Mercer has released a report, Rising costs, rising concerns: Medical inflation, which examines medical inflation during the past decade and, using analysis of the claims experience of a number of UK companies, provides some broad indicators about what might be a fair medical inflation assumption both at the current time and over the longer term.

The paper identifies some of the likely key drivers of medical inflation before looking at some options that might be open to employers to help them control and manage their medical plan spend in the future. Data contained in the report originates from a 2007 survey of historical claims of over 250 companies, with a combined annual claims spend of £142m.

The medical inflation landscape

Each year employers who provide private medical expense benefit plans to their employees, and often their dependants too, face the challenge of rising costs. Traditionally these cost increases have always run ahead of other measures of inflation such as retail prices or earnings. Generally, medical inflation seems to have picked up pace in the past 12 months and is running at close to 10% per annum.

Employers who provide these benefit plans face the annual challenge of renegotiating funding levels, insurance premiums, administration charges and other terms and conditions with insurers and plan administrators.

While the level and quality of the service provided by the insurer or administrator relative to the proposed charge for the service is a key element of these renewal negotiations, the price of the insurance or the self-insured funding level, to cover health care costs, usually provides the liveliest debate, and is often the focus of the whole renewal process.

The driver of the insurance premium or funding level is the claims that the provider believes will be incurred over the forthcoming policy year. In turn this may be driven by either the recent claims experience of the plan itself, or if the plan is not of sufficient size or is community rated, the claims experience of the insurer’s portfolio of similar plans.

Making projections about the level of future experience requires the extrapolation of trends from the past into the future, and, hence, the level of medical inflation used in a pricing exercise becomes a central assumption.

In order to control their plan costs from year to year, employers should have a vested interest in the medical inflation assumption being used by the insurer in the renewal pricing. Although a low assumption is desirable, with recent advances in medical technology and the development of new and expensive treatments, is a low assumption sustainable or even appropriate in the current climate?

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How can we help you?

Mercer's health & benefits business is the UK's largest intermediary for corporate medical expenses plans, assisting employers in negotiating with the providers of medical insurance and medical plan administration services.

Mercer recently launched MedForecast in November 2007 to help companies respond to medical inflation. Data on enrolment by healthcare plan type, premium costs, employee contributions and financial assumptions are collected using MedForecast. The data is combined with the client's target increases in healthcare budgets, planned fluctuations in headcount and current plan designs. MedForecast then illustrates projected costs and allows companies to model multiple healthcare scenarios, with multiple design and cost modifications projecting forward over five years.

 Learn more about Mercer's MedForecast offering

 Review Mercer's UK health and benefit service offerings   

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