Strategy

CFOs stare down healthcare cost inflation

Costs are volatile, growing, and tough to control.
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· 4 min read

Finance leaders are stressed by increasingly volatile health insurance claims and by the long-term growth in healthcare costs, which many of them said will affect business results if it keeps outpacing overall inflation in the coming years.

The volatility has been making it more difficult to accurately forecast healthcare costs, CFOs and other finance leaders of 80 mostly large companies told Mercer, which published a report this month based on surveys in February and March. Not that forecasting was easy before, as evidenced by the 72% of respondents who said their expenses are more difficult to predict for healthcare than other areas, the 67% who worried about the costs of their benefits “compared to other operating expenses,” and the 65% who said they reforecast two or more times each year. More than two in five said their benefits team told them to expect more volatility in their claims this year.

One thing that is easy to predict: the upward march of healthcare costs above overall inflation. It’s been growing about 1%–2% above inflation for the last two decades, “but even to maintain that level of cost growth will be difficult,” according to the report. Nearly all organizations surveyed (94%) would be in trouble if costs rise above CPI+2% over the next three to five years.

Among those with self-funded insurance plans (those that pay out their own claims instead of paying an insurance carrier), a combined 39% said their business would take a material hit if their healthcare costs went over budget by 4% or less. Healthcare costs are likely to be an issue “for some time,” the report said, because they tend to follow the ups and downs of overall inflation at a delay—and as we know, overall inflation has been pretty stubborn about falling.

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Pain points. The largest share of finance leaders (83%) said they’re “very concern[ed]” about what Mercer called high-cost claimants: those whose claims add up to between $100,000 and $1 million, a range that has “become more common in recent years and contribute[s] most to high trends and cost volatility.” A slightly smaller majority (67%) are very worried about “very-high-cost claimants,” i.e., those whose claims total more than $1 million. Paying for new weight-loss drugs like Ozempic brought up deep concern in 40% of respondents. About one in three are also not confident that programs such as well-being initiatives, clinical management programs, and specialized provider networks are saving them money.

Good news. About two in five finance leaders at self-funded organizations told Mercer they build a margin into their healthcare budgets, about equally split between those with a 1%–2% margin and those with one that’s 3%–5% over budget. (One in three “don’t use margins,” which is not such good news if claims are larger than forecast.)

Room to improve. Despite the growth in volatility, just two in five finance leaders said they want to improve how they predict healthcare claims, but they did seem more open to actions that would control costs. Finance leaders said they’d put a strong or very strong emphasis on several approaches: more closely monitoring the healthcare employees are using (64%), lowering costs by contracting with specialized provider networks (48%), and making employees pay for a larger portion of their healthcare (45%).

Mercer said CFOs can improve how they measure their benefit costs, specifically by tracking not just overall costs but also costs for beneficiaries with chronic conditions, and those for programs the organization pays for to help manage conditions.

News built for finance pros

CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.