Catalyst for Payment Reform

Has Price Inflation Got Your Attention? Carpe Diem!

Has Price Inflation Got Your Attention? Carpe Diem!

On February 10, the U.S. Department of Labor released its latest monthly report on inflation.  It was unwelcome news; the Consumer Price Index (CPI) (i.e., price inflation) jumped by 7.5% over the past 12 months, its highest annual increase in 40 years.  For employers and other health care purchasers that monitor their claims cost and utilization data religiously (who doesn’t?), this news prompts questions from purchasers about how inflation will impact their future health care spend.  For those of you that align your Plan Year with the calendar year, you’re just a few months away from possibly seeing a higher projected trend in your 2023 renewal rates.

If you’ve been in health care purchasing for even a short time, you know that employer health care costs have been rising faster than CPI for a while now.  Recall over the past decade plus during which purchasers made difficult decisions at renewal to increase copays, deductibles, out-of-pocket maximums, and employee contributions to shift more costs to employees, shrinking a +10% employer cost spike to +4%.  In recent years, having exhausted these tactics and learned that they can backfire, employers have turned to digital products to help manage their spending.

But cost is not the same as price.  Several factors drive an employer’s health care cost increases, including the rising prices providers charge for services, plan participants’ utilization of services, health care technology (e.g., new MRI machines), changing employee demographics, and even the cost of materials (e.g., bandages, medication, durable medical equipment, etc.).  According to the Health Care Cost Institute, prices account for approximately 70% of health care cost increases.  Furthermore, research shows that the provider consolidation over the past decade and longer has led to higher prices.  In other words, higher provider prices accounted for +7% of that +10% renewal increase you experienced in [insert year(s) here].  Health care price inflation, quite simply, is not a new phenomenon.

Growing provider market power has eroded health plans’ ability to negotiate; a larger provider in a specific market must be included in a plan’s broad network to ensure access, and therefore, the dominant provider can command the prices it wants.  When anticipating health care cost trend, a purchaser should reframe its mindset; in fact, the trend represents the actuary’s best guess at how successful the plan will be when it comes to negotiating prices with providers.

As purchasers make this connection, they should recognize the opportunity they have to put pressure on rising health care prices by implementing high-value strategies.  What can they do?

  • Offer an insurance option that directs plan participants to high-quality, low-cost providers, either as a replacement to a broad offering or as a competing offering with incentives (e.g., richer benefit design, lower employee contributions, concierge support, etc.).
  • Implement a precision network design that cuts high-priced providers from the network.
  • Offer access to high value centers of excellence and incentivize plan participants through benefit design to use them.
  • Leverage public hospital price transparency and quality data to navigate plan participants to high-value providers.
  • Embark on a reference-based pricing strategy.

Purchasers, carpe diem!  Ensuring that your 2023 benefits are affordable depends on it.

CPR’s Director of Member Services, Ryan Olmstead, MPH, wrote this blog post.

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