Impact of Rising Healthcare Costs on Self-Funded Insurance Plans

Current trends in rising healthcare costs

Current trends in rising healthcare costs are characterized by increased medical care ratios and significant expenditures due to various factors, including regulatory changes and external disruptions. Companies like Humana and UnitedHealth Group report rising costs impacting premium revenues and benefit ratios, indicating a challenging environment for self-funded insurance plans.

"Early medical cost trend indicators in our individual MA business are largely in line to positive relative to expectations, and we have seen strong year-to-date patient growth in our primary care business with 20% growth in our de novo centers and 7% growth in our more mature wholly owned centers." --- (HUM, earning call, 2024/Q1)

"As a result, the entire $220 million was recorded as a reduction to premium revenue in the second quarter, increasing our reported medical care ratio by about 25 basis points. Turning to the second quarter medical care ratio, it was also impacted by about 40 basis points, or $290 million due to the suspension of some care management activities after the cyberattack." --- (UNH, earning call, 2024/Q2)

"As we look ahead, I feel like we are making 2025 decisions with our eyes wide open, in-patient and out-patient trends, complex pharmacy changes from the Inflation Reduction Act, an insufficient 2025 rate environment based upon the final rate notice and a risk model being phased-in beginning in 2024 that is punitive to partial and full duals." --- (CNC, earning call, 2024/Q1)

"Benefits Expense The Insurance segment benefit ratio increased 320 basis points from 86.1% for the 2023 quarter to 89.3% for the 2024 quarter primarily due to higher Medicare Advantage medical cost trends in the 2024 quarter compared to the 2023 quarter partially offset by the impact of pricing and benefit design of our 2024 Medicare Advantage products, which included a reduction in benefits in response to the net impact of the final rate notice and the initial emergence of increased medical cost trends." --- (HUM, sec filing, 2024/Q1)

"For the three and six months ended June 30, 2024, we incurred $776 million and $1.4 billion of direct response costs, respectively, including network restoration and increased medical care expenditures, as we suspended some care management activities to help care providers with their workflow processes." --- (UNH, sec filing, 2024/Q2)

Financial implications for employers and employee benefits

Rising healthcare costs are projected to increase by 9% for employers, significantly impacting their financial strategies. Companies are adapting by enhancing employee benefits, such as creating benefit bundles, to meet employee expectations and manage high-cost claims driven by new therapies and chronic conditions.

"Market research shows that 63% of American workers stated they were likely to participate in voluntary benefits from their employer, indicating that employees expect their employers to provide programs in addition to traditional benefits such as a retirement plan, paid time off, and healthcare insurance." --- (PAYX, press release, 2024/08/28)

"This projected increase, which assumes employers do not implement employee cost sharing increases and other cost saving strategies, is higher than the 6.4 percent increase to health care budgets that employers experienced from 2023 to 2024 after cost savings strategies." --- (AON, press release, 2024/08/15)

"So we do see, pays per control growth, we see, GDP growth, we see the strength in employment numbers, ours and others continue to speak to the strength that exists in the macro environment, and it's yielding an environment, we'll get to demand in a minute, but it's yielding an environment that's very favorable for HCM as we sit squarely and the ability for companies to navigate this strength, and we'll get back to that, but as it relates to some of the things that we're watching, we're watching all of those, we're watching where ultimately GDP will land, We're watching unemployment." --- (ADP, conference, 2024/05/22)

"We're going to be doing some things in the next fiscal year around creating benefit bundles for our non-insurance HCM clients that allow their employees to feel like being part of that employee relationship gives them access to catastrophic care." --- (PAYX, earning call, 2024/Q1)

"Projected 2023 to 2024 Increase by Industry Employer Cost EE Contributions from Paycheck Plan Cost Manufacturing 5.2% 4.0% 4.9% Retail and Wholesale Trade 2.4% 0.3% 1.9% Public Sector 7.3% 6.7% 7.2% Health Care 5.8% -0.1% 4.6% Technology and Communications 7.4% 5.0% 7.0% Finance and Insurance 7.2% 2.5% 6.2% Professional Services 6.7% 6.3% 6.6% Using Predictive Analytics to Identify Emerging Risks and Refine Budgeting Processes High-cost claims continue to be an issue for employers and are being driven by emerging high-cost gene and cell therapies, complex procedures and a rise in chronic conditions." --- (AON, press release, 2024/08/15)

Impact on coverage options for employees

Rising healthcare costs are prompting companies like UnitedHealth Group and Humana to enhance coverage options for employees. Initiatives such as reducing prior authorizations and improving care management aim to lower costs and expand access to benefits, ultimately strengthening employee health security.

