As we hurtle towards 2022 and wrap up open enrollments for many of our groups, we’re seeing some continuing trends as well as new ones. With the end of the year upon us and the corresponding flood of lists out there, we figured “Why not add one more?” and put together our predictions for benefits in 2022 and beyond.
It’s our goal to not just help our clients understand where benefits are today, but where they are headed. As Wayne Gretzky famously said, “Skate to where the puck is going, not where it has been.” (Yes, this is overused in business, but it’s so good!).
Before we dive into our predictions, let’s lay a foundation for the factors and dynamics impacting the industry and employer firms today. We need to establish the mechanisms and factors impacting the industry before we can do our best job at anticipating how the industry will evolve moving forward.
Factor #1 – Increasing Healthcare Prices
As consultants, we explain to groups that health insurance premiums have doubled in each of the last two decades; they doubled in the decade before the ACA was passed in 2010, and they’ve doubled since 201o as well. While there are a few different inputs driving health insurance premiums, the most overwhelming driver of premium increases is the annual trend in medical costs of 6 to 9 percent since 2008, figures provided by PwC’s Medical Cost Trend: Behind the Numbers 2022.
When health care costs double every ten years, health insurance will also double (if not more, due to the dynamics of risk-taking by the carriers). This trend is still in play today and will be for the foreseeable future unless legislative action is taken to cap hospital and physician payments, prescription drug costs, and more of the drivers in healthcare costs.
Factor #2 – New and Expensive Drugs Coming to Market
While insurers cover a greater share of drug spending compared to a decade ago, drug spending has been increasing for years, and at a greater trend than overall healthcare costs. Sun Life, the largest stop-loss insurer in the industry, published a report on high medical claims and called out high cost specialty and injectable drugs as a driver of costs. Unfortunately, the dynamics of the prescription drug industry are pretty terrible for anyone hoping for drug spending to fall anytime soon. And we can see the impact of these drugs, such as Spinraza which costs $750,000 in the first year and $350,000 per year thereafter.
A significant result of this trend is data that has come out on people not taking medications due to cost, for example three in ten people polled in this study said they had not taken prescription medicine as directed due to cost.
Factor #3 – Mergers and Consolidation Impact on the Industry
Research has delivered bad news for hospital M&A activity, with consolidation driving up costs, in some cases by as much as fifty percent, and not improving quality of care in a measureable way. Kaiser Family Foundation provided commentary in July 2021 with regards to the Biden Administration’s Executive Order that instructs agencies to promote competition in the economy.
It is unsustainable for healthcare costs and health insurance premiums to perpetually increase faster than wages. If these trends hold, public agency intervention is inevitable, and potentially legislative action to alter the structure of our system. So we look to the market for trends in product development, use of healthcare strategies, and more to intervene and address these issues in our industry.
So, without further adieu, we predict the following trends in 2022 and beyond in employee benefits.
Trend #1: Increasing Prevalence of Alternative Funding
We’ve written extensively in this space on the use of self-funding a health plan rather than using a traditional fully-insured health insurance plan. The reason for this is that we see employers under pressure by increasing premiums, limited data and transparency, and increased demand for flexibility, and alternative funding may provide the relief that small and mid-sized firms seek.
According to the KFF 2021 Employer Health Benefits Survey, many large firms self-fund their health plans rather than purchasing health insurance from a carrier. Enrollment in self-funded plans differs widely based on firm type, with 82 percent of large firm employees enrolled in self-funded plans, versus just 21 percent of employees in small firms. Overall, 64 percent of employees are covered by a self-funded plan. This top-line number has been fairly steady and is similar to the percentage from 2020.
However, a whopping 42 percent of small firms reported that they offer a self-funded health plan, which is much higher than the previous years. These firms typically use various risk management techniques such as stop-loss insurance and medical stop-loss captives. I believe we will see this trend continue somewhat, albeit at a slower pace, as more firms learn about these alternative funding arrangements and more consultants bring these to the table for a benefits renewal.
In our own experience, groups may not transition to a self-funded plan for years after first learning about them. Some groups change to such a plan three, four, or more years after we’ve first presented the strategy to them. It takes time to develop trust with the client, experience, and knowledge with the decision-makers, and to implement some of these solutions. They aren’t an off-the-rack solution and take some work to properly adjust and fit to each client and employee population.
On the one hand, these plans provide relief to the right group. On the other hand, any group in these plans has therefore left a risk pool with other firms and as such, there is the risk of disruption to the community-rating premium structure used by ACA compliant small group plans. If healthy groups with low claims leave the small group risk pools, carriers will need to collect more premium from the remaining groups to maintain their loss ratios and properly manage their claims risk.
