Employers: A Perfect Storm is Converging Around Your Benefits Program Costs

Healthcare spending now accounts for 17.9% of our gross domestic product (GDP), and it’s expected to reach 19.7% by 2026 (CMS). Private health insurance spending rose 5.1% to $1,123.4 billion in 2016, accounting for 34 percent of total National Health Expenditure (NHE).

Numerous factors are contributing to the increase for employers providing private insurance, including skyrocketing pharmaceutical costs, chronic disease, financial stress, and an aging population. Let’s take a look at how each factor impacts you.

Pharmaceutical Costs Continue to Rise

Increasing drug costs are giving employers headaches and led to higher than expected premium increases for many companies this year. And the bad news keeps coming. Several drug companies kicked off 2018 by raising prices (Reuters). In March, Axios reported that the 20 most frequently prescribed drugs in the US rose by more than 200% in the past 14 months.

The public backlash around the price hikes of 2017, especially for life-saving drugs like insulin, has had little effect to date, but a new Congressional Committee report may change that. The cost of the 20 most frequently prescribed drugs for Medicare beneficiaries average da 12% increase over the past 5 years:

  • 6 of those drugs increased more than 100%
  • The increase cost Medicare an additional $8.5 billion.

An Emerging Rx Expense

The opioid epidemic has impacted people across all walks of life. Many working adults involved in accidents, recovering from surgery, or living with chronic pain have been affected. As employers, you were picking up the tab. With the epidemic brought to light, many states enacted legislation to severely limit the number of opioids and other pain medications prescribed at one time.

So, the good news is that the use of prescription opioids among people with employer-based health coverage has declined to its lowest levels in over a decade. The bad news is that your costs to treat addictions and overdoses has risen dramatically (Kaiser Family Foundation).

According to the Foundation’s analysis, employers paid $2.6 billion to treat opioid addiction and overdoses (from both prescription and illicit use) in 2016. That’s more than 8 times higher than what employers paid in 2003 ($0.3 billion).

Two other interesting facts were noted in the article:

  • 22% of people age 55-64 had at least one prescription for opioids filled in 2016, making this age bracket the highest utilizers.
  • Opioid use varies by region:

 

South = 16%
Midwest = 14%
West = 12%
Northeast = 11%

The Impact of Chronic Disease

The CDC estimates that approximately 71% of the total US healthcare spend goes to treat Americans with more than one chronic condition. A 2017 Rand study of US adults paints an even bleaker picture:

  • People with 5 or more chronic conditions account for 41% of total healthcare spending
  • People with 3-4 conditions account for 26% of total healthcare spending
  • People with 1-2 chronic conditions account for 23% of total healthcare spending.

The actual costs to treat the conditions, both direct and indirect, are shocking (see figure to the right).

$42 Trillion
estimated medical costs to treat chronic disease in the US.

$794 Billion
estimated annual cost of lost productivity due to chronic disease.

Source: The Partnership to Fight Chronic Disease

New Victims of Chronic Disease: Unborn Babies

Deaths during childbirth are decreasing the world over, but they’re on the rise in the US. A Michigan Medicine study of 8.2 million US childbirth deliveries over 10 years found that the cause of maternal death in 50% of the cases was attributable to one or more of the following chronic conditions: asthma, diabetes, hypertension, heart disease, and substance-abuse disorders.

Mothers aren’t the only ones at risk. Their babies can be stillborn, born prematurely, or suffer from long-term healthcare issues and disabilities.

According to the March of Dimes, 1 in 9 babies is born prematurely in the US, which:

  • Is the leading cause of death during the first month of life.
  • Causes developmental delays, cerebral palsy, blindness, and intellectual disabilities.

Employers cover almost 11% of all babies, spending more than $12 billion annually in direct healthcare costs. A premature/low birth weight baby costs an additional $49,760 in healthcare costs. Lost productivity from absenteeism and presenteeism further impacts your bottom line.

Financial Stress

You’re also bearing the cost of employee financial stress, both indirectly and directly. According to an article by Pension Consultants, The Impact of Financial Stress on Workforce Productivity,  1 in 4 workers suffers from serious financial distress. The article explains the 6 ways this impacts your bottom line:

Impact of Financial Stress on a Company with 1000 Employees

Affected Area Impact Cost per Year
Days Available 70% of absenteeism is tied to stress-related illnesses, which is one of the leading causes of financial distress. $2.52 M
Engagement A financially stressed employee spends 20 hours per month at work, on average, dealing with financial issues. $1.75 M
Fatigue Fatigue leads to presenteeism, causing 6 hours of lost productivity per employee per month. $500 K
Alertness About 70% of workplace accidents are stress-related. $667 K
Commitment 40% of workplace turnover is due to stress. $210 K
Ethics 4.2% of financially stressed employees have been caught stealing from their employers. $18.5 K

(does not include costs for security, HR, legal expenses, and replacement staff)

Read The Toll of Financial Stress on Health by colleague Brandon Conroy to learn more.

