Mitigating Growth in Medical Costs During Uncertain Times
As employee health benefits consume an increasing portion of the compensation pie, employers can take these steps to keep costs in check without reducing programs’ benefits.
Multiple factors increased costs in the healthcare industry in 2022, including the ongoing supply-chain impacts of the Covid-19 pandemic, geopolitical instability, and uncertainty around the global energy supply. As a result, most employers are now grappling with how to offer employees competitive health benefits while mitigating rising inflation and the overall impact on their bottom line.
It’s a problem that is not going away, as medical costs continue to rise rapidly. According to the World Health Organization, global spending on health more than doubled in real terms over the past two decades, reaching US$8.5 trillion in 2019, or 9.8 percent of global GDP. However, these expenditures were unevenly distributed, with high-income countries accounting for approximately 80 percent.
In the United States, employers are increasingly seeing medical benefits as crucial not only to attract and retain employees, but also to support worker focus and productivity. Unexpected healthcare expenses can be a significant stressor for employees. The average American consumer has a combined balance in checking and savings accounts totaling $5,300. That means unanticipated healthcare costs might quickly become overwhelming—and the resulting financial stress could increase employees’ physical and mental illness, reduce their productivity, increase burnout, and lead to higher turnover rates.
Thus, many employers are expanding medical coverage for employees around the world. Aon’s “2023 Global Medical Trend Rates Report” reveals that medical-benefit costs represent an increasingly significant portion of employees’ total compensation. The average global rate of increase for medical costs in 2023 is expected to be 9.2 percent, up from 7.4 percent in 2022 and the highest since 2015. Employers need to start 2023 by ensuring that their benefits spending is optimized.
What Is Driving Cost Increases?
While a range of global issues are impacting healthcare costs generally, four key factors are driving growth in employee-benefit costs:
1. The macroeconomic environment. Inflation and the possibility of a global recession were the two most significant concerns for business leaders in 2022. Inflation and salary growth are intrinsically linked. As companies navigate macroeconomic uncertainty, wages will increase—but potentially not as fast as inflation. Employers in the United Arab Emirates, for example, are looking to increase salaries and allowances as a result of rising costs, but few are taking action now. Overall, Aon’s research shows that companies are planning for compensation costs, including salaries and housing and transportation allowances, to increase in 2023.
2. Rising medical costs. Medical costs are increasing globally as populations age and experience worsening health conditions. The top medical conditions driving plan costs include cardiovascular problems, cancer/tumor growth, high blood pressure/hypertension, diabetes, and musculoskeletal/back issues.
Rising costs are also altering benefit designs. For example, in Germany, the public health system is considered one of the best in the world and private health insurance is less prevalent. However, talent shortages in key industries are driving companies to offer private medical insurance as a means to attract and retain talent.
3. Attempts to support health and well-being in a hybrid work environment. Holistic health has become a priority for employers, which are strengthening benefits programs to ensure that all employees and their families are supported. These enhancements may include an increase in voluntary benefit offerings and benefits designed specifically to support employees who are mainly working from home. Holistic health is an evolving trend that emerged, in part, due to the pandemic and the resulting changes to work patterns.
4. Global talent shortage. In the wake of the pandemic, a talent shortage is gripping most industries around the world. Covid-19 led to increases in resignations and early retirements. It also increased employees’ expectations of their employer, prompting increased talent mobility for many types of jobs. The war for talent has reached new heights; third-quarter data for the United States shows voluntary employee departures at 37 percent. This employment climate has driven up salaries, with a knock-on impact to the employee benefits linked to those salaries.
Advice for Employers
In these uncertain times, companies can increase workforce resilience by proactively supporting employees who are facing increased living costs and reduced buying power. The best way to do this is to optimize existing benefit plans, focusing spending on the right strategic areas to meet the specific needs of their workforce, while eliminating non-value-added practices and redundancies.
Invest in healthcare analytics. For any healthcare strategy to work, it needs to be built on robust data inputs and an understanding of the underlying claims and health-cost drivers. This information can then be used to set—and measure—tailored well-being initiatives and react to unexpected claims situations.
The goal is to improve decision-making using data. In addition to analyzing claims and cost data, undertake regular employee research. Surveys and focus groups across different segments and geographies will help build a comprehensive picture of how existing benefits are performing and highlight any gaps that need attention.
Ensure your benefits spend is optimized. Multinationals can often save 10 percent of their overall benefits spend through optimization exercises. Gaining insight into, and influence over, healthcare spending is critical. Goals of such a program should include:
- Ensure fees and expenses are in line with market rates.
- Eliminate duplicate coverage.
- Review plan design to remove or minimize avoidable costs.
- Review the employer/employee cost-sharing rules on the medical benefits to ensure they are aligned with market practice and encourage efficient use of the programs.
- Review benefits regularly to ensure they are at market levels.
- Review utilization of benefits to ensure value and relevance to the workforce.
- Consider multi-country solutions for financing benefits programs to capture global scale and minimize the frictional costs.
- Leverage broker and vendor consolidation, where possible.
- Ensure that decisions about benefits are taken with appropriate governance.
Define and pursue a well-thought-out strategic position. Set a talent, rewards, and benefits strategy that aligns with your business culture and tactical programs. Today, many organizations emphasize diversity, equity, and inclusion (DEI) and environmental, social, and corporate governance (ESG) practices, but they don’t align their benefits programs to those ideals.
Ethnic minorities, low-paid employees, women, and disabled staff members report facing more severe challenges in the current environment than their colleagues do. Notably, these groups are more likely to report not having enough money in emergency savings. Benefits play a critical role in ensuring corporate strategy trickles down to have a positive impact on all employees.
Place employee well-being at the heart of your benefits strategy. Each benefit program should have a clearly communicated link to improving employee well-being. Financial well-being, for example, is critical in this inflationary environment.
Mental health and support for employees’ emotional well-being became a priority for most organizations during the pandemic and have remained so in the months since. Ensuring that the offered health plans provide adequate mental health coverage is crucial. Still, mental health is influenced by many factors, some of which have no connection to specific employee-benefit programs. It is important for organizations to foster a culture with positive emotional well-being at its core. Quite often, this culture is driven by senior leaders across the organization talking about their own experiences and inspiring colleagues to seek out the support they need.
All well-being components are linked; for instance, financial stress can quickly manifest as a physical or mental health issue. Business leaders can build a more resilient workforce by combining healthcare data with other key data sources—information on employee absences, data from well-being apps, employee assistance program statistics, etc. Then they can identify a broad set of well-being focus areas and implement programs and strategies to tackle them.
Well-being initiatives informed by data and analytics are the leading strategy for mitigating runaway healthcare costs. By encouraging the utilization of preventative care, employers can avoid more expensive care down the road. And by keeping employees engaged in their wellness, they reduce the stress that could exacerbate other health conditions.