"And the majority of our prior authorizations are simply checking for coverage prior to treatment. We continue to look at ways in which we can reform and reduce the number of prior authorizations required, and we're also piloting across the country a gold card scheme to further improve people's experience." --- (UNH, event transcript, 2024/06/03)

"That is very well documented. We get better outcomes. We deliver better health security by lowering the cost to members for the care that they receive and giving them access to more benefits." --- (HUM, earning call, 2024/Q2)

"Earnings from operations increased due to the factors impacting revenue, partially offset by Medicare Advantage funding reductions and incremental medical costs for accommodations to support care providers as a result of the Change Healthcare cyberattack." --- (UNH, sec filing, 2024/Q2)

"They've also, as I've said before, consistently demonstrated a better impact to work with the hospital systems on those authorization requests and determining the appropriate level of care, which oftentimes results in not needing an inpatient stay." --- (HUM, earning call, 2024/Q2)

"we felt a profound sense of responsibility to do everything we can to preserve access to care, support our customers and clients and ultimately use what we learn to further strengthen our defenses and help others prevent similar attacks from being perpetrated in the future.As of today, Change Healthcare's major products and systems are restored, and our broader business recovery efforts are well underway." --- (UNH, event transcript, 2024/06/03)

Risk management strategies for self-funded plans

Self-funded insurance plans are increasingly focusing on risk management strategies, emphasizing the importance of Risk Capital and analytics. As payers assume more risk, proactive measures like improved claims processing and health assessments are crucial for adapting to rising healthcare costs.

"progress fully reinforces our 3x3 plan, focused on three fundamental commitments over the next three years, including capitalizing on our work in Risk Capital and Human Capital, delivering Aon client leadership, and amplifying these efforts through Aon Business Services." --- (AON, earning call, 2024/Q1)

"Well, it's been durable since 2006, and it's good that we've been in the business that long because as payers through the IRA step into more and more of the risk, managing the risk of that population as opposed to the federal government underwriting it, there's a pretty big step from 2024 to 2025 with payers stepping into 60% of the risk corridor on the catastrophic phase versus 20% in 2024." --- (CNC, conference, 2024/05/31)

"This progress fully reinforces our 3x3 plan, focused on three fundamental commitments over the next three years, including capitalizing on our work in Risk Capital and Human Capital, delivering Aon client" --- (AON, earning call, 2024/Q1)

"Our performance continues to improve with the processing of appeals, CTMs, and health risk assessments, and focus work by our call center and claims teams has driven improvements we would expect to see as part of scoring in October." --- (CNC, earning call, 2024/Q2)

"Our ability to invest there is important. Don't forget the analytic investment that's needed as well to be able to provide the insight around how to strategically manage those risks and ultimately match capital to that risk." --- (AON, earning call, 2024/Q2)

Regulatory changes affecting self-funded insurance

Regulatory changes are significantly reshaping self-funded insurance plans, impacting risk management strategies and operational results. Companies like AON and UNH emphasize the need to navigate these changes to control healthcare costs, while Centene highlights how recent legislation aims to enhance coverage and affordability.

"In Wealth Solutions, organic revenue growth of 4% reflected strength in retirement as our teams continue to help clients reduce risk through pension risk transfer and manage the ongoing impact of regulatory changes as we continue to bring leading capabilities to help clients match risk and capital." --- (AON, earning call, 2024/Q1)

"The rate of market growth may be affected by a variety of factors, including macroeconomic conditions and regulatory changes, which could impact our results of operations, including our continued efforts to control health care costs." --- (UNH, sec filing, 2024/Q2)

"In contrast to previous executive and legislative efforts to restrict or limit certain provisions of the Affordable Care Act (ACA), legislation and regulations at the federal level over the last few years have contained provisions aimed at leveraging Medicaid and the Health Insurance Marketplace to expand health insurance coverage and affordability to consumers." --- (CNC, sec filing, 2024/Q2)

"Regulatory change is rapidly reshaping the landscape for financial institutions." --- (AON, Twitter, 2024/07/25)

"The maximum amount of dividends that can be paid by our insurance company subsidiaries without prior approval of the applicable state insurance departments is subject to restrictions relating to statutory surplus, statutory income and unassigned surplus. CRITICAL ACCOUNTING ESTIMATES" --- (CNC, sec filing, 2024/Q2)