Many CFOs are looking across their business to understand how inflation might impact their company’s financials. One area of particular focus is health care, typically the largest HR expense after compensation. To better understand the CFO’s perspective on a range of issues related to health benefit costs, Mercer surveyed more than 100 finance professionals – mostly CFOs – and garnered insights on how they contextualize health care costs, the financial targets they need to achieve, and their point of view on different cost management strategies. These findings should be of value to benefit professionals as well as their colleagues in finance, as it will take strong collaboration to successfully navigate the unusually volatile environment that is almost certainly ahead.
When asked how health care expense rates as a source of concern compared to all operating expenses, unsurprisingly the majority of CFOs placed it among either their top three (16%) or top five (52%) concerns. What was more surprising is that a majority – 64% – says that health care cost growth needs to be at CPI or even below to be sustainable for their organization.
Given that employers have been unable to manage cost at this level in the past, that goal is aggressive. As we have written, a number of factors – higher utilization as people catch up on missed care, the impact of long COVID, and new high-cost gene and cellular therapies – point to both faster cost growth and greater cost volatility. Further, health care cost growth tends to lag inflation due to the contracting cycle among other factors. While health benefit cost growth and CPI were closer than usual in 2021, we believe the health cost trend will soon outstrip CPI once again. As organizations lay out health care targets, it will be important to keep these cost drivers in mind.
CFOs weigh in on health cost management strategies
It will also be important to consider the impact of health plan changes on employees, who are facing rising prices for many other goods and services. When CFOs were asked which cost management strategies should be emphasized, they were less supportive of plan design changes than of either provider network strategies or clinical management programs. Plan design changes generally shift cost to employees, and thus have a greater chance of causing dissatisfaction.
Given the tight labor market conditions, it’s understandable that CFOs would prefer strategies that don’t add to employees’ financial burdens. However, over 6 in 10 respondents say they do not have confidence (or enough information to be confident) that long-term benefits costs management strategies that require investment are actually saving money. Companies should consider a multi-pronged assessment strategy that considers the effectiveness of cost management interventions across all interventions (e.g., medical trend), at a segmented level (e.g., trend for those with chronic conditions or for inpatient facility expenses), and at a program level (e.g., medication compliance rates for those enrolled in a given program vs. those not enrolled). Given the rapid growth in adoption of these solutions, taking a portfolio approach to tracking these investments could prove useful.
Preparing for greater volatility
A review of claims experience in our data warehouse found that cost trends were significantly more varied among employers in 2021 than in the past. However, over half the CFOs indicate that they are not aware that they should expect greater volatility and uncertainty in costs going forward. Benefits departments should be sure to share relevant information with their colleagues in finance. This dynamic will be important for finance to consider in making decisions about margin levels, funding methodologies, and reforecasting frequency.
Our advice is to play both defense and offense – preparing for greater volatility while taking actions to slow cost growth. Of course, employers must balance the need to mitigate cost trends with already high levels of health care costs, a tight labor market, accelerating inflation in other parts of the economy, the acceleration of new and very expensive gene therapies, and more. However, not taking action is not a good option: rigorous plan management will be essential to successfully navigating through the turbulent times ahead.
You can download the complete survey report here.