Last year, something strange happened to cost growth for employer health benefits: it slowed. In the face of decades of high single-digit spending increases and two years of extremely elevated inflation, employer health spending grew at a rate distinctly lower than any year in recent memory—including pandemic year 2020.
So what gives? What caused this strange occurrence, and what might it mean for future commercial health spending? The Union team loves a good mystery, so we decided to do some detective work and try to crack the case, focusing on three key factors: price, utilization, and strategy.
Setting the scene: employer cost trends
The critical context here is the historical employer spending trend. Note that we’re setting aside Medicare and Medicaid cost trends for the moment. In the past decade, commercial medical cost trend, i.e., the amount by which private payer spending on health services increases each year, has reliably hovered between about five and a half and seven percent per year. Even in the most acute pandemic years, 2020 and 2021, spending growth remained around six to seven percent. That happened because even though claims volumes—and therefore utilization spending—for self-insured employers fell, those savings were offset by increased spending on virtual and behavioral health services, new spending on Covid-related care, and the return of pandemic-deferred volumes in 2021.
In 2022, cost growth was expected to ‘return to normal’…
Across healthcare, many predicted 2022 to be the first ‘normal’ year, or near normal, since the start of the pandemic; employer cost trend should have settled back around five to seven percent.
… But a mysteriously low cost growth appeared instead
Contrary to those assumptions, across various employer surveys and spending reports, private payers have consistently reported that costs in 2022 grew between just three and five percent last year.
Considering the steadiness of the historical precedent rates, that dip in and of itself is a highly unusual finding. What makes it stand out even more is the fact that it ran directly counter to what happened to costs in the rest of the economy. We ended 2022 with a 6.5% annual inflation rate, including a high of nine percent in Q2 of 2022. Usually, healthcare cost growth comes in higher than economy-wide inflation—so, healthcare spending increases of less than half that rate are unprecedented, to say the least.
Having set the scene, now let’s discuss what might be responsible for the unexpectedly low-growth year, and whether any of these factors can be extrapolated to predict cost growth differences in the future.
Suspect #1: Price
Question: Is it possible that the reduction in cost growth was due to a reduction in the average growth of prices for individual healthcare services?
Our answer: No. While the nature of commercial healthcare pricing likely helped buffer some employers from the immediate effects of inflation, changes in price growth probably did not cause the slowing in spend in 2022; employers shouldn’t bank on prices slowing for future savings either.
Reliable data on the prices employers pay for services can be difficult to track down (see every conversation about healthcare price transparency). But the Bureau of Labor Statistics does track the Producer Price Index (PPI) for medical care, which measures how much plan sponsors pay providers for healthcare. According to the BLS, the price of outpatient services grew about 1.4% in 2022, which is the lowest increase since 2017, but still an increase, nonetheless. And meanwhile, the cost of inpatient services increased 4.6% last year, faster than any other year since the BLS started collecting data in 2009.
Not only was there no across-the-board decrease in 2022 price growth, we expect that overall higher prices are on the way due to inflation and other economic pressures that providers are experiencing. Consider the fact that even the relatively high inpatient price growth rate of 4.6% was well short of the increase in prices producers saw across all goods and services. Last year the PPI growth rate for all goods and services shook out at 6.3% (down from a whopping 9.9% in 2021). Providers will work hard to make sure that the rates they are getting from payers reflect the higher prices that they have had to pay, especially for labor.
One reason we haven’t seen healthcare prices reach those highs of general inflation yet is because of the cyclical nature of healthcare contracting. Payers and providers usually do not go back to the negotiating table every single year, thus price changes tend to be phased in relatively slowly. Inflation started to pick up (in this case meaning surpassing three percent) around April 2021, then steadily rose throughout the year and stayed consistently high throughout all of 2022. So while inflation has been rising for the last two years, only in the last 12-14 months has it remained steadily elevated, leaving a fairly narrow window in which contracting parties could have accounted for the unprecedented rise in prices. Let’s do some back-of-the-envelope math: if we assume most contracts have a three-year time horizon, only about a third of negotiations would have even had the chance to adjust for current economic realities.
Implications: Prices will rise soon, and by a lot
If, as we suspect, multi-year contracts have sheltered plan sponsors from inflation in the short term, we’ll start to see that protection fade in the next year or two. And we wouldn’t expect to see rates simply bounce back to the typical five or six percent either. After nearly two years of being battered by high prices and rising labor costs, providers are going to push for even larger increases to help make up for the extremely high spending. Eventually, higher prices in the rest of the market will trickle into employer health benefits.
Suspect #2: Aggregate utilization
While delayed contracting can explain why healthcare spending didn’t shoot up in conjunction with the wider economy, it certainly can’t explain a dip in cost trend relative to typical annual growth (i.e. in years when inflation remained low and steady). So the mystery continues…
Question: If the main factor isn’t a reduction in the price of services, is a reduction in quantity (in healthcare terms, ‘utilization’) the reason for the muted cost increase for employers?
Our answer: Maybe. But the 'why' of this still needs answering. And if the 'why' is linked to the economy, and if all utilization is down across service lines, regardless of care type, because of economic pressures—this might not be great news for employers.
Employers that we’ve talked to did see lower utilization last year, as measured by a drop in claim volume, even compared to a pre-Covid baseline, though there is no strong consensus on why. One force that may be putting downward pressure on utilization is the persistent provider shortage, which is driving up wait times for many specialty services.
A more common theory is that patients are avoiding care altogether for financial reasons. The New York Federal Reserve uses yield curves as an indicator of recession, and currently their models are predicting a 70% chance of recession in the next 12 months. We can debate the semantic argument around what qualifies as a recession, and the not so semantic argument of the impact of recessions on healthcare, but it’s clear that some people delay care when they are experiencing economic hardship. In a recent survey, Gallup found that 38% of respondents said they had deferred care in 2022 due to cost. That is the highest rate of reported deferrals the firm has recorded since starting to track this data in 2001, including during the 2008-2009 financial crisis.
