The start of any year is a time of massive change. People make resolutions designed to better themselves. Holiday decorations begin to come down. And numerous benefits plans roll over and start anew for members.
While the hustle and bustle of benefits open season is an exciting time for human resources folks everywhere, that chaos has calmed down by the time January rolls around. As a result, the focus shifts toward thinking about benefits for the subsequent year.
Although we’re just kicking off 2022, it’s already time to start thinking about employee benefits for 2023. While there are countless considerations about the impact of health benefit decisions on both employers and employees, there are some important factors worth watching as you begin the planning process. Here are five factors to consider as you envision your benefits package for 2023.
1. Medical and pharmacy costs will rise by about 6.5%.
Medical and pharmacy costs are expected to continue rising. According to PwC’s Health Research Institute, the medical cost trend—defined as the annual percentage change in the cost of treatment for patients, assuming no year-to-year health benefit changes—ranged from 5.5% to 7% between 2017 and 2021, adjusted for COVID-19 impacts, and is expected to be about 6.5% in 2022. The medical cost trend includes changes in unit cost and utilization for medical services and prescription pharmaceuticals for fully insured and self-funded large employers.
Moving forward, you’ll want to understand your company’s medical cost trend (including its current and future cost drivers), its ramifications for your health insurance costs, and any tools available to contain those costs.
For example, embedded within the medical cost trend is specialty pharmacy, which is a class of provider-administered drugs for the treatment of conditions like cancer, autoimmune diseases, and certain rare conditions. Specialty pharmacy spend has been on the rise, increasing by 89% between 2009 and 2019 and 14% in 2019 alone, as shown in the 2020 Magellan Rx Management Medical Pharmacy Trend Report. Specialty pharmacy now accounts for half of the total pharmacy benefit spend although only 2% of the population uses this class of drugs. As the breadth of new therapies increases—some of which have a price tag exceeding $1 million—the impact of specialty pharmacy is expected to further increase medical cost trend.
Likewise, medical cost trend is a foundational component in the overall cost to administer a health plan; it has impacts beyond just the trend amount. Consider this exaggerated example of deductible leveraging: You offer a health insurance benefit with a deductible of $1,000 and 100% coverage after the deductible. If the medical cost in one year is $1,500, the employee would pay $1,000 toward medical costs, and the health plan would cover $500. Assuming a medical cost trend of 10%, the total cost of care would increase to $1,650 the next year. If the benefit structure remained the same, that means the employee’s out-of-pocket cost would remain $1,000, while the health plan’s liability would go from $500 to $650—a 30% increase.
2. Expect an average annual employee deductible increase of 5.4%.
In aggregate, employers have been raising health plan deductibles as a means of offsetting higher health insurance costs. Some organizations are increasing deductibles by leaning out existing health plans, while others are adopting high-deductible health plans as a buy-down alternative for employees.
The Kaiser Family Foundation’s 2021 Employer Health Benefits Survey shows the average annual employee-only deductible for all firms with a deductible has increased from $991 in 2011, to $1,669 in 2021, which is an average annual increase of nearly 5.4%. In addition, KFF’s survey shows that the percentage of covered workers in health plans with single out-of-pocket maximums of more than $3,000 increased from 38% to 64% from 2011 to 2021.
3. Average annual employee health insurance premium contributions should rise by 3.5%.
Employee health insurance premium contributions have seen increases in the same way as deductibles. Per the same KFF survey, annual employee contributions toward single health insurance premiums increased from $921 in 2011 to $1,299 in 2021, averaging out to about 3.5% annually. That trend will likely continue in the new year.
4. Per capita annual out-of-pocket health care expenditures should hover around $1,200.
According to the Centers for Medicare & Medicaid Services, the 2019 out-of-pocket personal health care expenditure (not paid by health insurers) in the U.S. increased by 4.6%—to $406.5 billion. This translates to slightly more than $1,200 per capita, or nearly $5,000 for a family of four. Concurrently, a 2021 Bankrate survey showed that only 39% of Americans surveyed would have enough savings to cover an unexpected $1,000 expense.
5. Employee retention should be your top focus.
Employees bring ingenuity, productivity, and brand perception to an organization. Typically, employees are also the most significant financial investment for organizations via the cost of salaries and benefits. Additionally, a study by the Society for Human Resource Management stated that an employer’s cost of replacing an employee is between 50% and 75% of their annual salary when considering recruiting, hiring costs, training, and loss of productivity.
The benefits offered (and their administration) to employees are one of the most important components of a successful company. According to a Glassdoor study, 80% of employees would choose additional benefits over a pay raise; that same study found that 60% of people consider benefits and perks to be a major factor in weighing a job offer.
When selecting benefits, consider both the utilization and effectiveness of each benefit enhancement in terms of outcomes and employee engagement. If employee utilization is low while effectiveness is high (e.g., smoking cessation programs or imaging referral assistance), find ways to increase utilization. Conversely, a benefit with high utilization but low effectiveness should be evaluated in terms of being an employee perk. If utilization and effectiveness are both low, it’s probably time to remove the enhancement.
Ultimately, communication regarding your benefits package is the key to success. A 2018 survey showed that 40% of employees have difficulty understanding what benefits their health plan does and does not cover. Similar to how educated consumers are better equipped buyers, benefit-educated employees are better equipped health care consumers.
Physical, emotional, and financial health are all essential components of employee well-being. Adopting programs that offer guaranteed financial assistance for employees’ unexpected out-of-pocket health-related expenses can be an efficient way to offer differentiated benefits while improving employee engagement as well as health outcomes.
JR Clark is the SVP of health plan product & strategy with Paytient, where he helps the company best serve its partnered health insurers/payers. Before joining Paytient, JR spent 13 years as a director and actuary with Anthem Blue Cross Blue Shield in St. Louis, Missouri. He has also worked as an actuarial analyst in the retirement practice at Watson Wyatt Worldwide in St. Louis and as a nuclear engineering specialist in the spent nuclear fuel group at Florida Power & Light.