Health Benefits Budgeting Can Be a Challenge

The COVID-19 roller coaster makes it hard to predict what costs will be, but some strategies can help sponsors get to a close approximation and mitigate costs.

In 2020, the delay in medical care created by the COVID-19 pandemic decreased health care costs for employers that use plans provided by carriers (i.e., that are fully insured), as well as employers that self-insure health care for employees.

According to the Business Group on Health’s “2022 Large Employers’ Health Care Strategy and Plan Design Survey,” in 2020, the overall health care cost trend was 0%, though some employers experienced a negative trend.

Employers expected a rebound in 2021, anticipating that employees would return to normal care.

“When budgeting for health care benefit costs in 2021, employers anticipated their costs would go back to normal, but the spread of the Delta variant impacted working populations,” notes Arthur Hall, senior vice president and employee benefits national practice leader at USI Insurance Services. “Both fully insured and self-funded plan sponsors paid a little more than budgeted.”

Hall says the changing developments with the virus are creating a challenge for health benefits budgeting.

“Employers that have set their budgets for 2022 now don’t know what the Omicron variant will do,” he says. “If there’s a high incidence of infection but low severity, the budgets may be fine. It also depends on how many employees in an employer’s workforce are vaccinated.”

Julie Stone, managing director, health and benefits, Willis Towers Watson, says the volatility of the virus and return to care make budgeting for health benefits a challenge.

“Employees deferred elective procedures and preventive care, then they came back and now there’s a risk they will defer these things again. It’s the roller coaster we’ve seen,” she says. Stone adds that this is exacerbated by health care systems’ capacity and workforce issues—which could contribute to more deferred care as well.

Willis Towers Watson saw employer health care benefit costs go down in 2020 and increase 5% in 2021, Stone says. It expects costs to increase a little more than that in 2022.

Budgeting Tips

If preventive care didn’t rebound, employees with chronic conditions might see more serious diagnoses, says Hall. Employers should look at the incidences of preventive care over the past 12 months to see how any deferred care might drive high-cost claims over the next two years.

According to USI’s “2022 Employee Benefits Market Outlook” report, group health plan data shows that for many employers, 5% of plan members incur 60% of claims, largely due to undiagnosed conditions or mismanaged chronic disease care. USI’s claims data also shows that 70% to 80% of adult plan members do not engage in annual primary care visits, while 50% to 60% of plan members do not receive recommended cancer screenings. “Without regular check-ins and recommended screenings, conditions go unmanaged until serious medical intervention—such as hospitalization or high-cost treatment—is needed,” the report says.

When considering their budgets, employers should also look at how many out-of-network claims they had. Hall says the No Surprises Act—which established new federal protections against most unexpected out-of-network medical bills when a patient receives out-of-network services during an emergency visit or from a provider at an in-network hospital without advance notice—will have some impact on costs. However, it’s unknown whether that change will be significant or not.

“If only 5% of the population historically has had out-of-network emergency claims, the impact will likely not be significant. If 12% or more have, the impact will be more significant,” Hall says. “It all depends on the claims arbitrator whether the legislation will save employees and employers significant money.”

He says health plans today pay a relatively paltry amount for out-of-network care; the health care service provider will either write off the cost or pursue payment from an individual. The No Surprises Act provides a forum for hospitals to contest these deals with insurance providers or self-funded employers, he says, so he thinks there will be much more arbitration for those groups.

To get their health care benefits budgets right—unless they plan to make mid-year benefit changes—employers need to reassess claims activity and consider what is happening with the COVID-19 pandemic in March, Hall says.

Stone says self-insured employers need to look at monthly health care costs, not just yearly totals, to figure out what the drivers of cost are. How much are employees seeking preventive services, elective procedures, cancer screening and mental health services? She says the goal is to see employee use of these things going up to minimalize complex hospitalizations and keep costs down.