Implications: Utilization cuts blind to care type rarely benefit the payer in the long run.
In either case (wait times or economic stress), if those reasons are driving lower healthcare spending, then utilization rates will continue to lag in the next year or so as staffing issues persist and volumes track with the wider economy—but (again if those issues are the reason), that trend cannot last. Deferred preventive services in the short term translate into sicker patients and higher utilization of urgent services in the medium-to-long term as health worsens. At some point, such an effect would end up driving employer health spending higher.
Suspect #3: Payer strategy
Utilization being down because patients can't access services is never a positive interpretation; but there is another angle to consider, which, if accurate, would be much better news for employers (and patients!).
Question: Is it possible that efforts to steer patients to more cost-effective utilization patterns might actually be working—and could that shift be significant enough to manifest in a two-to-four percentage point drop in cost growth?
Our answer: Maybe. And if the care being shifted is in fact low-value utilization, this would be a significant return on employers' longtime efforts along these lines.
All care deferrals are not created equal. Care that is necessary, received in the lowest-cost appropriate setting, and of high quality is typically considered ‘high value,’ while care that is unnecessary/preventable, excessively, expensive, and/or low quality is considered ‘low-value.’ It’s possible that some of the utilization that was avoided or deferred last year was actually low-value utilization, which would be a huge win. It’s essentially the inverse of the dynamic described above, in which when preventive services go unused, this causes problems down the road.
There is some early evidence to support the idea that overall efforts to improve patient use of different sites of care might be working. For example, the National Health Interview Survey collects data on medical usage, including the share of adults who report using various services in the last 12 months. Throughout 2019, on average about 21.9% of adults had gone to the hospital emergency department. Last year that number fell to 19.7%, representing a ten percent drop. Conversely, the share of adults reporting having seen a doctor in the last 12 months as of the fourth quarter of 2022 (84.9%) was nearly identical to the share in Q4 of 2019 (85%).
If patients really are using sites of care more effectively, what would explain this development? We can’t help wondering if maybe the notable uptake in ‘navigation’ efforts by employers might actually be starting to reshape service consumption patterns.
Taking a step back: Navigation is an extremely broad term, which encompasses everything from merely furnishing some additional cost information for patients on one end of the spectrum, to centers of excellence and global direct contracts on the other. The goal of all these efforts is the same though: move members away from higher-cost, lower-value care and toward lower-cost, higher-value care.
Historically speaking, the discourse around employer benefits innovation has not been optimistic. There’s been a tendency to first hype up these efforts, then dismiss them as ineffectual because they didn’t seem to make a dent in cost growth trends (yet?) and were not widely adopted. However, if you’re familiar with models such as the Gartner hype cycle, you know that after the ‘disappointment’ phase, a hyped-up innovation given enough time to mature can go on to produce an eventual rise in utility and benefit as its issues are worked out and effects have time to be measured.
Consider, too, the ever-growing infrastructure of service vendors presenting themselves as the cure to healthcare spending woes (see: Transcarent, Carrum, The Clinic, and many more). Given the extent to which these services seem to be gaining traction among employers, it doesn’t seem wholly unrealistic to suggest that the cost trend dip might be an early sign that these employer efforts are actually making a difference.
In this post, we have tried to keep the focus exclusively on employer populations; it would be too complex to try to have a conversation about both public and private payer cost trends simultaneously. But breaking our own rule for a moment, it is possible this dip is also, in part, due to a spillover of similar ideas and goals in Medicare strategy into employer-sponsored utilization patterns. There has been a proliferation of population health-linked delivery models established by accountable care and Medicare Advantage risk organizations. Even though we are talking about different populations and different incentives, a provider care model designed to amp up preventive care for seniors could well improve care for non-Medicare beneficiaries, if they are receiving care from the same providers designing more proactive care paths for high-value models.
Implications: A demonstrated track record (if that's what this is) will accelerate value-related utilization shifts.
If purposeful, value-oriented employer strategies are managing to curb cost growth, that’s an outcome that has a good chance of sticking around. The longer private payer costs continue to buck economic trends and historical norms, the stronger the case for a systematic, consciously-designed shift in utilization patterns being the explanation. If that happens, and the navigation vendors arm themselves with persuasive data proving their efficacy, they’ll have an increasingly compelling value proposition. The flywheel effect will allow the trend to pick up speed, with an even larger number of employers and payers adopting these models and magnifying the effect.
What that would mean for industry players varies, but basically it would mean that higher-cost sites/providers would lose utilization at an ever-steeper rate, while lower-cost sites/providers would keep or gain it.
Unmasking the perpetrator(s)
The bottom line is that we cannot definitively pinpoint a single origin point for the lower-than-expected employer cost growth phenomenon. Rather, it is most likely that a complex interplay of the factors we’ve outlined above lowered cost growth:
The immediate impact of inflation was mitigated by the nature of healthcare payment negotiations…for now.
Meanwhile, inflation deflated demand for at least some kinds of healthcare services among cost-conscious adults.
All the while, strategic investments by employers, spurred on by post-pandemic benefits adjustments, may be nudging volumes toward more price-friendly providers and sites of care.
Perhaps what made 2022 exceptional was actually the convergence of all these factors at once. And while some are likely to fade in the near future, others could be around for years to come.
If you’d like to check out our detailed report on employer healthcare strategy in 2023, or have an alternative theory for whodunit that we didn’t discuss, drop us a line at firstname.lastname@example.org.