Tips for Navigating a Tightening Health Insurance Market and Skyrocketing Premiums

January 4, 2023

When the report on future healthcare costs for U.S. employers in 2023 was released by AON, a national actuarial firm, projected a 6.5% increase — more than double from 2021 to 2022 — employers across the country took notice, but no alarm bells were raised.

The fact that we have been in a hard insurance market is not new, with increases averaging 2% – 5% annually over the past decade. Healthcare costs have significantly outpaced other increases in the American economy including the Consumer Price Index, but the situation has only become more critical recently.

In New Jersey, the 2023 State Health Benefits Plan (SHBP) Rate Setting Analysis report,  conducted by the State of New Jersey’s actuary, AON, projected a 25% increase in active employee premiums sending shockwaves of disbelief and deep financial concern through public entities across the state. The possibility of a double-digit increase was the wake-up call that left municipalities enrolled in the SHBP scrambling to figure out a way to maintain budget lines for healthcare.

To put this in perspective, if a town spends $1 million annually for healthcare benefits and suddenly gets hit with a 25% increase in premium costs that would translate to an additional $250 thousand dollars not originally accounted for in the budget. Even the best emergency fund may not be enough to cover this added expense.

Although temporary fixes are still being explored on different levels to reduce the impact of this price jump for SHBP-enrolled entities, the reality is that the old way of thinking about healthcare plans must change. Municipalities need to take a stronger risk management approach going forward to control costs.

How Did We Get Here?

There are several drivers that have led to this nationwide health insurance challenge, including the post-COVID-19 fallout, workforce shortages, and of course – inflation.

COVID-19 continues to have an impact on costs. The artificial suppression in access to services and the consumption of health care in 2020 and 2021 resulted in an artificial flattening of healthcare costs, hence the large projected increases for 2023.

People who avoided care or delayed getting the care they needed didn’t get miraculously better, instead, the result has been a sicker population of covered participants in most group health plans. Now we are seeing a resurgence of people seeking care and the pent-up demand for health services is growing, resulting in more claims than normal.

Workforce issues are also driving up costs. Many healthcare workers in the system are burned out and large numbers have left the industry, making it incredibly difficult for employers to attract and retain people in frontline healthcare service.  And, it is costing more to pay those professionals, some paying 15-20% more in salaries than before the pandemic.

In the Northeast, the cost of goods and services is higher than in other portions of the country.  Inflation is impacting prices on everything from simple supplies to the materials necessary to run a doctor’s office or hospital. These costs are eventually passed on to consumers and health plans.

Challenges Facing Public Entities

Public entities are always trying to hold the line on costs, but the added inflationary pressure combined with rising salaries and health benefits costs are putting a lot of  pressure on public officials. Unlike the private sector, municipalities only have a couple ways to generate revenue – taxes or fees – neither of which is a popular nor realistic long-term solution.

With most municipalities still paying the lion’s share for employee health benefits, these entities will ultimately be responsible for making up the difference. Municipalities don’t have the inherent flexibility to change rates as needed to keep up with rising costs since health benefits are collectively bargained for two to five years at a time. As costs for goods and services increase, what the employees pay remains largely flat until the end of the contract.

There are a few municipalities, counties and authorities that have implemented a cost-sharing clause in their contracts, which means that if premiums go up, workers pay a percentage tied to that premium to help offset the increase.

Municipalities only have three choices for securing health insurance; purchase plans privately through the commercial insurance market contracting directly with the plan provider, enroll in the State Health Benefits Plan, or apply to join a regional Health Insurance Fund (HIF).  Currently, the majority of New Jersey’s 564 municipalities are enrolled in the SHBP, around 180 are part of the New Jersey Health Insurance Fund (“hi” fund) system, and the rest have private market coverage.

Five Tips to Better Manage Rising Healthcare Costs

1. Modernize Plans – Historically public entities had generous health plans that outpaced the private sector with respect to the levels of coverage, but it is time to modernize this level to provide some savings. Government entities need to have candid conversations with bargaining units and labor leaders about changes to plan design that will be necessary to save money and maintain quality coverage.

