Healthcare inflation is expected to rise

While overall inflation has declined over the last year, economists say that health insurance will likely increase soon, boosting inflation for roughly another year.

In October, the U.S. Bureau of Labor Statistics (BLS) will update its calculations for health insurance prices. Rather than directly measuring premium costs, which may vary from policy to policy, BLS uses health insurers' profits as a proxy for consumer prices when determining health insurance inflation.

Since October 2022, health insurance costs have decreased by around 3% to 4% a month, but starting next month, the consumer price index (CPI) for health insurance is expected to start increasing by just over 1% month over month.

It appears that the health insurance CPI "will start rebounding" again, said Andrew Hunter, the deputy chief U.S. economist at Capital Economics. With health insurance inflation elevated, the Federal Reserve may choose to raise interest rates once again. In August, Federal Reserve chair Jerome Powell said that inflation "remains too high" and that the Fed is "prepared to raise rates further."

Health insurance contract renegotiations are likely to be a 'bloodbath'

Amid an uncertain economic environment, industry experts said that contract negotiations between insurers, providers, and employers are expected to be difficult as each side argues over potential rate increases.

"The bloodbath is underway," said Jeff Goldsmith, founder and president of the consultancy Health Futures.

Because of rising expenses and upcoming Medicare payment cuts, some hospitals and health systems have sought to increase their reimbursement rates by 7.5% to 15% in new insurance contracts — much higher than the typical 4% to 6% increases.

However, insurers have been reluctant to agree to these increased rates, citing their own higher operating costs and unexpected spikes in utilization. This has led more insurers and providers to deadlock during contract negotiations.

According to data from FTI Consulting, there were 41 public contract disputes between insurers and providers in the first half of 2023, compared to 15 in the same period in 2022. Adam Broder, FTI's managing director, said this increase reflects the uncertain macroeconomic environment, pressure from employers to improve the value of services, and the growing complexity of these contracts.

"The two sides are finding compromises, but it's becoming harder," Broder said. "The contracts are becoming more complicated, margins are so thin, and the push to show value on both sides, both payer and provider, is now becoming so important."

Aside from providers, insurers are also facing tense contract negotiations with employers as they seek to increase premiums. Increased premiums will help insurers offset higher reimbursement rates from providers.

According to a recent report from the investment bank Stephens Inc., health insurers are proposing an average increase of 10.9% in small group premiums in 12 states. The report also found that for-profit insurers are planning larger premium increases compared to nonprofit ones. So far, Cigna has proposed the largest average increase across all the surveyed markets at almost 23%.

Courtney Stubblefield, managing director and leader of insights and commercialization at Willis Towers Watson, said some employers are asking insurers and pharmacy benefits managers to show them workers' claims data that justify the proposed double-digit premium increases. However, many companies have had difficulty accessing this information.

"There's a lot of employer challenge to [insurers'] data, due to some of the assumptions being used in the marketplace, and it definitely can get heated," Stubblefield said. "There are a few insurers that have come out higher [in proposed premium increases] and been fairly intractable."

Some employers have also begun utilizing price transparency data in their negotiations with insurers. According to Rob Andrews, CEO of the Health Transformation Alliance, this data has allowed employers to find that many insurers privately negotiate better prices with health systems for Medicare Advantage plans compared to employer plans.

"This is very early days of a sea change in the market where self-insured employers for the first time can benchmark their pricing," Andrews said.

More employers are also considering switching their health insurance partners over proposed premium increases. Some employers are also experimenting with new ways to provide health and pharmacy benefits for their workers.

"Increasingly employers are finding ways to get around their intermediaries that don't support them," said Michael Thompson, CEO of the National Alliance of Healthcare Purchaser Coalitions. "Now that we've gotten to the other side of the pandemic, all bets are off, there's a lot of activity going on." (Tepper, Modern Healthcare, 7/26; Reed, Axios, 9/19; Iacurci, CNBC, 9/17)

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