vulnerable people while continuing to engage with all employees to support their well-being. Employers must also consider reasonable cost-containment measures for their benefits plans. This will be vital for managing long-term cost volatility. Ideally, such measures should steer people toward high-quality care, helping to create sustainable benefits solutions for all.
1 Statistics Canada. “Latest Snapshot of the CPI, August 2023,” Consumer Price Index Data Visualization Tool.
2 Office of National Statistics. “Consumer Price Inflation, UK: August 2023 .”
3 Statista. “Inflation Rate of Brazil in July 2023, by Sector.”.
4 Government of India, Ministry of Statistics and Program Implementation, National Statistical Office. Consumer Price Index Numbers on Base 2012=100 for Rural, Urban and Combined for the Month of July 2023.
5 "Brazil Inflation Calculator: World Bank Data, 1980–2023 (BRL).” Official Inflation Data, Alioth Finance, September 13, 2023, available here.