Since the onset of the COVID-19 pandemic, employer health and benefit costs have increased significantly, and employers need to find solutions to help combat these costs.

Ryan Daniels, CFA, partner, and research analyst focusing on healthcare technology and services with William Blair's Equity Research team, shares his insight with Client Focus on this potential mega-trend and why he believes integrated cost-containment solutions can help alleviate employer healthcare costs, which are set to spike over the coming years.

Client Focus: In your report, “Coming Healthcare Cost Tsunami: Driving a Need for Engagement, Cost Containment Solution,” what inspired the team to analyze the employer healthcare market so deeply?
Daniels: This report is part of our Quarterly Healthcare Mosaic series, in which we aim to identify a topic with broad implications for our clients—in both the public and private markets. More specifically, we attempt to find important and far-reaching topics we believe will become increasingly critical going forward yet have not been broadly discussed by others.

For this report, we brought together macro data we are seeing regarding healthcare spending, future trends regarding the rate of spending growth, the impact this could have on employers, and what they are currently doing—and are likely to do—to help address this issue. Here, our team concluded that the U.S. healthcare market is likely to see materially higher costs trends in 2024 and beyond, so we analyzed why that is likely, along with which solutions employers are likely to implement in order to help address cost trends, improve healthcare for employees, and better engage their workforce.

Healthcare spending accounts for about 20% of our GDP; increasing cost trends in healthcare and health insurance will, therefore, greatly impact economic growth and inflation. And healthcare costs also affect everyone. Accordingly, it is a topic of interest that should concern broader audiences, whether it is the premiums individuals pay for their insurance, what employers pay for coverage for their teams, or how the government funds care for beneficiaries.
Client Focus: You discuss four factors for why you believe employer healthcare costs are set to spike after a period of “sub-trend costs inflation.” Why are these factors significant?
Daniels: First, to outline the key factors, they are pent-up demand for more discretionary services following the COVID-19 pandemic, delayed care and preventive procedures that could lead to higher-acuity cases going forward, a continued uptick in behavioral health issues, and, lastly, likely significant future rate increases in healthcare provider pricing over the next two years.

On the first point, we are seeing signs of increasing overall demand for healthcare today, especially in areas like outpatient surgical care. There are a few factors behind this. First, there is likely pent-up demand for this care as it is nonemergent and was postponed during COVID-19. Additionally, supply is also increasing, as the healthcare workforce, which faced many challenges related to staffing, turnover, and burnout during COVID-19, is now more stable. So, more demand for care and more supply of care equals more surgeries and higher medical costs. That is the first big driver of pending cost increases in the industry.

Second, preventive care, like colonoscopies, breast imaging, or cardiac screens, took a back seat during COVID-19. And a lack of early preventive care could lead to higher-acuity cases in the coming years. While time will tell, some experts believe there is some inevitability to this occurring. If it does, it will certainly drive up the demand for care and the cost of treating these patients.

Third, there has been an enormous uptick in demand for behavioral healthcare over the last two years. While it’s hard to say what is causing this, be it the pandemic, remote work, or social disconnection, the punchline is clear: there’s a lot more need for behavioral care. The silver lining here, however, is that individuals are now much more active in seeking treatment. The stigma for seeking care has been reduced, and virtual care or telehealth for mental health has blossomed. Therefore, we see a clear upward trend in this service.

Lastly, we expect to see a significant increase in the price of healthcare services in 2024 and 2025. Generally, hospital systems enter into multiyear contracts with payers that establish their reimbursement rates. Thus, even as labor, supply, and drug costs have been skyrocketing over the past few years, hospital rates have been fixed. However, when contracts come up for renewal, we anticipate hospitals will be looking for a much larger price increase; some experts indicate that they are seeing 10% to 20% rate adjustment requests, versus the typical 5% rate increases. And if payers give higher payments to providers, this will also trickle down to employers and employees paying more for insurance coverage to offset this trend. Given the lag effect here, this is probably the one area people are the least aware of, but it will have huge implications on cost trends going forward.
Ryan Daniels, CFA, partner, and research analyst
Client Focus: You also highlighted that employers now emphasize solutions with high ROI, increased employee engagement, and greater overall integration. What do these strategies and solutions look like to meet this new demand?
Daniels: In our view, it is all about signing up with a single provider that helps manage the full spectrum of benefits and healthcare delivery options versus cobbling together a number of point solutions from different vendors. This helps reduce the contracting burden on human resources managers, and it’s a more effective means for employees to access care from a single source of truth—such as a patient advocacy and navigation vendor.

These vendors start by helping employees with selecting the right health insurance plan. Employees can call their advocate team, who will then help them understand their likely care needs and help pick the right plan among all the various options an employer offers during open enrollment. If they need care, they call the same number, and a care navigator will help them find the best in-network doctor to see, understand out-of-pocket costs, and even book an appointment. Leading companies also have trusted vendor programs, where they have pre-screened point solutions, such as care for high-risk pregnancies or second-opinion services, and created a portfolio for employees to access—again, by calling the same number or using the same app or website.

This “one call, one advocate” process is much easier to access and maintain for all parties involved. And having a single vendor makes it much easier to analyze the ROI and engagement created by the program. Thus, our team views this as the future of benefit design for most employers.
Client Focus: Can you expand on what other solutions you believe could experience more demand due to the rising healthcare cost environment?
Daniels: We believe the onsite and near-site primary care providers will also be big winners in the marketplace over the next several years. Here, an employer contracts with a third-party advanced primary care provider to actually put a health clinic, staffed with a primary care physician (PCP) and other ancillary providers, in their office to provide care for their workforce and, oftentimes, their dependents.

Besides the convenient location and easy access to care, another unique aspect of this model is the employer pays the operator to staff and run these clinics. Thus, when an employee sees a clinician there, there is no paperwork to fill out, no insurance to claim, and no copayment; it has all been covered already by the employer. Because of this, preventive care services have much higher engagement, as they are more convenient and accessible—all at no cost to employees. Moreover, it is seen as a very tangible healthcare benefit for the workforce, and satisfaction levels with such an offering tend to be extremely high. Put simply, it engages workforces with a single solution that generates high employee engagement, strong satisfaction, and, usually, a robust ROI through lower long-term healthcare cost trends—all of which can help offset the inflationary trends we believe the market is about to experience.

Please contact your William Blair advisor if you would like to receive a copy of Daniels’ full report. You can also listen to his latest podcast episodes below.