Annual insurance carrier survey: Healthcare claim trend projections for 2018
Dan Gowen, Employee Benefits National Practice Leader
Nick Allen, Employee Benefits National Practice Leader, Actuarial Services
A critical first step in strategic and financial planning for 2018 and beyond is to have a realistic expectation about what will happen to your business' healthcare costs if you do not make any changes to your benefit plan. Plan sponsors will benefit from a clear understanding of healthcare trend projections, as a difference in healthcare trends of just 2.0% compounds to a difference of 10.4% in plan costs after just five years.1
Wells Fargo Insurance recently released the results of its 2017 Spring Healthcare Claim Trend Survey, which surveyed nearly 70 insurance carriers across the country on their actual and forecasted claim costs. This advisory reviews the concept of trend and shares current trends by product, along with our medical trend projections for plans that will begin in 2018.
The most important application of these trend forecast results is to help your business project costs. As of now, the excise tax, or "Cadillac" tax, is still slated to go into effect in 2020. Healthcare cost trends remain the single-largest determining factor of whether your group's plan will hit the excise tax thresholds. Regardless of the direction healthcare reform may take, employers should continue to address aspects of the market that can be influenced within their organization. See our client advisory
for five employee benefit strategies you can control.
What is healthcare trend?
The cost to provide healthcare services changes frequently. Some expenses, such as surgical costs, increase because of new, better, or more expensive medical technologies, which doctors and hospitals can access. Other expenses, such as durable medical equipment, decrease because of cheaper materials.
The annual change in healthcare cost is known as trend, which is the sum of all changes in cost throughout the healthcare industry. Healthcare trend affects employers, care providers, insurance companies, and consumers. This trend varies by geography, but the way in which it affects employers does not change.
For example, two employers in a similar geography are likely to experience very similar annual trends, even with differing occupational profiles. This occurs because healthcare trend is the change expected in claims cost before implementing any employer initiatives, such as plan design changes or health and productivity programs.
A difference in healthcare trends of just 2.0% compounds to a difference of 10.4% in plan costs after just five years.
What factors can affect healthcare trend?
Each of the following factors can affect trend:
- Price inflation or deflation
- Healthcare service utilization
- Aging of the covered population
- Deteriorating health of the covered population
- Leveraging effect of deductibles and copays
- Variations in provider treatment patterns
- Changes in federal or state legislation
- Improvements in medical technology and drug therapies
- Consolidation of healthcare providers
- Cost shifting (from public payers, such as Medicare, to private plans)
Why is trend important and what should employers do to plan for it?
Several factors that impact trend are beyond employers' control. For this reason, it is critical for employers to do two things:
- Examine and understand the historical and future trends in the industry, in addition to other changes that may specifically impact your organization. While price inflation or deflation affects all employers without bias, employee aging, health status, and demographics will vary by group.
- Develop and implement strategies to counteract the effect of healthcare cost trends. While cost shifting through plan design or monthly contributions can be an effective short-term solution to reduce employer costs, it will not counteract long-term trends. As such, strategies that maintain a long-term view are needed.
The purposes of a healthcare strategy are to:
- Provide benefits that your employees value and are in line with the company culture
- Keep employees healthy and productive
- Make long-term costs sustainable
To attain sustainable long-term costs, employers should aim to have healthcare trends that are in line with a modest index, such as the medical consumer price index (CPI). Current healthcare claim trends are well in excess of that index.
Average trends in 2017
When planning their healthcare strategy, plan sponsors should consider several key observations about healthcare trend as identified in our survey:
- Medical trends increased from our Fall 2016 survey and remain in the high single digits as of May 2017. Those trends range from 7.7% for HMO plans to 8.0% for PPO plans and 8.6% for consumer-directed health plans annually.
- As shared at the beginning of this advisory, while the difference in trends by product may seem insignificant, a difference in healthcare trends of 2.0% compounds to a difference of 10.4% in plan costs after just five years.
- In the current environment of employers' sensitivity to costs, we expect both plans with more limited networks and with more aggressive managed medical care to continue growing in popularity.
- While medical cost trends are higher than in the fall of 2016, our survey shows a moderating of prescription drug cost trends, although they remain well in excess of 10%.
- Last year, we forecasted a 2017 prescription trend at 13.9%, the actual average of which is 12.8% now. The primary reasons for the drop are that prescription drug managers are narrowing formularies, shifting reimbursements to a more outcomes-based setting, and negotiating deeper discounts amid public pressure.
- Claims trend for specialty drugs continues to run in excess of 20% annually, but it does not appear it will be higher in 2018 than in 2017.
- The dichotomy between medical and drug trends has resulted in an increased proportion of total healthcare spend on drugs. The prescription drug component of employers' plan designs continues to receive intensified scrutiny from both our employer clients and us.
Projected trends for 2018
Survey methods: In our survey, we collected probabilistic data on 2018 projected trends from carrier respondents and also gathered membership data for each product. We paired this data with our actuarial judgment and market knowledge, and weighted each response to give more credibility to the forecasts provided by those with larger populations in the given product. This allows us to project a range of cost trends for each product.
We have also provided an expectation for the national average in 2018. The range for each product category reflects the variance in carrier responses, as well as localized variances in healthcare delivery. The chart on the right represents the cost trends that will be used to set premiums for 2018.
The two most visible observations are:
- Costs trends in 2018 are expected to remain relatively flat for every product, relative to 2017, except for prescription drugs.
- Cost trends for medical expenses have more uncertainty than cost trends for prescription drugs.
While the rise in medical trend is not a reason to panic, it does bear monitoring economic trends as these can be indicators of future medical utilization.
Trends may also rise due to higher prices being charged in certain areas like surgical procedures, or if there is continued activity in the consolidation of healthcare providers. The continued transition of provider reimbursement models from fee-for-service (pay for volume) to value-based models (pay for value) may help balance out the additional utilization.
The variability of the carrier responses creates room for error in our best-estimate forecast, and reflects the many unknown external forces in the healthcare marketplace today.
Prescription drug trends are projected to decrease slightly in 2018 and the concern remains centered on the growth of specialty drugs. Cost containment for specialty drugs is a complicated problem that requires a thoughtful, multifaceted approach. See our related client advisory
on managing specialty drug costs.
1. Wells Fargo Insurance 2017 Spring Healthcare Claim Trend Survey