Rising health care costs likely to crunch employers facing tight labor market

All signs are pointing toward significantly higher health costs in the employer market next year, which will translate into larger-than-normal premium increases.

Why it matters: Employers will have to choose between taking the hit or passing the added cost to their employees — a decision that’s particularly difficult in a tight labor market.

Driving the news: Seven in 10 employers expect moderate to significantly increases in the cost of health benefits over the next three years, according to a recent Willis Towers Watson survey.

  • “There’s this terrible reality that they’re trying to increase affordability at the same time the actual total cost is going up more than they expected,” said WTW’s Jeff Levin-Scherz.
  • More than half of survey respondents said they plan to address rising costs by using programs or vendors that would reduce total spending. Less than a quarter said they will shift costs onto employees through higher premium contributions, and 14% said they’ll shift costs through out-of-pocket expenses.
  • But employees may not tolerate premium hikes in the current labor climate. Hundreds of New Jersey public employees rallied last week to demand that a vote on a more than 20% premium increase next year be delayed, Bloomberg reported.

Between the lines: Part of the reason why health costs have not risen in tandem with general inflation this year is because payers have pricing contracts — often multi-year — with providers, drug manufacturers and medical device makers.

  • That means that underlying inflation in labor or production costs isn’t immediately shifted into payment rates or, subsequently, premiums.
  • Hospital groups have been telling anyone who will listen how much their costs have gone up in the past couple of years. It stands to reason that those complaints loom large in negotiations with insurers.
  • “There are signs everywhere that hospital price increases are coming, and that’s going to push insurance premiums for employer-provided health benefits higher next year,” said Kaiser Family Foundation’s Larry Levitt. “The health care sector has been somewhat insulated from the inflation that’s been hitting the rest of the economy, but probably not for much longer.”
  • Given the structure of contracts, these rate increases may be spread out over several years.

The big picture: Employers have overwhelmingly responded to rising health prices for more than a decade by offering plans with higher deductibles and out-of-pocket spending.

  • That means that health insurance has gotten more expensive even for Americans who get their coverage through work.

  • But there have been signs that employers have maxed out their ability to shift costs to workers as more and more insured Americans struggle to afford care.
  • Now, employers are struggling to attract and retain workers, meaning they are likely even more averse to reducing the value of the health benefits they offer.

What we’re watching: Whether employer premium hikes will be politically weaponized heading into the midterm elections.

  • There are signs that the GOP may try to connect them with overall inflation, which the party sees as a winning attack against the Democrats.
  • “Prices are sky high for food, shelter, and even health insurance, yet over the last month, the Biden administration … even provided generous subsidies to the wealthy for things ranging from electric vehicles to Obamacare,” House Ways and Means ranking Republican Kevin Brady of Texas said recently.

Yes, but: Workplace coverage hikes may not be as easy to tie to Democrats as rising Affordable Care Act costs would have, had Congress not extended enhanced subsidies.

  • “The ACA is the signature domestic policy achievement for Democrats from the last decade, so Republicans would have pointed to big premium increases as a failure of Obamacare,” Levitt said. “Neither Democrats nor Republicans have moved in any serious way to improve affordability for people with employer health benefits.”