Inside the Pressure Cooker: What plan sponsors should be watching this renewal season

Inflated health and pharma costs and an erratic medical industry leave plan sponsors with nowhere to hide.

Financially speaking, health plan sponsors are in for a bruising renewal season. But why is this year shaping up to be such a pressure cooker? Let’s open the lid, break down some of the ingredients, and dig into what employers will be facing in the months ahead.

Specialty Drug Costs

Escalating pharmacy plan costs are a major factor in America’s healthcare affordability crisis. The lion’s share of this phenomenon is due to the cost of specialty drugs, which account for as much as 30-50 percent of plan spend for many employers. This is a large departure from the recent past, as pharma spending used to account for perhaps 10 or 15 percent of plan spending. Much of this tremendous increase is fueled by the questionable practices of pharmacy benefit managers (PBMs), which often take advantage of misaligned business incentives to overcharge their clients.

The recent development and approval of highly specialized gene and cellular therapies has also played a large role in rising costs. While these therapies are miraculous from a medical perspective, their enormous price tag means that use by a single plan member can have immediate financial consequences for employers. Unfortunately for cash-strapped businesses, there is little to stop these unfavorable trends from accelerating further during the upcoming renewal season and beyond.

General Healthcare Inflation

The rate of healthcare inflation has been quite erratic in recent years, with industry figures often bearing little relation to the rest of the economy. Thus far, 2024 is looking like a “normal” year, with data from the Bureau of Labor Statistics suggesting a healthcare inflation rate of around 2%.

While this figure is pretty good in a vacuum, it actually represents a significant spike. 2023 saw healthcare inflation at its lowest level in more than a decade, clocking in at a mere 0.5%. In the second half of 2023, healthcare prices actually saw a bit of deflation, a phenomenon virtually unheard of in the modern United States. This much-needed reprieve appears to be over, and it will be painful for consumers to readjust to rising prices.

In addition to this, health insurance carriers typically have multi-year contracts with medical providers and medical groups. Many of these contracts, signed during the low-inflation period of 2020 and 2021, are expiring this year. When renewed, vendors may demand significant price increases to account for the inflation in the general economy during 2022 and 2023. These higher costs will ultimately impact consumers and benefit plan sponsors.

Contract Negotiations

Contract disputes between insurers and medical providers have been a regular headline in the health industry for a while now, especially in the Bay Area, California with the continued consolidation of medical groups. Most negotiations are completed before the old contract expires, and consumers usually only hear a little about these behind-the-scenes disagreements. However, due to various factors, we could hear more noise and see possible disruption.

When insurers and providers fail to reach an agreement on time and contracts expire, employers and members are left to find out that coverage is no longer available through their health plans. This can cause a considerable amount of anxiety for patients as routine in-network care moves out-of-network. Insurance carriers negotiate with provider groups to try and find the balance between affordability with network discounts and a broad network of providers. This translates into choice for members, giving more flexibility in where members choose to seek care.

Employers should closely keep track of these negotiations while preparing for upcoming plan decisions, although this is much easier said than done. Carrier and provider negotiation timelines often do not match up with renewal timelines, which can lead to heartburn once renewal season is over. Imagine selecting your insurance carrier of choice for the upcoming plan year only to learn that your new or existing medical insurer has no contract with the main medical provider in your community. Not exactly the peace of mind you thought you were buying, right?

Doctor and Nursing Shortage

Healthcare staffing has been a mess since the COVID-19 pandemic. Today, high burnout and elevated quit rates for younger healthcare workers are being compounded by the retirement of waves of baby boomer physicians. Researchers estimate that we are rapidly approaching a shortfall of hundreds of thousands of nurses and doctors, accounting for roughly ten percent of the total healthcare workforce. The cost of services will rise as demand increases, especially if there is a shortage of providers able to provide the service in a given area. With unemployment continuing to hover at historic lows and America’s demographic drought in full swing, it is unlikely that this problem will be reversing itself any time soon.

It is estimated that the U.S. healthcare industry will face a shortfall of 2.1 million nursing professionals in 2025.

— Research by Josh Bersin, HR and Workplace Industry Analyst

Recommendations

Where does this leave employers who provide about 50% of Americans’ health insurance? While some employers are financially able to cover these higher increases, many others may not be able to absorb these costs. OneDigital recommends the following cost-saving strategies:

• • Keep track of contract renewal dates and the progress of ongoing negotiations for medical groups that your employees use.
  • Consider plan design changes such as tiered network plans, the elimination of out-of-network coverage, or the introduction of multiple HDHP options.
  • Consider alternative funding models that could allow you to reduce plan spend without compromising on coverage.
  • Assess possible plan design changes or potentially add an HDHP plan.
  • Develop a robust open enrollment strategy to educate and incentivize employees to enroll in the plan that best fits their needs.
  • Evaluate prescription drug costs and consider ways to reform your plan and take control of your spending.
  • Ensure that your benefit committee is engaged, proactive, and empowered to propose cost mitigation strategies to management.

Looking for more actionable strategies? Access OneDigital’s Cost Containment Playbook for 25 Strategies for Healthcare, Pharmacy, & Workforce Optimization.