In addition, employers should monitor vaccine rates among their workforces to prevent COVID-19 from leading to more catastrophic costs, says Stone. “There’s so much for plan sponsors to monitor that will give indications of what’s happening in their workforce,” she says.

Stone adds that experts do not yet know what the Omicron variant will produce as far as long COVID-19, when people have symptoms that linger or return for weeks or months. Plan sponsors need to be thinking about whether Omicron will affect disability claims and not just medical care claims, she says. It’s part of the whole picture for plan sponsors.

Hall says health care budget numbers might be off for large employers that set their budget in July, but smaller employers that set their budget in September or October might be more on point. He suggests that self-funded employers set their budgets at the higher end of their estimates. If they have a high number of vaccinated employees, their budgets might be on point.

Thinking about the size of most fully insured plan sponsors, Stone says where a plan sponsor is located might have an effect on premiums. It’s a little early to project what premiums trends will look like for 2023, but she says her sense is, on a national aggregate, they won’t differ much from 2022.

Stone says most self-insured plan sponsors will set 2023 employee premium rates between April and July, but it will be hard to tell in March/April how the year will play out. She suggests plan sponsors look at a full six months of monthly details and consider cost-management opportunities. Stone notes that many plan sponsors deferred making changes to health benefits during the pandemic to avoid increasing employee stress. “Sponsors should think about other ways to manage health care costs,” she says.

Cost-Saving Strategies

Encouraging employees to seek preventive care is the single best thing employers can do to manage long-term costs, Hall says. “Employers need to spend more time focusing on disease management, preventive care and getting employees to use in-network providers to reduce costs for the long term,” he says.

“In case there is a rebound in health costs, plan sponsors should consider high performance networks and specific clinical case management opportunities depending on the needs of their employee populations,” Stone suggests. “Mental health is top of the list for sure. But anything that is a key driver of costs is important.”

Hall says pharmacy cost is the easiest to manage down and is the most impactful. According to USI’s “2022 Employee Benefits Market Outlook” report, specialty drugs generally represent about 2% of all drugs dispensed; however, with an average price tag of $84,442, they account for nearly 45% of all prescription costs paid by employer health plans.

“And it’s not just the prescription plan that is being impacted; employers are now facing a significant cost exposure for medical plans from certain other drug treatments,” the report says. “Infusions, cancer treatments and gene therapies, which are not processed through a pharmacy and are administered in a hospital or clinic setting, range in cost from tens of thousands to millions of dollars annually.”

Fully insured employers should have conversations about some type of alternative funding for pharmacy costs, Hall says. For example, pharmacy benefit managers (PBMs) have traditionally offered prior authorization (PA) to mitigate high-cost medications, a process by which specialty drugs need to go through clinical approval prior to being dispensed to a plan member, according to the USI report.

Some employers, particularly those with lower-wage employees, have begun using “foundation” programs, a type of manufacturer assistance program (MAP) provided by the pharmaceutical industry to help health plan members cover the costs of these expensive drugs. Hall says, for self-funded employers, reviewing pharmacy contracts could result in an 8% to 10% savings in premiums.

Using virtual and digital care is also helpful in keeping costs down, Stone says. Providers might charge more for in-office visits, so employers should encourage virtual care/telehealth visits. Given the increased use of virtual options during the pandemic, telehealth “has legs” to become more acceptable, she says.

For self-funded plan sponsors, Stone says it is worth thinking about a working spouse surcharge. She says Willis Towers Watson is seeing some plan sponsors impose a surcharge to cover spouses who have access to coverage elsewhere but decline it.

On a final note, Stone says many employers are thinking about equitable cost sharing when setting health care budgets.

“They are considering affordability for the lower-wage workforce,” she says. “For example, an employee earning $60,000 or less might pay less for the same coverage as someone making more. Making sure workers have equitable access to coverage ensures workforce continuity. And there’s no discrimination risk if benefits are not favoring higher-paid people.”