Sweet Spots of Healthcare Innovation in the Commercial Market
If we stress test the healthcare system, the potential breaking points will have the highest demand for innovation, i.e., the sweet spots discussed in this article.
During the 2007-2009 financial crisis, the Federal Reserve required large banks to conduct a stress test to determine if they had enough capital to weather an economic downturn and/or financial market turmoil. Banks that failed the test were required to shore up their capital reserve.
For the same token, if we hypothetically stress test our healthcare system (e.g., using a 15% cost increase), where will breaking points appear? Which employers and employees will experience significant decreases in access to and quality of care or lose insurance coverage entirely? These breaking points (i.e., sweet spots), if identified correctly, are the places that have the highest demand for healthcare innovation to improve care delivery and efficiency. Identifying these sweet spots will guide our innovation efforts.
But how can we find these sweet spots?
In the commercial market, employee contribution to health insurance premiums is a great indicator of sweet spots, which is sensitive to healthcare cost growth and publicly available. Here’s why.
When the growth of healthcare costs (and as a result, health insurance premiums) outpaces that of general inflation, which has mostly been the case in the last several decades, employers have several options to reduce the burden of health insurance benefits.
They can reduce employee wages, but they don’t do that because that will just offend all their employees; in academic terms, it is called “nominal wage rigidity.”
They can stop increasing wages to allow general inflation to partially offset the real cost of health insurance. Since healthcare cost growth is larger than general inflation, this doesn’t fully address the problem.
They can hire fewer workers; this is often used instead of lowering employee wages.
Employers can also drop health insurance benefits entirely. This rarely occurs in large companies; only very small companies (e.g., those with ≤10 employers) drop insurance coverage.
Finally, employers can continue offering health insurance benefits but increase employee contributions, often in the form of higher premium contributions and/or deductibles. And this is what a majority of employers use to lower their health insurance costs. In fact, a recent study showed that for every dollar increase in healthcare costs, employee total compensation reduces by $0.52, which is mostly explained by a similar increase in employee premium contributions.
The growth of employee premium contributions may be examined from several different angles: geography, industry, employment size, and wage level.
Below, we present the employee premium contribution growth during 2012-2021 using the Medical Expenditure Panel Survey insurance component data. Due to data availability, our analysis focuses on employee premium contributions rather than deductibles, which did increase significantly in the last 10 years, especially in large employers. By the way, please email us if you would like to have the aggregate data used to make the charts.
Which geographic areas have had the largest growth in employee premium contributions in the last decade?
The chart below illustrates a large variation across geographic areas (69 core-based statistical areas or 676 counties) in the growth rate of employee premium contributions in 2012-2021, ranging from -1.6% to 9.9%. The national average is 4.3%. There are three areas with a negative growth rate: Detroit-Warren-Dearborn, MI; Miami-Fort Lauderdale-West Palm Beach, FL; and Columbia, SC, while three areas had a rate of over 9%, including Riverside-San Bernardino-Ontario, CA; Omaha-Council Bluffs, NE-IA; and Memphis, TN-MS-AR. A 9% growth rate means employee contributions double every 8 years.
How about industries?
Agriculture, fishing, forestry, and construction industries had the highest growth rate of 6.9%, whereas professional services and all other industries had a much lower growth rate of about 3.6%.
How about employment size?
Apparently, small- and medium-sized employers had a higher growth rate than large employers. Medium-sized employers had the largest contribution dollar amount every year during the time period. The fact that medium-sized employers had a slightly higher growth rate than small-sized ones could be due to the employer mandate, under which employers with 50 or more employees are required to provide health insurance. Thus, medium-sized employers had to rely more on employee premium contributions.
How about employee wages?
As shown in the chart below, employers hiring low-wage workers (the bottom two wage quartiles) had a higher growth rate in employee premium contributions. This is not surprising since there isn’t much room for such employers to allow inflation to erode real wages; assuming these employers are required to offer health insurance benefits, increasing employee contributions and hiring fewer workers are likely to be more viable options than lowering wages.
Summary
In the commercial market, some employers bear a larger burden of healthcare cost growth relative to their ability to address the challenge than others, including those located in specific geographic areas, in specific industries, with a small or medium employment size, and with low-wage workers. There is a high chance that these employers are willing to try new healthcare financing and delivery models. Healthcare innovators can tap into these sweet spots to improve access, quality, and efficiency of our system.
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