There’s been no shortage of recent studies indicating that, for the past few years, prescription drug inflation in Canada has been relatively flat. Drug patent expiration and pressure from provincial governments to reduce generic drug prices are two of the biggest contributing factors to this recent phenomenon. So, if prescription drug inflation is flat and drugs are the largest component of most employer-sponsored health plans, why are insurers still using annualized health trend rates in excess of 11% to determine premium rates?
The answer—in a nutshell—is that drugs are becoming a smaller piece of the healthcare pie and that each year more plan members are using more expensive services more frequently. Sounds simple, but let’s break it down.
Prescription drugs
It doesn’t seem long ago that prescription drug costs were 65% to 75% or more of an employer’s healthcare spend. Drug costs under most group health plans are still the majority, but it’s not uncommon for drugs to make up less than half of the healthcare cost pie. So, while drug inflation may be flat, it’s having a smaller overall impact on healthcare cost trend. Conversely, other health plan expenses such as paramedical practitioners, vision care and medical services and supplies have been increasing at much higher inflation rates.
Paramedical practitioners
Paramedical practitioner expenditures have been appreciably increasing as a percentage of the healthcare cost pie. I’ve seen more than a few clients’ paramedical expenditures actually surpass their drug spend in recent years. Several factors have undoubtedly contributed to this trend.
Many plan sponsors have expanded the list of covered practitioners to include acupuncturists, registered dietitians and other practitioners that were less commonly covered several years ago. Use of massage therapy has increased noticeably in recent years as plan sponsors have removed physician’s referral requirements. A recent trend study by Great-West Life showed a 170% increase in the percentage of plan members using massage therapy compared to 10 years earlier. Lastly, as paramedical practitioner coverage has become such a highly valued employee benefit, we’ve seen many plan sponsors increase annual coverage maximums as part of their recruitment and retention strategies.
However, high use of paramedical practitioners should not necessarily be viewed negatively by plan sponsors as it may help reduce drug costs and incidence of disability as well as improve employees overall health and well-being.
Higher utilization and cost per employee
Great-West Life’s trend study also showed that 88% of plan members used a healthcare service at some point in the year compared with 78% of plan members 10 years earlier. The same study indicated a near 50% increase in the number of covered healthcare services accessed each year per plan member as well as a 116% increase in the average annual cost per claim per employee compared to 10 years earlier.
Deductible erosion
Plans with flat dollar deductibles that aren’t increased annually will be impacted by higher rates of inflation over time. For example, let’s assume you have a plan with 100% co-insurance and a $100 annual deductible:
| Gross per | Net claims |
Year 1 | $1,000 | $900 |
Year 2 | $1,115 | $1,015 |
Increase | 11.5% | 12.8% |
While gross per capita claims increased by 11.5%, net claims under the plan actually increased by 12.8%, as the deductible does not increase with inflation. In fact, some insurers apply higher healthcare trend rates to plans that include flat dollar deductibles.
Profit
It should come as no surprise to anyone that a certain level of profit is also built into most insurers’ heath trend rates. And though some may disagree with this approach, we’d likely see other insurer expenses increase if profit wasn’t included in these trend rates.
This may help to explain some of the reasons why the healthcare trend is not flat but it’s difficult to determine if it actually adds up to the 11.5% healthcare trend rate that most insurers arrived at a few years ago. As drug costs are expected to rise with the end of the current “drug holiday” and an abundance of expensive biologic and specialty drugs in the pharma pipeline, there may be pressure on insurers to increase their healthcare trend rates accordingly in the future.