22 November 2022
Uncertainty has been the name of the game for benefit specialists over the past few years. However, very few benefit managers have had to cope with the high levels of inflation we are experiencing in 2022, nor with the imminent threat of a potential inflationary recession.
As a result of these economic challenges, employees are facing multiple new hardships. In response, employers are trying to get ahead of what meaningful inflation means for the design and financing of their employee benefit and well-being plans.
Industry concern is high — as shown by the fact that governance and financial risks featured prominently in our People Risk 2022 research. Three such risks were in the top ten of the 25 risks reviewed. (These were: administration/fiduciary; increasing cost of health, risk protection and well-being benefits; and benefits, policy and reward decision making and accountability).
Pensions are one immediate priority, with both plan sponsors and beneficiaries concerned about the erosion of purchasing power and the dependability of past assumptions made about funding and income streams. Concerns are also high in relation to risk protection benefits (such as group life and disability insurance), which are influenced by investment earnings. It is clear that the current economic situation could lead to pricing changes, and those involved in life, disability and medical insurance pricing may already be seeing early signs of the insurance market hardening.
In light of these developments, a key question must be asked about medical and insured benefits: Will the current inflationary environment affect them in a significant way?
While employer costs for employee medical coverage are impacted by inflation (in rises 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 (e.g., moving to more expensive treatments)
- Changes in utilization patterns (e.g., people not accessing services due to COVID-19 restrictions)
- Rising interest rates (which typically boost the investment returns of insurers and enable them to offset some of the higher claims they are liable for)
- Regulatory changes
The hard truth is that insurers, advisors, and plan sponsors are facing many difficult questions when they try and anticipate 2023 claims: Will preventive care that was deferred during the pandemic translate into later-stage diagnoses? Will compensation increases for exhausted health-care workers result in patients and payers shouldering higher costs? Will demand for new treatment regimens further drive up claims or will it make the management of conditions more effective?
One encouraging sign is that, around the world, inflation in medical costs is not as pronounced as the inflation being seen in energy and food prices:
In Canada, health and personal care prices have increased by 0.3% from June to July of this year, while the total Consumer Price Index has increased by 0.4% in this period.
In the UK, the most recent reports show no percentage increase in health pricing.
Dubai (UAE) observed no increase in health expenditures year-on-year, from 2021 to 2022.
In Brazil, the inflation rate of health and personal care stood at 6.14% in June 2022 compared to the same month of the previous year. This was the lowest rate among all categories.
In the US, the Kaiser Family foundation found that the annual change in the price of medical services (4.8%) was notably less than the annual change in the price of all goods and services (8.5%) (see figures 1 and 2).
Healthcare has seen an increase of 5.49% in India. This is lower than increases in other sectors such as fuel and lighting (9.54%) and household goods (6.85%).