Aaron Mauck: I'm glad you could join us today to talk a little bit about the challenges with employer costs for healthcare. We know this is an enormous issue when we're all confronting. Can you start us off perhaps by explaining what the employer ecosystem looks like and just who the important players are in this?

Max Hakanson: So employer sponsored insurance, a lot of us are familiar with it. A lot of us are covered by employer sponsored insurance. About half the people in the U.S. obtain insurance by their employer, and essentially all that means is the employer in a self-funded model is paying for the insurance of their employee population. And they're assuming that risk, so they are liable.

They hold that risk/ whereas employers in fully funded pay a premium to an insurer and so they don't hold the risk. Therefore, if the healthcare expenses are really high for one year, they're not liable, but if the costs are really low, they don't see that savings or benefit.

Sally Kim: To summarize, I think there are three major players in this space that we have been thinking about. So there's the employer, obviously since they're the ones oftentimes paying the bills, there's the health plan or carrier, and then there's also this middleman of sorts, the broker/consultant, and that's actually Max's favorite topic to talk about.

Hakanson: Yeah, I definitely enjoy talking about the brokers and I'm glad you mentioned them because I think they're a really important but often overlooked part of the employer sponsored insurance world.

So essentially brokers and consultants work as contractors to help employers research, select and administer benefits. So they're using their expertise and access to data to help their employer clients find the best benefits for their organization. So just simply put, they play the role of expert advisor to an employer.

Mauck: So in other words, they reduce the friction that would naturally exist between the plans and the employers and allow for a better facilitation between those two roles.

Hakanson: Yeah, I think you get at it, the liaison, that middleman role.

Mauck: That middleman role, that's another way to describe it. So knowing that that's the case and we have these big players, what can you tell us about the current state of employer sponsored insurance? In particular, the challenges associated with costs, which we know have been rising for some time?

Kim: Yeah, not to be grim after your optimistic take on brokers, but healthcare costs are increasing by 5 to 6% in 2023. And while that might not seem like a large number, take into consideration that a lot of these companies might have margins of even as low as 1 to 2%. And then we often feel that at the end of the day as employees, if any of you all are covered by employer sponsored insurance.

Mauck: So how is this reflecting itself in terms of what employers are saying around their concerns, whether they be around cost or knowing that we're in a situation where it's very hard to attract and retain the right kind of talent, the role that benefits can ultimately play in helping to improve that employee value proposition.

Hakanson: But benefits play an incredibly important role in both the attraction and retention of employees. It's such a big draw for attracting employees in the United States since insurance is so often tied to employment. It's a huge selling point.

Mauck: It sounds like we're in a pickle. We know that healthcare costs are rising and benefit costs are rising. But at the same time, benefits are one of the major ways in which we work to attract employees. How are we going to balance that tension and our employers ultimately expressing this concern to us?

Kim: Yeah, honestly, the perennial challenge that we always talk about whenever we study employer sponsored insurance is the palatability to employees versus the cost spend. So even though employers say to us all the time that they want to reduce spend, it's really hard for them to actually do so because they also need to retain employees and keep them satisfied at the end of the day.

Hakanson: And there are a couple numbers that make this real. I want to call out a couple surveys because there's so many employer surveys done every year that provide us great data. So from the purchasers business group on health last year, 87% of employers said they believe healthcare benefits will become unsustainable in the next five years.

And according to a Willis Towers Watson Survey, 94% of U.S. employers say that managing healthcare benefits costs will be their top priority over the next couple years. But I want to push back against something that's said by those employers, and it's around this unsustainable language because we've really been hearing this since the '90s.

Despite all of this talk, costs have continued to rise and pretty much every employer out there is still offering healthcare benefits to their full-time employees. So employers really have yet to reach the point where they can't afford healthcare costs. And since healthcare is really such an assumed benefit in the US, employers don't feel like they have any other option but to continue covering those workers healthcare benefit costs

Kim: I think where we might see folks actually facing this unsustainability factor are for small employers. But even if a handful of employers realize that they can't take on healthcare benefits anymore and offload benefits, for example, maybe to ICHRAs, I think that will be a very small proportion. And most of the employers we're talking to are actually sticking with status quo.

Mauck: Hold on, my ears just perked up. You mentioned ICHRA. I'm not sure everybody knows what that is. Can you explain that for us?

Kim: Yes. In a nutshell, ICHRAs, which are individual coverage. HRAs are basically an employer, usually a small one can say, "I'll give you this amount of money, and then you can go buy your coverage on the exchanges." And this actually broaden the folks who could offer coverage because some small employers may not have chosen to offer coverage before ICHRAs were an option.

