Top 3 strategies employers will use to take on health care inflation 

October 12, 2022

Persistent inflation is casting a wide shadow over much of economic life these days, and employer-sponsored health programs are no exception. HR departments still struggle to find and keep employees in a tight labor market, and health benefits remain very high on the list of reasons that workers choose one employer over another. Yet cost management is a growing imperative. The underlying medical plan cost trend was estimated at 7.0% for 2023 – that’s how much cost would rise, on average, if employers renewed their current plans without making any changes. Employers expect to hold cost growth to 5.6% after making changes, but that’s high relative to cost increases over the past decade, which have averaged around 3% each year. 

And it’s very likely going to get worse. As the graph shows, health benefit cost growth is almost always higher than inflation, but in 2022 and 2023, benefit cost growth is lagging inflation. What this means, unfortunately, is that we likely haven’t yet seen the full impact of inflation on medical plan cost. Most health plans have multi-year contracts with provider systems, and thus inflationary cost increases will continue to be phased in over the next few years as contracts come up for renewal and providers negotiate higher reimbursement levels.

For many, affordability concerns take traditional cost-management tactics off the table

Traditionally, employers have dealt with rising costs by shifting a greater portion of health plan cost to employees. But health care affordability is a real issue for many employees, and at a time when inflation has already heightened financial stress for so many, employers want to avoid adding to that if they possibly can.

In a soon-to-be-released Mercer survey of about 700 employers conducted last month, 43% of respondents with 500 or more employees say they expect that actual cost in 2023 will exceed the amount now budgeted. Still, only about a fourth are planning to take actions to dampen the impact on the budget that would shift more cost to employees. Some (23%) say they will raise employee contributions by more than they would have otherwise; just 10% will make plan design changes that shift more of the cost of care to employees, such as raising deductibles or copays.

In fact, about half (51%) say that, in light of the impact of inflation on their employees, they are adjusting benefit strategy to address health care affordability. To keep more money in their employees’ paychecks, nearly a third (29%) are adjusting employee contribution increases for 2023 downward. Nearly a fifth (19%) are holding back on increases to deductible or other cost-sharing provisions. Another fifth (21%) are making some other change to improve health care affordability.

Getting back to long-term cost management

But the imperative to manage cost remains and employers need to take advantage of this brief window to get out in front of accelerating health cost growth. The pandemic disrupted cost-management efforts as most employers focused on minimizing change to employees and grappling with workplace safety. But with steep cost increases looming, they are refocusing on cost management strategies that can slow cost growth over the longer term while minimizing cost shifting to employees. Here are the top three strategies that large employers have implemented or are seriously considering, according to the new survey:

#1 Managing the cost of specialty prescription drugs.  Specialty biotech drugs have revolutionized treatments for conditions such as HIV, multiple sclerosis, cancer and rare genetic conditions. They are also very expensive, and in recent years employers have reported double-digit increases in their specialty drug costs. So it’s not surprising that 50% of employers surveyed say they are taking focused action to manage specialty drug costs. These might include plan design changes to steer patients to a specialty pharmacy; focusing on the site of care; seeking support from drug manufacturers to lower member out-of-pocket costs; demanding integrated care management from PBMs and health plans; and mitigating claims risk via authorization programs, stop loss coverage or captives.

#2 Programs to improve health condition management. The use of targeted programs aimed at specific health conditions (e.g., diabetes, musculoskeletal, pain) has gained traction in recent years as a way to achieve better outcomes and lower costs. Currently, 49% of all large employers responding to the survey – and 58% of those with 20,000 or more employees – offer these types of programs or are seriously considering it. In addition, 12% of all employers (and 20% of jumbo employers) have adopted enhanced clinical management models beyond the standard health plan model.

#3 Steering employees to high-value care. About a third of all large employers in the survey (34%) are using various network strategies, including alternative networks, high-performance networks and COEs, to steer employees to high-value care. Among jumbo employers (20,000 or more employees), this figure jumps to 62%. These approaches deliver savings by focusing on the quality and efficiency of a provider network, rather than its breadth. Navigation or advocacy services can also be used to steer employees to higher-value care: 26% of all large employers, and 38% of jumbo employers, use this approach or are seriously considering it. And while advanced primary care is still in its infancy (with 13% of large employers focused on this strategy), it is poised to grow. Research has shown that primary care can deliver greater health care value through its focus on prevention, early detection and steerage to high-quality, cost-effective specialists, and new options are flooding into the market.

As employers well know, there is no one solution to the problem of health benefit cost growth, especially when affordability is a concern. But there are a number of effective strategies that address key cost drivers – and given the economic outlook today, there will never be a better time to try them.