February 5, 2023

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How medical inflation is ensnaring big employers

Illustration: Maura Losch/Axios

A convergence of factors driving up health costs is threatening to make next year a very pricey one for big employers, forcing some to make difficult tradeoffs and eat some of the added expense.

The big picture: Rising medical costs combined with the anticipated end of COVID-19 government flexibilities and delayed care for non-COVID patients are creating a triple whammy for employers with few options to adjust, experts say.

  • As Caitlin Owens reported in September, seven in 10 employers expect moderate to significant increases in the cost of health benefits over the next three years.

What they’re saying: “Employers are fed up, as they should be. They’re footing the bill, along with Medicare and Medicaid, for everything,” said Brian Miller, a scholar at the American Enterprise Institute and hospitalist at Johns Hopkins Hospital.

  • “Everyone is angry about drug costs. Well, yes. But that’s 12% of costs,” he said. “Hospitals and physician practices are 51% of health care expenditures … We actually haven’t really looked at that.”

Driving the news: Employers have been able to shift some of the cost burden to workers through premium increases or high-deductible plans. But the tight labor market could provide an argument against that in the next two years.

  • A further complication is the forthcoming transition of the COVID response to the private sector, which will put health plans and patients on the hook for the cost of tests, vaccines and other treatments.
  • And the demise of Roe v. Wade is turning up the heat on employers to beef up their benefits, particularly in reproductive health, in order to stay competitive, Tammy Sun, CEO of Carrot Fertility, told Axios.
  • “It’s put a lot more pressure on employers because employers are the delivery mechanisms of health care,” Sun said. “They had to deal with COVID. Then they had to deal with the Great Resignation. Then they had to deal with the recession and are laying people off. And now they have to plug this other gap.”

Between the lines: A divided Congress isn’t likely to offer many policy fixes, with Republicans likely to focus on tax and budget issues and the Biden administration expected to use executive branch agencies to push its labor and employment agenda.

Yes, but: Even so, experts say they aren’t expecting total gridlock.

  • There may be traction barring anti-competitive contracting practices between providers and health plans, said Geoff Manville, partner and senior director of government relations at Mercer, during a recent webcast.
  • “There could be a lot of pressure next year to do even more with all signs sort of pointing to a big spike in costs next year for consumers and employers,” Manville said.
  • Antitrust regulation could focus more on provider consolidation, and there could be more efforts focused on drug price transparency and the role of pharmacy benefit managers, per the Purchaser Business Group on Health.

  • One health cost issue facing longer odds is paid family leave, which was dropped during talks on the Build Back Better package but still could be revived in the run-up to the 2024 presidential race.
  • “Right now the parties are pretty far apart,” said Zach Baron, a health policy and law expert at Georgetown University. But he said both sides could see it in their interest to score some narrower policy wins addressing health costs to appeal to independent voters.

What’s next: In the meantime, employers are watching the lame-duck session to see how accommodating lawmakers might be.

  • A coalition of hundreds of companies called for Congress to extend telehealth flexibilities before they expire at the end of the year. It’s still possible some elements of bipartisan legislation addressing mental health — a major priority for employers — may also get squeezed in.
  • But if lawmakers punt, big companies could face the combined force of medical inflation as the economy heads into a recession.
  • “We got to get that legislative vehicle. That’s going to be key to getting … just about any health care priority done,” Mercer’s Manville told Axios.

Editor’s note: This story has been corrected to reflect that remarks about the prospect of policing anti-competitive contracting practices in health care was made by Geoff Manville, partner and senior director of government relations at Mercer.