Lincoln International healthcare experts examine the impact of inflation on the healthcare insurance market.

Annual CPI and Medical Inflation: 2001 – 2024 (projected)⁽¹⁾

Trend in Observed Total Hospital Admissions as a Percent of Predicted Admissions (December 29, 2019 – December 5, 2020)⁽²⁾

Prescription Drug Expenditures and Prescriptions, 2016 – 2022^(3,4)

Average Annual Growth Rates of Spending, Utilization and Prices for Hospitals’ and Physicians’ Services, 2013 – 2018⁽⁵⁾

Payment-to-Cost Ratios for Hospitals, 2000 – 2018⁽⁵⁾

Growth at the Lower End of the Employer Market Will Further Increase Stop Loss Premiums⁽⁶⁾

Change in Health Benefit Cost per Employee, Workers’ Earnings and CPI⁽⁷⁾

The Cost of Employer-Sponsored Coverage Continues to Rise⁽⁸⁾

1

Self-Funding Growth will be Led by Small and Midsized Business (SMB)

In the U.S. in 2022, 65% of all employees eligible for health benefits were enrolled in a self-funded plan sponsored by their employer, up from 44% over the past 20 years. Large employers (1,000 employees and over) were the most likely to engage in self-funding, eschewing fully insured plans, with nearly 90% of employees covered by a plan sponsored by the employer. Self-insurance adoption rates among SMBs trails larger companies.  Penetration of self-insurance structures varies by size among employers with 200-999 lives (59%), 50-199 lives (30%) and 3-49 lives (11%). The market disruption of COVID, coupled with a transitory period of low medical inflation, temporarily slowed the inexorable shift to self-funding, particularly among SMB employers. With COVID mostly in the rearview and elevated medical inflation fast approaching, interest among employers in self-funding is greater than ever. Coupled with an expanding universe of high-quality solutions – from administration, to stop loss, to medical management – self-funding represents an ever more attractive long-term alternative to fully-insured.

2 

Shifting Costs through Increased Contributions and Higher Deductibles is Limited

During the past 20 years, employee contributions as a share of total cost has remained remarkably steady, increasing from 14% (1999) to 17% (2022) for single coverage and 27% (1999) to 28% (2022) for family coverage. Large employers tend to contribute a great share of cost (74%) for family coverage relative to small employers (64%), while both contribute ~83% of cost for employee-only coverage. Given the competitive labor market and importance of a quality and affordable plan, it is unlikely additional premium sharing, above and beyond medical inflation, can be passed down to employees.

Despite seeing a rapid increase in adoption, going from 4% of covered workers in 2006 to 24% in 2014, growth in high-deductible health plans has stagnated at ~30% since 2016 and is not expected to grow as a share of plans in the coming years. The total plan cost savings from promoting “consumerism” has been limited at best.

3 

Health Insurance Plan Design and Funding Strategy are Becoming a More Strategic Corporate Decision

In 2022, the average all-in cost of family GHI was $23k, which equates to nearly a third of overall compensation expense. As GHI inflation continues to outpace wage increases, this ratio will grow over time. Human capital (HR) will need to work collaboratively and creatively with finance (CFO) to craft a long-term strategy to address the need to control costs, while simultaneously limiting additional employee cost share and maintaining the overall quality of the healthcare plan. This will require increasingly sophisticated planning and a longer-term horizon (i.e., 5 years or longer) to effectively address.

4

Plan Sponsors will be Focused on Both Short-Term and Long-Term Solutions

The cost of GHI is set to increase substantially in 2023 and 2024 before reverting to the long-term trend of 2-3% above CPI and worker wage increases. This is not an acceptable outcome for either employers or plan members given the increasingly large share of compensation devoted to health insurance, with limited improvement in health outcomes. There is a clear need for both near-term and long-term cost containment – improving outcomes through more effectively managing existing claims or reducing the frequency, or severity, of certain types of morbidities.

5

Aggressive Payment-Focused and Care-Focused Strategies will be Used to Contain Costs

Self-funding in and of itself is no longer an effective strategy to reduce costs in the short-run and control medical inflation in the long-run, to say nothing of improving plan member outcomes. As the industry continues to mature, medical TPAs and cost containment providers will need to effectively deploy a broad spectrum of solutions across the claims cycle.

1. Reducing Payments for Incurred Claims: Strategies include claims audits, subrogation, reference-based pricing (RBP), direct contracting, specialty drug carve-outs and specialty networks. Financing strategies include stop loss and captive solutions. The goal is to minimize the final payment to settle a claim.
2. Facilitating More Effective Care for Incurred Claims: Strategies include care coordination of complex, high-cost medical claims, drug regime adherence, centers of excellence for high cost / high volume claims, digital health and steering patients to high-value providers. The goal is to minimize the severity / duration of an existing claims by improving patient outcomes.
3. Decreasing the Frequency of Certain Claims: Strategies can range from wellness and EAPs to incentivizing certain behavioral changes amongst a member population. Other preemptive strategies like genomic testing are also being deployed. The goal is to improve plan memberhealth to limit certain morbidities, such as type 2 diabetes, heart disease, or mental health challenges, before they manifest into larger health issues.

The marketplace is answering the call for new approaches. A number of innovative startups and small companies are driving the frontier of innovation with next generation versions of tried-and-true models, as well as new tech-enabled approaches to afford SMB employers the same innovations available to larger employers.  There will be no “one size fits all” approach, and each employer will determine directly (or with the assistance of their broker) the proper blend of in-sourced and outsourced solutions. Solutions providers will similarly seek to establish a continuum of capabilities to offer their customers more than just a single point solution.

6

Near-Term M&A Activity will be Weighted Towards Consolidation vs New Platform Investments

M&A activity during 2016 – 2021 saw a wave of private equity investments in privately owned companies and the early stages of secondary PE to PE trades (see Lincoln’s February 2022 Perspective highlighting some of these transactions). Activity centered around platform investments by sponsors seeking to consolidate a quickly maturing sector. 2022 has thus far been weighted towards tuck-in / consolidation plays as larger sponsor-backed platforms position themselves to go to market in 2024 / 2025, leveraging expected synergies to beat out standalone buyers (see the overview of 2022 transactions below). This trend is expected to continue into 2023 leading into the next wave of platform transactions.

As the industry has matured, and the dust has settled on past deals, buyers have become more discerning in evaluating assets. Not all TPAs or cost containment providers are the same, and two seemingly similar assets in terms of size or scale may trade for materially different multiples. Companies that can prove out a sustainable growth story and long-term value proposition are seeing high demand and attractive valuations, while more commoditized or undifferentiated players are seeing tepid interest and valuations.