Self-Funded Employers Expected to See Lower Health Benefit Costs

A potential for changing experiences and a plethora of variables make preparing health benefit plans for next year a difficult task.

In an update to an analysis conducted in April that projected employer health benefit costs for employers that are not fully insured could rise as much as 7% due to COVID-19-related claims, Willis Towers Watson now says self-funded employers could see costs reduced by as much as 4%.

Trevis Parson, chief actuary at Willis Towers Watson in Philadelphia, explains there are several reasons for this. “We have a situation here where we’re trying to make the best estimate we can based on the most recent utilization. We noticed the infection levels modeled previously ranged up to 50%. Now we see we are not going to reach 50% in this wave; we may see 15% of the population in some hot spots like New York City,” he says. “We lowered our assumed infection levels to anywhere from 1 to 20% thinking that would cover most, if not all, geographies in country. When we did that, of course, the cost increase wasn’t as great.”

The deferral of non-essential care is also a factor in the new cost estimates. Parson notes that the previous analysis included a modest level of care deferral, but he says experience is showing it is actually more significant. “There are no cosmetic surgeries, knee surgeries, regular office visits and maybe even some routine cancer care. Medical providers have been redirected to do other things, and many people are not comfortable going into a care setting for fear of getting sick,” he explains.

The Willis Towers Watson analysis used low, medium and high care deferral assumptions, which reduced estimated costs further.

When lower infection levels and deferral of care are combined, “updated estimates basically say, if an employer is in an area like New York City where the infection level is higher, and if deferral of care is assumed to be low, the employer may still see a 3 or 4% increase in costs. However, if an employer is in Omaha, where there is a low infection level and people are deferring care, which is what we’re seeing, the employer may see a reduction in costs of 3% to 4%,” Parson says.

Christopher Nadeau, regional executive vice president at Gallagher’s Benefits and HR Consulting Division in Boston, echoes many of these observations when explaining that Gallagher is also predicting a decrease in health benefit costs for self-funded employers.

“When this first started to occur, our clients had anxiety about the impact on their medical spend this year and next. They were seeing in the media a prediction of infection rates between 30% and 50%,” he says. Gallagher’s model uses a range of infection rates from 0.5% to 10%. Nadeau says Gallagher feels comfortable that this range is based on updated data.

“We threw in costs of COVID-19 testing and treatments. Employers had anxiety about waiving employee cost and taking it on their own, but we didn’t think it would be a significant piece of overall costs,” Nadeau adds. “The third thing we looked at was the impact of non-COVID claims. They have all but disappeared, which is a pretty significant piece of projections for clients.” He points out that a decrease in non-COVID claims is occurring not only because people are deferring care but also because of lifestyle changes. “No one is popping his knees playing baseball, for example,” he says.

Assuming stay-at-home requirements remain in place for two to three months and a continued deferral of non-essential care, Gallagher predicts a 10% reduction in costs for March and a 10% to 15% reduction for April, May and June.

Nadeau says Gallagher has also been tracking claims weekly. Looking at about 350,000 employees of its clients, through April, there has been a reduction of about 22% overall in medical costs. He adds that overall medical spending—not industry, region or demographic specific—reduced about 17.5% from the beginning of April through the first two weeks of May. Just as an aside, he notes that dental claims were down 75% in the month of April.

So, could the effects of the COVID-19 pandemic on health benefit costs drive them down below the normal trend? Employers had projected a 5% cost increase this year in the Willis Towers Watson Best Practices in Health Care Employer Survey. “If the trend is 5% and the reduction in costs because of COVID-19 is 5%, employers may see flat costs,” Parson says. “If the reduction is greater, it could be the first time costs decline year-over-year in at least 70 years. So this is very meaningful and rare when viewed in that context.”

Looking Ahead

Nadeau notes that while Gallagher’s modeling showed employers didn’t overreact to what they saw in the media, there are so many variables that affect what they will see this year. For example, knowing now that the disease skews higher in older people, men and people with certain underlying conditions, depending on a company’s employee demographics, it may see a higher infection rate among employees, resulting in higher costs.

Parson notes that health officials are also predicting a second wave of COVID-19 cases, either as states pull back on restrictions or perhaps in the fall. Whether this happens and how bad it is if it does happen will affect costs for employers this year.

Both Nadeau and Parson reflect on the likelihood of deferred care returning, pointing out that major carriers have looked at what happened after natural disasters and found a 40% to 60% return to care. Parson says the effect on employer health benefit costs will also depend on the timing of the return to care.

Typically, some self-funded employers would already be done developing what their plans will look like in 2021 and the rest would be working on it right now, Parson says. He expects this year, they will be working on it heavily in June and July. “With all the uncertainty, it is extremely difficult this year. Add to that some employers’ financial status is not good so they have to consider other business concerns when determining how much they can spend,” Parson says. “No doubt what will end up happening is employers and consultants will be making bigger guesses. We are unlikely to get information needed in time to base next year on this year’s experience, so we are likely to look back at pre-COVID experiences.”

Nadeau says employers should have trusted consultants that can cull through the numbers and whose interpretations employers trust.

Willis Towers Watson’s next paper will talk about 2021 scenarios, according to Parson. And Nadeau says Gallagher’s next one will be about how to approach renewals next year.