The pandemic revealed vulnerabilities to our health care system and overall economy, and the impacts are driving up health care spending and the cost of care.
The onset of COVID-19 prompted a surge in demand for clinical health services. At the same time, the extenuating circumstances of the pandemic limited physical access to care. Concurrently, the government response to the pandemic included massive increases in public spending on medical services and products.
As a result, health care revenue from employer-sponsored plans sharply declined following a drop in health services utilization as providers cancelled elective care and as patients practiced social distancing by avoiding health facilities.
The pandemic, in retrospect, revealed vulnerabilities to our health care system and overall economy, and the impacts are driving up health care spending and the cost of care.
A Temporary Sugar High – The Inflationary Impact of Stimulus Checks
The American Rescue Plan Act of 2021 (American Rescue Plan), enacted in early March 2021, provided tens of millions of Americans with checks as part of the COVID-19 relief bill. How effective were those stimulus checks? Some argue the money may have fueled inflation and led many to a false sense of financial relief and empowerment. Researchers at the Federal Reserve Bank of San Francisco found that the stimulus may have raised U.S. inflation by about three percentage points by the end of 2021.
Now, years later, a near-confirmed national recession coupled with an ever-increasing rate of inflation, has physicians and patients alike anxious over “what’s next” in terms of health care inflation and what will add to their financial stress. All have good cause to be concerned. Year over year inflation, as estimated by the Consumer Price Index, remains at 8.2% as of September 2022.
Recession Reality - The US Economy is Slowing
Changes in Gross Domestic Product (GDP) are the most frequently cited indicator of economic activity. In the U.S., 2022 GDP decreased at an annual rate of 1.6% in the first quarter of 2022, and .6% in the second quarter. The Bureau of Economic Analysis issued its Advance Estimate of 3rd Quarter GDP as an annualized rate of 2.6%, potentially leaving economic growth on track to be slightly positive for 2022.
Regardless, how will the slowdown in economic activity be different this time? While increasing in nominal dollars, Americans continue to shoulder only a small percentage of medical costs as out of pocket expenses. That is, on average, and averages can be deceiving, Americans pay out of pocket only about 10% of the cost of all medical services received. So, while the sharing of costs remains mostly unchanged in percentage terms, because the cost of medical services keeps increasing, workers must allocate an increasing portion of their take home pay to cover their contributions towards the cost of coverage, as well as their out-of-pocket costs.
Increasing Health Care Premiums and Renewals
During the open enrollment period, employers and employees alike are at heightened levels of concern over the potential for significant increases in renewal premiums and increases in point of purchase cost-sharing. Some public exchange increases will exceed 10%, federal employee premiums will increase 8.7% and employer-sponsored coverage is expected to increase 6.5%. A large segment of American workers are financially fragile. Nearly three-fourths of surveyed workers confirmed that they live paycheck to paycheck and that they would have some or significant difficulty in meeting their financial obligations if their next paycheck was delayed a week (not missed, but delayed, and delayed only one week)!Many are unprepared for regular household expenses, let alone unexpected out-of-pocket medical expenses.
A Review of Insurance Rate Hikes
Most plan premium changes insurers are requesting for 2023 fall between 5% and 14%. Health reform requires a review of public exchange rate increases of more than 10% to 15% to ensure they are based on reasonable cost assumptions and solid evidence. No such review applies to employer-sponsored plans.
HHS expects the cost of health coverage in the public exchange will decline for the insureds, even though the total cost of coverage will increase, because most public exchange coverage costs are paid by taxpayers. That is one reason why few Americans enroll in marketplace exchange coverage unless they qualify for taxpayer financial support. As part of the Inflation Reduction Act, the Senate passed a three-year extension of enhanced subsidies for people buying their own health coverage on the Affordable Care Act Marketplaces. These temporary subsidies were originally slated to last two years (2021 and 2022) and were passed as part of the American Rescue Plan. And, because the Inflation Reduction Act extends the enhanced subsidies for three years and not permanently, future Marketplace enrollees may see steep premium increases whenever the enhanced subsidies eventually expire.
At the start of the pandemic, Congress enacted the Families First Coronavirus Response Act (FFCRA). That legislation included a requirement that Medicaid programs keep people continuously enrolled through the end of the month in which the COVID-19 public health emergency (PHE) ends. On October 13, 2022, U.S. Department of Health and Human Services Secretary Xavier Becerra extended the COVID public health emergency for another 90 days until January 11, 2023. The Biden Administration has indicated it will provide a 60-day notice before ending the PHE. Most expect the emergency will end sometime early in 2023. When it does, between 5 and 14 million of the now 89 million Medicaid beneficiaries will lose their medical coverage. Because millions may have returned to work, employer-sponsored coverage will be disrupted due to the significant number of mid-year enrollments.
We expect medical providers, hospitals, physicians, drug manufacturers and others will be raising prices in 2023 to minimize the impact inflation and enrollment disruptions will have on their medical practice. To counter those and other inflationary trends, we recommend plan sponsors:
Making such protections and coverage options available to workers is increasingly part of a ’health and wealth’ strategy that optimizes both savings and financial preparedness.
Christine Cooper is the CEO of aequum LLC and the Co-Managing Member of Koehler Fitzgerald LLC, a law firm with a national practice. Christine leads the firm’s health care practice and is dedicated to assisting and defending plans and patients.
Jack Towarnicky is a member of aequum LLC. As an ERISA/Employee Benefits compliance and planning attorney, Jack has over forty years of experience in human resources and plan sponsor leadership role.