- COVID-19 is throwing a serious wrench in employer efforts to calculate their 2021 medical cost trend, according to a new report from financial services company Credit Suisse.
- Usually, companies base their forecasts on prior-year historic data. But now, only about 60% of employers are using their actual 2020 claims experience, while making adjustments to try to normalize for the effect of the pandemic. Another 26% are formulating expected medical costs for next year based on 2019 data, and not even using data from this year to set rates. Another 9% are using data from the first two months of 2020, in a bid to eschew COVID-19 abnormalities altogether.
- Employers also vary widely in forecasts for how COVID-19 will affect 2021. About 61% think pent-up demand will raise costs above the normal baseline, forecasting a gross medical cost increase of 5.8% in 2021 compared to 2020 and a net medical cost increase of 5%. However, 39% of companies believe employees will likely continue deferring care next year and expect much lower cost increases: a 2.4% growth in gross medical costs and a 2.1% rise in net medical costs.
The coronavirus pandemic has effectively thrown the healthcare industry into chaos, as hospitals receive billion-dollar bailouts from the federal government to stay operational amid rising expenses and lowering revenue and payers report skyrocketing profits due to delayed care. Beginning largely in March and April, patients began widely deferring non-emergent care, wary of potential virus transmission in doctors' offices and hospitals and facing service restrictions during state lockdowns.
It's too early to say how this situation will change in the back half of the year and beyond, as it largely relies on the country's future success in managing COVID-19, along with the creation and dissemination of a viable vaccine. But health insurers, in an industry where revenue relies on accurately predicting future healthcare use, are facing particularly acute uncertainty as they struggle to set rates for 2021.
Credit Suisse surveyed 700 health benefit managers over the past month to analyze how employers and insurers are approaching health benefits for 2021, given the uncertainty. In the report published Friday, the massive Swiss financial services firm found the methodology employers are using to set rates significant impacts their expected cost increases for next year.
The majority of employers are using adjusted 2020 data to set rates for next year, and expect net medical cost increases of 4.1% in 2021. However, employers using 2019 data to set rates expect a net increase of 3.9%, while the minority of employers using only the first two months of 2020 to set trend expect a higher net increase, of 4.6%.
Unsurprisingly, medical cost trends this year have been generally lower than expected as patients widely deferred non-emergent care amid the pandemic. About 45% of self-insured employers reported a better-than-expected medical cost trend this year. Last year and the year prior, that percentage was just 16%. Another 35% of employers' 2020 medical cost trends have been in-line with expectations, while just 19% are seeing higher gross medical costs.
Comparatively, last year and the year prior, a respective 33% and 36% of employers reported higher-than-expected gross medical cost trends.
Credit Suisse also found employers and payers expect premium growth to continue moderating next year, though it's still forecast to increase above net cost trends. Average employee premiums are forecast to hike 4.4% in 2021, compared to 5.4% a year ago and 6.1% the year prior.
Over the past three years, the spread between premium growth and expected net cost trend has narrowed from 250 basis points in 2019 to 30 basis points for 2021.
Overall, gross medical costs are expected to jump 4.7% in 2021 on a year-over-year basis, versus an expected increase of 5.1% for this year and 5.1% for 2019. Employers expect to reduce their 2021 medical cost trend by 60 basis points through benefit buy-down strategies, such as offering fewer benefits or higher cost sharing.
That's compared to an expected 130 basis points drop last year and an 150 basis point drop the year prior, and brings the expected net medical cost trend down slightly, to a 4.1% year-over-year increase for 2021.
The narrowing between growth in premiums and cost trend suggests health plans will pursue margin gains mostly by leveraging operating expenses, which ties in with the ongoing trend of managed care company consolidation, Credit Suisse analyst A.J. Rice said. The horizontal deals enable payers to reap larger and larger premium revenue, while holding operating expenses relatively stable.
In other interesting findings, three-quarters of employers think a majority of their workers aged 60 to 64 would continue employer-sponsored coverage if given the option to buy into Medicare early. It's a key tenet of Democrat presidential nominee Joe Biden's healthcare plan if elected in November.