With medical trend rate this year set to outstrip 2022, employers must consider different priorities and options
Inflation was arguably the most important economic story of 2022. Heavy fiscal spending that kept economies afloat during the pan- demic also ensured they would emerge from COVID-19 running hot. War in Ukraine and resulting sanctions against Russia disrupted food and energy markets spurring inflation even more.
Fast-forward to today and consumers and businesses are still paying the price – literally. Manufacturer facilities shut down during the pandemic, causing the oft-mentioned ‘global supply chain issues.’ Even now demand for goods and services exceeds the capacity of producers. There are some signs this imbalance is beginning to calm, but increased production costs are still fuelling price increases.
Meanwhile, workers’ cost-of-living expectations are on the rise. The Bank of Canada’s recent survey publication on ‘Consumer Expectations for Q3 2022’ says 40 per cent expect their wages to grow by four per cent or more over the next 12 months. When it comes to inflation, expectations drive reality: higher wage demands lead to higher wages lead to higher costs lead to higher prices.
In short, inflation is still everywhere, escalating costs for consumers and businesses alike, and it goes without saying that employee benefit plans are not immune. The way in which employers are addressing surging plan costs, however, has yet to fully play out, in large part because the impact of the new inflationary environment has yet to be fully felt.
That could change – dramatically – this year. Indeed, based on our projections of healthcare cost trends in 2023, the time has arrived for plan sponsors to become more diligent about managing rising costs within their benefits packages while exploring ways to keep their plans relevant and attractive to employees.
Of course, employers are no strangers to higher-than-normal inflation in employee benefit plans. Healthcare inflation has exceeded general inflation by a substantial margin for a long time. Healthcare costs have consistently risen on an inflation-adjusted basis for years, even well before the current inflationary period began in late 2021.
In fact, looking at data from Statistics Canada and the CIHI (Canadian Institute for Health Information) on private health expenditures going back to 1975, we can see that inflation in private health has exceeded general inflation by three percentage points, on average, for the better part of five decades.
Employers should probably not expect this year to be an outlier. Aon’s recently published ‘Global Medical Trends Report’ estimates that the medical trend rate for Canada will be 7.5 per cent in 2023. That compares favourably to the global estimate of 9.2 per cent, but much less favourably to the outlook for general inflation in Canada, which the Bank of Canada expects to decline to three per cent by the end of the year.
New Challenges
Still, as much as employers might have gotten used to such rapidly rising costs by now, healthcare inflation in 2023 could present significant new challenges. That’s because the estimated medical trend rate of 7.5 per cent for 2023 is far, far higher than the actual trend observed in 2022 across Aon’s book of business. In other words, the impact of inflation appears to have been deferred to some extent, but it will likely be felt more severely in 2023, especially as other business costs rise at rates more substantial than in the past.
One reason is logistics: employers typically undertake the bulk of the work to set rates for employee benefit plans two to six months in advance of the plan year – typically between June and September for plans with January 1 start dates. During that period last year, organizations were still dealing with the so-called Great Resignation and other human capital challenges around retaining and attracting top talent. As a result, many organizations were not in a position to pass along substantial plan cost increases to employees, even though an inflationary crisis was looming. One indicator of that reality was cost-sharing between employers and employees in Canada remained at an 83 per cent/17 per cent split in 2022, when life, disability, health, and dental costs are all taken into account.
Instead of revisiting that cost-share, many employers instead focused their efforts on challenges like ensuring their plans aligned with organizational strategies on health, wellbeing, culture, and diversity, equity, and inclusion (DE&I). Anecdotally, some employers managed back some of the savings they realized from low utilization during the early days of the COVID-19 pandemic, reinvesting in their benefit programs to meet those strategic goals.
In our view, 2023 will necessitate different priorities, especially if healthcare cost inflation unfolds as expected. Already (and again, anecdotally), some employers have taken steps to remove from their benefit packages programs that have seen no utilization or have low perceived value among employees. More organizations are looking to maximize efficiencies within their plans and increasingly are considering how to capitalize on insured programs that cap their spend to a fixed cost.
Meanwhile, the challenge of attracting and retaining top talent has not gone away, but many employers are turning to communications strategies to reinforce employees’ perception of value of what already exists in their programs. They are also continuing to promote wellbeing as a longer-term strategy to proactively manage costs associated with preventable accidents, injuries, or conditions.
All of these are smart responses to a rising cost environment, but two things stand out for us as we think about ways to make them even more effective.
The first is also the most straightforward: get the core right. Employers need to make sure that they are dealing with the right providers and that the providers’ fees are competitive and in line with industry norms.
Meanwhile, employers also need to ensure that their plans address their own competitive expectations – that is, that they are not overly generous or out-of- market in any area.
Finally, they should review and consider financial options, including multinational pooling, captives, or other alternative risk financing tactics that could help mitigate cost escalation without impacting their benefit plan offering.
Listen to Employees
Our second piece of advice is take the opportunity to listen to employees. Many employers have not ‘checked in’ with their employees for a good number of years – and, of course, the disruptions of the pandemic did not help – to understand what they value in a benefit plan and what they do not. Whether through a pulse survey, focus groups, or some other listening technique, such check-ins can help employers keep plans relevant and attractive while potentially revealing opportunities for cost reductions. The reality is that you don’t always have to spend more to generate the same or better perceived value.
How long the current inflationary environment will last is the million-dollar question. Most major economic outlets are not predicting a return to the Bank of Canada’s two per cent target inflation rate until at least 2024. Because of the delayed effect from inflation last year – and because actual cost trends to benefit plans will not be known until midway through 2023 – employers can still look to take measures that could impact the trajectory of plan costs. Going forward, we may well see more plan reductions, cost-shifting, and other techniques to manage cost escalation. That is why, now more than ever, it is important for employers to be diligent in the financial monitoring of their plans, to truly understand where benefit dollars are being spent, and to figure out how best to keep costs sustainable.
Joey Raheb is Chief Broking Officer and National Leader, Growth, and Client Engagement at Aon Canada.
