Healthcare trend projections for 2016
By Nick Allen, FSA, FCA, MAAA - National Practice Leader, Actuarial Services, and Dan Gowen, National Practice Leader, Employee Benefits
Wells Fargo Insurance recently released results for the 2015 Spring Healthcare Trend Survey of more than 65 insurance companies nationwide. This advisory will review the concept of trend, current trends by product, and reveal our medical trend projections for plans beginning in calendar year 2016.
What is healthcare trend?
The cost to provide healthcare services is always changing. Some expenses, such as surgical costs, increase because of better, more expensive medical technologies to which doctors and hospitals have access. Other expenses, such as durable medical equipment, decrease because of cheaper materials. That annual change in healthcare cost is what’s known as trend. Healthcare trend impacts employers, care providers, insurance companies, and policyholders. It is the sum of all changes in cost throughout the healthcare industry. The impact of trend varies by geography, but the way in which it impacts employers does not. Healthcare trends permeate throughout the entire industry, so two employers in a similar geography may experience very similar annual trends, even with occupational profiles that could be very different. This occurs because healthcare trend is the expected change in claims cost before any employer initiatives, such as plan design changes or health and productivity programs. Each of the following can drive trend increases or decreases:
- Price inflation or deflation
- Healthcare service utilization
- Aging of the covered population
- The leveraging effect of deductibles and copays
- Variations in provider treatment patterns
- Changes in federal or state legislation
- Improvements in medical technology and drug therapies
Why is trend important?
You have probably noticed that some of the items in the list above are out of employers’ control. For that reason it is critical to do two things. First, we must examine and understand the historical and future trends in the industry, as well as those trends and other changes specific to our clients. Again, while price inflation or deflation affects all employers without bias, employee aging and demographics will vary by group. Second, we must develop and implement strategies that are customized to counteract the impact of healthcare cost trends. While cost-shifting through plan design or monthly contributions can be an effective short-term solution for reducing costs, it will not counteract long-term trends, so our clients need strategies that keep the bigger picture in mind. The purposes of a healthcare strategy are to:
- Provide benefits that your employees value,
- Keep employees healthy and productive, and
- Make long-term costs sustainable.
Having sustainable long-term costs means having 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 2015
In Wells Fargo Insurance’s 2015 Employee Benefits Market Outlook
, we forecasted medical trends would remain at or slightly below 2014 levels. As you’ll see in the forthcoming charts, the prediction is on target so far. Medical trends have decreased the past couple of years but they remain in the high single digits, ranging from 7.2% for HMO to 9.0% for Indemnity Fee-for-Service annually. That difference may seem insignificant, but a difference in healthcare trends of 2.0% compounds to a 10.4% difference in plan costs after just five years. In the current environment of employers’ extreme sensitivity to costs, we expect both national HMOs and more localized staff-model HMOs to increase market share as long as these differences in cost trends between HMO and other product lines continue to flourish.
While medical cost trends improved from a year ago, the survey shows a continued increase in prescription drug cost trends. The primary reason for this escalation is growth in the costs and usage of specialty drugs. The dichotomy between medical and drug trends has resulted in drugs having an increased proportion of total healthcare spend. The prescription drug component of employers’ plan designs continues to receive intensified scrutiny from our clients and us.
Projected trends for 2016
Looking back at historical trends helps us understand the evolution of this business. It also gives us the benefit of hindsight while looking for drivers (e.g. we know prescription drugs trends have been high, so we can begin the process of looking for the culprits). This is vitally important for learning about how we arrived in our current environment, but less telling for what the future holds. Our ability to plan for the future alongside our clients lies in our aptitude for anticipating cost changes before they occur. This year, for the first time, Wells Fargo Insurance has developed healthcare cost trend forecasts for next year.
In our survey, we collected probabilistic data from all of the carrier respondents in regards to where they project trends for 2016. This data, paired with our actuarial judgment, was used to project a range of cost trends for each product. We are also providing an expectation for the national average in 2016. The range for each medical product exists because of both the variance in carrier responses, as well as localized variances in healthcare delivery. This is a first look into the cost trends that will be used to set premiums for 2016.
Wells Fargo Insurance 2016 medical trend forecast and variance, by product
The most visible observations are:
- Costs trends in 2016 are expected to increase for every product, relative to 2015, except for prescription drugs.
- Cost trends for medical expenses have more uncertainty than cost trends for prescription drugs.
The projected uptick in claims trend starting in 2016 appears startling, especially for HMOs, which are projected to increase 8.6% in 2016 compared to 7.2% now. Looking more closely at the other products, though, the cost increases are not escalating any faster than they have decreased over the last year or two, so it seems plausible that market factors could accelerate healthcare costs in an upward direction.
The variability of the carrier responses creates room for error in our best-estimate forecast, and also speaks to how many unknown external forces exist in the healthcare marketplace today.
Prescription drug costs are projected to increase again, but not as much as they will in 2015. We are at a time during which patents for many brand name drugs have recently expired. That pattern will continue into 2015 and 2016 when drugs such as Abilify and Crestor experience patent expiration. Expiring patents will result in an increase in generic drug usage, which should create future savings. Another favorable development in pharmaceuticals has been the first approved biosimilar drug. This could open the door to cheaper, yet still effective, drug therapies that would be used as alternatives to high-cost specialty drugs.
Applications and implications
The most important application of these trend forecast results is to project costs. Having a realistic expectation for what will happen to your healthcare cost if you make no changes to your plan is a critical first step in your business’ strategic and financial planning for 2016. We recommend that you consult with us when it comes time to project your costs into the future, as there are many other forces besides healthcare cost trend that need to be considered, such as demographic changes, new products, or mergers and acquisitions activity.
Another thing employers should be thinking about now is the excise tax, or “Cadillac” tax. Starting in 2018, excise taxes will be charged based on how much your group’s plan exceeds the excise thresholds. For every dollar that your plan exceeds the excise thresholds, your plan will be charged $0.40. As of right now, 38% of large employers* are expected to hit the excise tax threshold in 2018 if they make no changes to their plan design. For many employers, healthcare cost trends will be the biggest determining factor as to whether and when their plan will exceed the excise tax thresholds. Since the excise tax thresholds will be adjusted in the future in a manner that is not tied to medical inflation, and which is likely to be lower than medical inflation, it is vital that employers strive to manage their healthcare cost trends in order to avoid or minimize their excise tax exposure in the long run. Without a strategy to bend your cost trend down to CPI levels, your plan will hit the excise threshold, and probably sooner than later. With the expertise of our national resources and local account teams, we can help you build a glide path to excise tax avoidance or mitigation.
As we mentioned, getting your group’s healthcare cost trend to levels that index with medical CPI or lower is the ultimate goal, and we can use what we know about why these cost increases are occurring in order to counteract their effects. Solutions will be customized to your business and we can discuss them with you in person.
*American Health Policy Institute, November, 2014. Retrieved from http://www.americanhealthpolicy.org/Content/documents/resources/Excise_Tax_11102014.pdf Informational disclosure.