You also have direct costs caused by work-related stress. According to a 2015 Forbes article, workplace stress costs employers up to $190 billion, which equates to 8% of your healthcare spend each year. Treatments cover a variety of issues, including aches and pains, anxiety, heart disease, high blood pressure, alcoholism, and mental illness.

Read Could Mental Health Be Your Biggest Cost Driver to learn more.

An Aging Workforce

We’ve been hearing for decades about the vacuum baby boomer will create in the workforce when they retire. HR pros everywhere shivered at the thought of replacing the knowledge of these employees and the sheer number of employees they would lose in a short time. But it isn’t happening entirely that way. An unexpected scenario is unfolding, and it can significantly impact your bottom line.

What’s the scenario? Not all aging adults are retiring. In fact, according to in the Bureau of Labor Statistics (BLS), people aged 55 and older will be the fastest growing segment in the workforce through 2024 (see table to the right).

You might be thinking that this is a good thing since you’ll be able to retain your most experienced and knowledgeable workers. In that sense, it is. But there could be a downside, which could have a large impact on your overall risk.

Lack of Retirement Preparedness

Many baby boomers are financially unprepared to retire. In fact, many Americans just don’t know how to save money:

  • The median retirement account balance is only:
    • $2,500 for all working age households
    • $14,500 for near-retirement households (National Institute of Retirement Security).
  • 64% of Americans can’t cover a $1,000 emergency without borrowing money (MarketWatch 2015).

A big reason employees can’t save money is that they are using what they have to pay for healthcare. Out of pocket spending grew 3.9%, to $352.5 billion in 2016, or 11 percent of total NHE.

 

Annual growth rate in labor force by age, projected 2014–24 (%)

 

Age group Annual growth rate in labor force,

projected 2014–24

16 to 24 -1.4%
25 to 34 0.8%
35 to 44 1.0%
45 to 54 -0.8%
55 to 64 0.6%
65 to 74 4.5%
75 and older 6.4%
Source: U.S. Bureau of Labor Statistics

In fact, cost-sharing has increased more significantly than wages (Kaiser Family Foundation), causing more insured Americans to struggle to pay for healthcare (see chart to the right). Another factor is the move from defined benefit plans to defined contribution plans to fund retirement, putting more of the burden on employees to save for retirement.

 

Health Cost Rise as We Age

I’ve already talked about the costs associated with chronic conditions, but this is worth noting.

The CDC reports that 1-4 Americans has a chronic condition, and that those 65 and older have 3-4 conditions. As chronic conditions rise, so do healthcare costs (see figure to the right).

The health of these older workers could also impact your absenteeism and productivity, as well as safety, disability, and workers’ compensation costs.

Read Financial Wellness—A Means to Retirement Readiness to learn more.

What Can You Do to Control Your Employee Benefit Costs?

These factors are converging to create a perfect storm as you try to manage your healthcare and other benefits costs. You can’t rely on the same interventions you’ve relied on in the past to keep this storm at bay.

Wellness programs. You’ve implemented a wellness program to improve employee health and reduce your costs, but how effective is it? According to the 2017/2018 Willis Towers Watkins Global Benefits Attitude survey, only 32% of employees believe employer wellness programs encourage healthy lifestyles. Numerous other studies show that wellness programs are not effective, even when incentives are offered.

Cost Shifting. Rising medical and drug prices caused you to shift more costs to your employees, but as the data previously discussed, employees are drowning. They can’t take any more. And cost shifting could actually increase your costs in the long run.

Read my previous blog Is Cost-Shifting Reducing Your Healthcare Costs in the Long-Run to learn more.

You Can’t Tackle All These Issues in Silos

To effectively address all converging issues, you need a holistic view of what’s happening in your population, not a singular view of what is happening in each data silo. That hasn’t worked in the past, and to paraphrase Einstein, the definition of insanity is doing the same thing and expecting different results.

If you integrate data across all your benefits programs, you will get a 360-degree view that allows you to identify correlations that could be adversely impacting your population, such as:

  • How switching to a high deductible health plan impacted your medical utilization, workers’ compensation, and disability costs
  • How poor employee health is contributing to safety, workers’ comp, and disability costs.

You need to strike a balance between retaining a skilled, knowledgeable workforce and the direct and indirect costs associated with an older workforce. For that, you need to access to real-time data, such as:

  • 401 (k) contributions
  • Medical and Rx costs
  • Workers’ compensation and disability
  • Safety.

Only then can you truly assess what the cost of an aging workforce will be.

The perfect storm is nearing. Do you have the holistic view of your human capital programs that you need to be able to come through the storm in tact?

Sashi Segu

Sashi Segu

Sashi Segu, Counsel, has participated in cases and provided legal expertise on HIPAA, ERISA, privacy, compliance, and other healthcare-related fields. Sashi left Innovu in March 2019 to pursue other interests.

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