Mauck: Alright. So small employers are encountering some notable potentially existential challenges when it comes to their coverage. But we know that large employers are also expressing a lot of concern. Why are the anxieties so heightened right now?

Hakanson: There are a number of different factors. Inflation comes to mind immediately, and it's something we've heard brought up in a number of calls with employers. So insurers tend to be isolated from inflation and have been over the last couple years because they renegotiate contracts with providers every two to three years or so.

However, insurers are starting to feel this pressure come as providers are now renegotiating their contracts and asking for higher reimbursement to keep up with inflation. So employers are worried that the plans are going to shift that cost burden onto them. That's the one big concern.

The other piece I think that needs to be mentioned and is getting a lot of attention in the market is drugs. Drug spend increases are already outpacing medical spend for employers, but they're really concerned about what's coming around the corner next. Particularly two types of drugs.

We have the ultra-high cost drugs, which are used to treat rare diseases often with a huge price tag of hundreds of thousands if not millions of dollars. And then we have another class of drugs that's concerning employers. And those are drugs that are going to be widely available to large swaths of their population if approved.

Specifically, weight loss drugs like Ozempic and Wegovy are big concerns now, since two-thirds of the U.S. adults are overweight or obese, these medications require injections every single month. So those costs could literally double the cost of health insurance in the US, which I know you've talked about on Radio Advisory before.

Kim: Yeah. Also, we've been relying on high deductible health plans and increasing cost sharing for decades, but we're at a point where the average American can't even afford their current deductible. So that's obviously not a lever that employers could squeeze because there's not that much juice left there.

Mauck: Alright. So what I'm hearing is that this is overdetermined. You've got the challenges associated with the economy, which obviously anytime you have certain recessionary forces or inflation, there are going to be some concerns here.

But then we have some trends that have been accelerating for some time and are now reaching a breaking point. Pharmacy costs, which is going to be a huge consideration, and the limits of our existing tactics, things like high deductible health plans, are there other factors that are coming in from the governmental side that may be playing a role, like changes in policy or law?

Hakanson: Yeah, Aaron, what I think we need to talk about is the Consolidated Appropriations Act. Essentially what that is, is expanding the fiduciary responsibility that ERISA had set on employers back in 1974. This is just expanding what their role needs to be as an employer, giving out benefits to their employees.

So really it says they need to pick cost effective and reasonable benefits for their employees. Otherwise there's a vast amount of litigation that could potentially be brought on them and other parties in the ecosystem. So this could potentially be huge or it could potentially be a flash in the pan like so many other pieces of legislation have been.

Mauck: Well, Max, what does cost effective and reasonable mean in the context of the CAA?

Hakanson: It's a great question, and we're starting to find out based on the litigation. We've seen a few lawsuits already take place. One got settled between Gallagher and a Florida school district. The challenge is those words are so broad. We're going to have to find out what it means, but really it means the employer needs to be in charge and seek the data for their benefits. That's the big piece.

This is really around data, making sure that they have access to the data and then are using it to pick the most reasonable, cost-effective benefits for their employee population.

Mauck: So it sounds like this legislation puts employers in the driver's seat, sometimes in ways they wouldn't be comfortable with?

Hakanson: Yeah. Historically, they've relied a lot on their broker and consultant partners to handle a lot of this, and this is really telling them, "Hey, you are the party that needs to be responsible. You are the fiduciary for your employees, and so this is putting them back in the driver's seat." I really like how you put that.

Mauck: So it sounds like there are a lot of pressures on employers at present, which are driving their anxiety. Certainly cost, the considerations around attracting and retaining employees, and new legislation, all things for them to be concerned about. Are employers in a position in which they can invoke some kind of change themselves? We know they have the most at stake. So one would assume they would be the ones with the impetus to drive healthcare affordability and innovation.

Kim: You would think so, but I think one of the most interesting things we've found in this study is that no one is actually incentivized to drive down spend in employer sponsored insurance. And that's why we're dealing with the same strategies we've been working with for decades.

So even though the employer is the one paying, they are more incentivized to not disrupt their employees because they care about retention and satisfaction, not just spend. And then brokers are not necessarily incentivized because many of them are paid more if their employers are paying more for their healthcare. And then plans, especially if the employer is the one paying for it, are not incentivized to drive down spend if they're being paid by the number of claims they're processing. So not to over generalize, but it has been discouraging to see how no one wants to be the driver of change here.