2. Funding Options

    • Fully Insured – Many public entities have fully insured plans which means they pay a guaranteed premium each year for a contracted time. This is easy to budget for but doesn’t reflect what may be happening in the traditional marketplace leaving the entity open to tremendous cost increases when the contract ends. Insured plans also pay more on certain taxes and fees and have less flexibility than self-insured plans.
    • Self-Funded – Under these plans, an employer pays for actual claim costs and administrative expenses up to a certain cap. These plans offer greater transparency, so you only pay for what you use, and provide techniques like population health and wellness that can help lower the impact of your claim costs. Self-funded is a good option for larger municipalities but may be too volatile for smaller public entities under 100 employees.

3. HIF Pool Buying Power – For 30 years, regionally based Health Insurance Funds (HIF) have been providing a stable and reliable way to procure and provide health benefits. The HIFs function like Joint Insurance Funds (JIF) to purchase property & casualty insurance coverage but, the HIFs secure healthcare benefits. HIFs give towns of all sizes the ability to pool claims history together with others and enjoy economies of scale to get better quality benefits at lower costs. The HIFs that are part of the “hi” fund have kept rate increases over the past five years to 1.66% and saved members 1.1 billion since inception in 1992.

4. Pharmacy Focus – Pharmacy costs, in particular specialty pharmacy costs, have been rising faster year-over-year than other medical costs, due in part to higher production and manufacturing costs and increased demand. Specialty medications are often very expensive but can have a big impact on quality of life or be used as a cure.

    •  Pharmacy coalitions are a great way to pool and lower costs by getting better economies of scale.
    • Implement pharmacy quality techniques to ensure that the right medications are being prescribed and used properly.
    • Develop partnerships with vendors or work more closely with pharmacy administrators to help manage specialty pharmacy costs.

5. Retirement Plans – Many municipalities have been experiencing large waves of Baby Boomers retiring over the past few years, which can put a significant strain on healthcare budgets. The best solution to retiree issues is to transition these populations to Medicare Advantage Plans which have been proven to be highly effective in offering comprehensive coverage at the lowest possible price.

An additional suggestion would be to explore adding Population Health or Wellness programs. It is well documented that 90% of the costs of healthcare is driven by 10% of the people. Implementing programs that provide nurse navigation services, disease management, or help employees handle catastrophic or chronic conditions are proven to have a big impact on employee health and quality of life. These programs can be effective over time but won’t move the needle on rising costs immediately.

Telemedicine, which has become a staple in most health plans, is a great tool to help expand access to healthcare, particularly in this market where getting an appointment with a specialist can take months.  However, it is not a huge driver of savings.

Future Outlook
The combination of inflationary pressures, workforce challenges, and the continued lingering effects of COVID-19 will continue to put real pressure on the system in terms of costs for the foreseeable future. There is no “softening” of this hard health insurance market coming anytime soon.

Public entities are going to have to focus on doing whatever they can to hold the line on health insurance plan costs. Tough decisions will have to be made, and they may not be popular with employees or taxpayers but will be necessary to keep budgets balanced.

About Conner Strong & Buckelew
Conner Strong & Buckelew is among America’s largest insurance brokerage, risk management and employee benefits brokerage and consulting firms. The firm is an industry leader in providing high-risk businesses with comprehensive solutions to prevent losses, manage claims, and drive bottom-line growth. Its employee benefits practice focuses on providing best-in-class benefits administration, health and wellness programs and strategic advisory services.

Founded in 1959 with offices in New York, New Jersey, Pennsylvania, Georgia, Massachusetts, Florida, and Delaware, Conner Strong & Buckelew has a team of 450+ professionals, serving clients throughout the United States and abroad.

About The New Jersey Health Insurance Fund (“hi” fund)
The “hi” fund provides complete benefit services and products to public entities in New Jersey. This includes health, pharmacy, vision, dental, COBRA and retiree benefit administration, wellness, personalized health coaching, telemedicine, population health services and benefits automation. The “hi” fund is the largest non-state operated benefits pool in America. www.hifundnj.com.

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Health Insurance Funds

Practice Leader

Joseph M. DiBella

Executive Partner, National Employee Benefits Practice Leader

More than 27 years of employee benefits experience

Previously led national and large account business for Horizon Blue Cross Blue Shield of New Jersey