Earlier this year, a timely article in Benefits Canada suggested that Aon plc had forecasted an increase in employer-sponsored medical benefits of 7.5% in 2023. At that same time plan sponsors had just been jolted by the release of a similar (8.5%) Ontario Dental Association fee guide increase for 2023. These were disconcerting figures, as health and dental premiums combined account for some 60% to 75% of overall benefit costs.
Since we have repeatedly been exposed to “the sky is falling” explanations for possible rate increases from Insurers, which were rarely supported by our book of business, it was easy to dismiss these forecasts initially. We perhaps should have realized that this year (2023) could be different, because, unlike previous years, the in
flation number, or Consumer Price Index (CPI) inflation, was at 5.9% to start the year. So, it took a few months of client renewals to drive home the message that benefit costs could indeed spike 7% – 9% in 2023. If accurate, these cost increases would finally align with the Insurer’s conservative assessments of inflation/utilization in benefits, which had seemingly been wrong for at least half a decade.
With nine months of 2023 figures in the books and with inflation down to just 3.3%, we undertook the annual deep dive of our insurance business to see how it had fared, relative to the broader industry forecasts.
Over the last 5+ years, fully insured (non-self-funded) plans had faced annual inflation/utilization suggestions from Insurers of approximately 9% for healthcare and 6-7% annually for dental in Ontario and throughout most of Canada. But, for our Human Capital Benefits (HCB) block, before an oversized +4.05% overall change in 2022, annual cost increases during the prior 4-year period were mostly flat, i.e. (+1% to -1%), bookmarked by an atypical increase of 3.1% at the backend of that timeline (2018). In actuality, that (3.1% increase) was a decrease from the 8.45% annual change in the year prior (2017).
Our conclusion had always been that Insurers never needed the increases they had asked for, or that our firm had always managed to negotiate much of those excesses away. Unfortunately, we did not have any super consulting powers in this regard, as my colleague and friend David “Dave” Patriarche, founder of the Canadian Group Insurance Brokers Association has always had similar figures, to that of our HCB book.
What this means, is that so far in 2023, Insurers have been correct about cost escalations. A combination of general inflation and specific drivers of medical and dental utilization have conspired to create these above-average increases in premium costs. So much so, that our block numbers for 2023 are tracking at +7.1%. Following an equally aggressive move of +4.1% in 2022. See the table below:
The median cost increase across our plans is 4.1% over the last 9 years. That number falls to 3.1% going back 12 years. Figures, that one might suggest are more in line with long-term inflation.
Coming out of this analysis is whether the recent levels of increase in plan costs (2022/23), have ‘legs”? In other words, is there support for a period of above-average premium increases in benefit plans? Looking back at the period from 2015 to 2018, there is support for high single-digit increase levels, but what is not shown in the table, is that these increases were short-lived. In fact, in 2014, 2013, and 2012 the median change in the HCB block was 0%, 0.4%, and -0.42% respectively. This suggests a pattern where neutral cost increases are followed by a short period of robust increases before costs settle back. As with any trend, we will not be able to fully interpret it for some time in the future.
The key message for our clients and perhaps for other clients in the insurance industry is that although 2022 and 2023 median costs are up (perhaps slightly ahead of current inflation figures) as expressed by the CPI, long term, it is ‘mostly certain’ that plan costs typically do not expand beyond CPI unabated.
Essentially, as explained to me by an actuary colleague, Kwame Smart of Eckler Ltd.), long-term healthcare modeling assumes (for sustainability) that costs do not continually expand beyond CPI, because that would mean that society is spending an increasingly higher proportion of Gross Domestic Product on healthcare. Outsized spending in this area is not sustainable as this spending would come at the expense of spending elsewhere, i.e. Infrastructure/education, etc. If this were to happen, ultimately spending priorities would shift away from health spending or budgets would be cut to maintain sustainability.
If captured correctly, the message to our clients and perhaps other plan sponsors is that yes, we are facing a bumpy patch now, but it is unlikely that these sustained high single-digit increases can continue too much further over the coming months and years.