Healthcare cost – and volatility – has CFOs worried 

Healthcare cost – and volatility – has CFOs worried
June 27, 2024

As we head towards the third quarter of 2024, top concerns around health programs are affordability for both employees and employers, the potential impact of GLP-1s on cost trends, and the increased volatility in claims. For fully insured sponsors, claims volatility makes it difficult to predict cost from year to year, while self-insured sponsors may also experience the effects of claims volatility within a given year. Healthcare trends have been impacted by broader economic inflationary pressures with a lag, and the environment will remain challenging for some time to come. While we expect medical cost trends to be similar to last year’s, we see growing cost pressure from prescription drugs, which account for approximately one-third of total health plan costs. 

Chances are, your organization’s CFO has been paying more attention to your organization’s healthcare expenses and cost mitigation strategies than in the past — or will start soon. Mercer recently surveyed 80 CFOs and other finance professionals to discover their perspectives on a range of issues related to healthcare budgets. Here’s some of what we learned. 

Healthcare cost increases relative to CPI

Not surprisingly, more than two-thirds of CFOs surveys indicated that healthcare costs are a significant or very significant concern. What is surprising, however, is that about half believe that their organization’s healthcare cost needs to rise at no more than the rate of general inflation, or CPI, to be sustainable over the next three to five years. Although inflation has been elevated recently, the Federal Reserve is working toward the goal of keeping inflation to just 2%. With this as a baseline assumption for inflation going forward, achieving what many of the CFOs surveyed consider to be sustainable levels of increases will require significant action. 

For the past two decades, average annual health benefit cost increases have typically run 1% to 2% above CPI, but even to maintain that level of cost growth will be difficult. Given that many interventions in healthcare take time to implement and impact outcomes, it’s important for employers to plan over a multi-year time horizon, anticipating that aggressive strategies may need to be implemented today to achieve financial goals within three to five years. 

Increased claims volatility

The predictability of healthcare expense can be evaluated by looking year over year or throughout a single plan year. Whichever view they take, the majority of the CFOs surveyed believe that healthcare is less predictable than other expenses. The CFOs in organizations with fully insured programs are only slightly more sanguine about health care predictability than those in self-funded organizations; while their expenses may be fixed for a 12-month period, renewals can be quite volatile and result in unexpectedly large increases. 

Over two-fifths of self-funded respondents indicate that their benefits department has told them to expect somewhat more, or even much more, claims volatility than in the past. An analysis of employers’ actual year-over-year health benefit cost experience (from Mercer’s National Survey of Employer-Sponsored Health Plans) found a growing and significant amount of volatility over the past several years. This was true even among very large organizations with 20,000 or more employees. This is likely to be the new normal, as the rising incidence of high-cost episodes of care provides a basis for potential surprises from year to year. 

Preferred cost management strategies over the next three years

The survey presented CFOs with three broad categories of cost management strategies and asked which they would like to see emphasized in their own programs. Overall interest in cost management strategies is high, with the greatest interest in clinical management, followed by network strategies, and then plan design changes that would shift more cost responsibility to employees. Clinical management typically involves few trade-offs for employees and thus is the least disruptive, offering benefits for both the employer and employees. 
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Interestingly, network strategies, which can cause member disruption (but don’t necessarily need to), also garnered a high level of interest. Strategies that maintain broad networks but use plan design or other mechanisms to steer members to higher-value providers are gaining traction, offering an option that preserves choice while encouraging the use of lower-cost, higher-quality providers. Somewhat fewer respondents favor plan design change that results 

in cost-shifting to employees. Depending on the current level of cost-sharing and on employee demographics, there may or may not be “room” to increase employees’ share of healthcare cost before it becomes an impediment to seeking necessary care. 

Better analytics needed

The majority of CFOs are either not confident or don’t have the information to state that long-term cost management strategies -- including well-being initiatives, clinical management 

programs, and specialized provider networks – are saving money. This is an important issue for HR and benefit managers, especially if investment decisions are scrutinized more closely as budgets get tighter. It is important to have metrics in place to measure performance, ideally at three levels: 

  • Program level – how health benefit cost is trending overall 
  • Segmented level – how cost in specific areas is trending (for example, for high-cost claimants or for individuals with diabetes or other chronic conditions)  
  • Solution level – what value is provided by specific health solutions (e.g. a diabetic management program) that have been implemented 

The information needed for independent ROI analyses can come from a data warehouse that aggregates medical plan claims as well as from the point solution vendors in which investments have been made. These analytics are invaluable when evaluating the current and future portfolio of healthcare investments. When discussing health program strategy with your CFO, having solid data will help ensure a productive conversation.  

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