Inflationary Impact on Employer-Sponsored Health Coverage: Will a Recession be Different this Time?

Providing all Americans with access to affordable, quality healthcare is one of the most significant social and economic challenges of our time. The surge of COVID-19 corresponded with a higher demand for clinical health services, followed by record inflation and increasing costs of care. As a result, the pandemic revealed healthcare vulnerabilities, complex realities, and ever-increasing measures to reduce costs.

The pandemic exposed a much larger segment of Americans as being financially fragile—living paycheck to paycheck and unprepared for regular household expenses, let alone out-of-pocket medical expenses. Now, compounded by indications of a national recession and an ever-increasing inflation rate, employers and employees alike have heightened concerns over potentially significant increases in the cost of medical services, pharmaceutical drugs, and medical supplies and devices.

Both employers and employees expect increases in the cost of coverage (employer and employee contributions) and point-of-purchase cost-sharing (deductibles, copayments, coinsurance, etc.). Increasingly, Americans have become anxious over “what’s next” in terms of price increases and what will add to their financial stress thanks to the soaring cost of living. A continued surge in inflation could potentially devastate healthcare providers, payers, and ultimately, patients.

Recession Reality Sets In

Inflation has outpaced wage growth. Through June 2022, average real weekly earnings are down 4.4% over the past 12 months—from the combination of inflation and a reduction in the average number of hours worked. That’s the largest reduction in real wages since the 1970s.

The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The PPI rose 11.3% from a year ago in June, near the record 11.6% posted in March. Excluding food, energy, and trade, the core PPI was up 6.4%. This suggests that inflation for consumers will continue to increase in 2022.

Why is the PPI important? It measures inflation from the perspective of costs to industry or producers of products. Because it measures price changes before reaching consumers, some people see it as an earlier predictor of inflation than the Consumer Price Index (CPI). The CPI includes only components of personal consumption directly paid for by the consumer. In contrast, the PPI for personal consumption contains elements of personal consumption that are not paid for by the consumer.

Gross Domestic Product (GDP) measures the value of the final goods and services produced in the United States (without double counting the intermediate goods and services used to create them). Changes in GDP are the most famous indicator of the nation’s overall economic health. Real GDP decreased at an annual rate of 1.6% in the first quarter of 2022, followed by a second decline of .6% in the 2022 second quarter. Whether officially a recession or not, the U.S. economy has slowed, declined.

June health plan renewals suggest high single-digit rate increases for medical coverage in 2023. However, more recent anecdotal data suggests many, perhaps most plans, will see double-digit rate increases for 2023.

Will it be Different this Time?

As stimulus checks were deposited, a record number of workers quit their jobs, creating the so-called “Great Resignation,” nowadays, as folks reenter the workforce, renamed the “Great Reshuffle.” Notably, the July 2022 civilian labor force participation rate of 62.1% declined from 62.2% achieved in June 2022—still significantly below pre-pandemic levels.1

While fewer people are in the labor force compared to pre-pandemic levels, unemployment remains historically low.2 Most Americans who want to be employed still have jobs. Regardless of work status, sending out federal stimulus checks failed to target only those in need.

A recession traditionally lowers employment, lowering the number of Americans who secure healthcare coverage through employer-sponsored plans. However, this recession may not be like other recessions. It may technically be our first ever “full employment” recession, likely a statistical anomaly caused by a combination of factors:

  • Labor force participation at 62.1%; however, those who have left the labor force as part of the Great Recession are not counted in the employment/unemployment data
  • The 3.6% unemployment rate
  • The addition of 528,000 jobs in July 2022

HSA Strategy to Support “Financially Fragile” Workers

Healthcare inflation is impacting both employee contributions and out-of-pocket costs.

Plan administrators and brokers need to take a holistic approach to employee health benefits and strategic action to ensure their plan design incorporates the most effective strategies available to address today’s economic challenges to the “health and wealth” of their participants.

The rapid inflation rate is proving Health Savings Accounts (HSAs) a strategic and valuable option for employer-sponsored health plans. HSAs are ideal for today’s financially fragile workers unprepared for everyday expenses, let alone out-of-pocket medical expenses. Most have no savings earmarked for regular medical cost sharing. Done right, an HSA strategy will better prepare participants for copayments, deductibles, coinsurance, and unexpected out-of-pocket medical expenses.

Implementing HSAs as a Competitive Advantage

Both plan sponsors and participants are still learning the benefits of HSAs. Education should focus on the advantages and clear rewards—both now and in the future. Health plan sponsors should consider how HSA-capable coverage is communicated to employees to fuel greater adoption and optimization of these accounts.

Plan sponsors can position HSAs as a program capable of “Quadruple Duty:”

  • Fund current and future year out-of-pocket medical, dental, vision, and hearing costs as well as certain medical and Long-Term Care (LTC) premiums
  • Fund those same costs in retirement as well as Medicare Part B and Part D premiums
  • Use to provide an income in retirement, without tax penalty (after age 65)
  • Serve as a survivor or legacy benefit—unused monies are passed on to designated beneficiaries

Employers can start implementation by conducting full-positive annual enrollments. When individuals elect medical coverage, using the HSA-capable option and a positive contribution amount as defaults prompts employees to opt out if they want a different coverage option. Opening the HSA on the first day of coverage with a nominal employer contribution gets them off on the right foot. Also, adding midyear HSA re-enrollment can help alter the default investment from capital preservation to longer-term investments.

References:

1. Treading Economics, Labor Force Participation Rate. “The civilian labor force participation rate is the number of employed and unemployed but looking for a job as a percentage of the population aged 16 years and over.” Accessed 8/25/22 at: https://tradingeconomics.com/united-states/labor-force-participation-rate.

2. U.S. Department of Labor, Bureau of Labor Statistics, The Employment Situation, July 2022, 8/5/22. Accessed 8/25/22 at: https://www.bls.gov/news.release/pdf/empsit.pdf.

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