Trend #2: Greater Use of Provider Differentiation
The greatest pressure (IMO) on the healthcare industry is that of price – how much employers are spending, how much employees are spending, and what they are (or are not) receiving from the healthcare industry. One area of focus has been on driving lower acuity forms of care as an alternative to expensive emergency department visits, as every year, one in nine people with employer-sponsored health insurance have an ED visit. While this effort has successfully shifted members to urgent and virtual care (as appropriate based on how the member presents), we haven’t actually seen the hoped-for decreases in spending.
Research from the Health Care Cost Institute found that emergency department diversion has reduced utilization (Great!), but the price of every ED visit has increased so much that the net impact on spending has been nill. Furthermore, member out-of-pocket spending skyrocketed during the study period. So while utilization fell 4% from 2012 to 2019, the average price of an ED visit rose 57 percent to $1,055 in 2019. The researchers identified one driver of the increased spending to be the coding of more severe and higher-priced services.
As the great healthcare economist Uwe Reinhardt famously said (along with some friends), “It’s The Prices, Stupid.”
We as a country have some of the highest per-capita spending on healthcare, not because we utilize so much more than people of other nations, but because we pay more for the healthcare we receive (or consume, however, I take issue with that terminology). Researchers believe prices to be the primary reason for why our spending is so high relative to other countries, given that we have shorter hospital stays and fewer angioplasty surgeries than other countries, to name just a couple of examples.
In response, the health insurance industry has developed narrow networks to drive down payments to providers and hospitals for inpatient and outpatient care, the two largest areas of cost for health spending. This is in line with numerous findings from researchers that price and quality are disconnected in healthcare (HCCI “Price-Quality Paradox”, Health Affairs “What Do We Know About Prices and Hospital Quality?“). When a narrowed-down list of providers is offered to members as a way to manage the cost of care and improve quality outcomes, we call it Provider Differentiation.
Payers are bringing more narrow and differentiated networks to the market to fight the tide of rising healthcare costs. And as I see no reason for costs increases to abate in 2022 or beyond, I predict that groups will increasingly rely on provider differentiation to control costs and drive value for members.
This is tied in often with value-based care arrangements between payers and providers and an increasing emphasis on primary care, both of which will continue to increase as more options come to the market and employers become increasingly familiar with the strategy. However, I would merely be chasing after and jumping on a moving train with this “prediction,” so I’ve left them both off this list.
Trend #3: Slowdown in Digital Health Vendor Activity
We have seen unprecedented investment activity in digital health over the last few years. Research by Rock Health, summarized in Beckers Hospital Review, identified 541 digital health investment deals through the first three quarters of 2021 alone for an average deal size of $39 million, compared to 464 through all of 2020 for an average deal size of $31.5 million.
The most common categories for therapeutic-focused start-ups included mental health, cardiovascular disease, diabetes, primary care, and oncology. Each of these categories raised over $1 billion so far through 2021. A few years ago, total digital health investment over a year didn’t exceed $1 billion. And now, there are dozens of vendors promising significant ROI value propositions in attempts to command the attention of large employers across the country.
And yet… their customers are burnt out.
Like any market, there is both supply and demand to consider in the shape and composure of the market. While the supply of these vendors continues to increase (and some do deliver great results!), my concern lies with the demand curve, namely employers in the market to purchase and implement digital health solutions in 2022 and beyond.
In our benefits consulting work, we see employers and decision-makers with too many demands on their plate and not enough time in their day to get to everything. We’re hard-pressed to get their attention for their benefits renewal, let alone introduce new products and vendors into their benefits package. So while it is inspiring to hear start-ups niching down into high-need areas like Type 2 diabetes management or addiction treatment, I worry that employers don’t have enough time on their hands to take a holistic approach to build their offering of digital health vendors.
Hence, I believe we will see a slowdown in digital health investment activity in 2022 as investors are deterred by concerning and middling results in existing investments and across the market. Of course, one countering perspective here is that investment activity slows down just because the lowest-hanging fruit has already been picked. But this still would support a slowdown in investment activity in the digital health space.
Rather, I believe we will see continued consolidation among digital health companies. We’ve seen mergers like Headspace and Ginger, Doctor on Demand and Grand Rounds, and Teladoc and Livongo, and acquisitions like Accolades purchase of second opinion platform 2nd.MD. These will continue through 2022 and beyond as companies with committed users but limited market growth opportunities find strategic value in joining forces.