In light of the COVID-19 pandemic, Nyhart’s Healthcare Actuarial team has received many questions about how this may impact an employer’s health plan. Some common questions include:
- How will the pandemic impact my immediate costs and how should I budget for them?
- What will be the long-term impact and how should we prepare?
- What should I expect for upcoming rate renewals?
- Should I consider new plan designs / cost sharing arrangements to help mitigate some of the financial risk?
It is important to note that as of the date of this article, the impact of COVID-19 on a specific employer and their costs is largely unknown. However, there are several important considerations to be aware of when considering costs to expect in the future as a result of COVID-19.
Various Costs to Consider
The Families First Coronavirus Response Act6 has required that COVID-19 tests be covered by all health plans without participant cost sharing. This requirement applies to private, governmental, and church plans both fully-insured and self-insured. Services supporting or administering the tests can be furnished at an office visit, telehealth visit, urgent care, or emergency room.
Costs related to testing have been noted to be relatively low4. Generally, these costs are comprised of a combination of lab testing and PCP/Telehealth visits with data suggesting lab-only tests cost approximately $120; however, when combined with PCP/Telehealth visits, the cost is approximately $2404.
There have been recent examples of other means of testing as well. In Indiana, Eli Lilly has been providing drive-thru testing for the employees of healthcare providers. Further technology enhancements forthcoming by firms such as Roche have also been prevalently documented. As innovation continues to evolve, forward looking costs related to testing will be impacted.
Hospitalization treatment costs for COVID-19 is not uniform and costs can vary significantly. The key drivers of plan costs will likely be:
- The number of people who require hospitalization
- The number of days spent in the hospital
- The cost of treatment in the particular geographic area
High expense treatments requiring hospitalization resulting from COVID-19 are frequently being compared to severe cases of pneumonia. Based on a recent study released by Kaiser, the average hospitalization costs for pneumonia with major complications and comorbidities was $20,292 in 20182. Someone without any major complications that still requires hospitalization could see costs averaging $9,7632. On the other hand, other sources4 intuitively benchmarked the cost of treatment relative to Medicare pricing, which then allows for a national average commercial plan reimbursement cost estimated at $75,000. While these numbers may seem high and vary significantly, some experts believe the actual hospitalization rate may be low. If experienced in large quantities, the Penn Model estimates that the number of COVID-19 patients who will actually need hospitalization is only around 5%, with only 3% being hospitalized and experiencing major complications1.
Employers should also note that those who are most impacted with hospitalization are typically older individuals in the 65 and older population. These individuals are likely covered under Medicare, and will not have a negative impact on employer-sponsored plans. Employers can look to their own population’s general demographics to draw some type of guidance as to how much of an impact COVID-19 may have. Considering high level factors such as average member age, prevalence of underlying conditions susceptible to hospitalization with COVID-19, and ability to self-quarantine (or work from home) in their employee group can be useful when estimating the potential cost impacts.
Treatment discussion thus far has been centered on hospitalizations. However, there is also the subset of costs from outpatient services to consider. These visits have been estimated to vary in costs from $600-$1800 per positive case4.
With hospitals preparing for an increased number of patients because of COVID-19, many are already cancelling or postponing elective surgeries and visits until further notice following the CDC’s guidance3. For self-insured plans, this will likely reduce the paid claims activity for months in which this guidance is still in place.
There are two trains of thought on what happens after the guidance is lifted and hospitals no longer postpone elective surgeries/visits. One is that pent up demand for these services later in 2020 will offset any savings that were experienced earlier in the year. This essentially defers costs until towards the end of the plan year, potentially after employers and their consultants have gone through their renewal process. The other is that due to physician capacity issues and overall hesitation of the population to visit facilities, a plan could have an overall reduction in claims levels for 2020. Some have speculated that some of these services will likely never happen in 2020 or 2021.
Neither can be predicted with any certainty until more data becomes available for April and May 2020.
Covering Treatment Costs
Insurers such as Cigna have recently come out publically stating they will cover the cost of treatment, including hospitalizations and ambulance transfers. This change impacts fully-insured group plans, individual plans, and Medicare Advantage plans. For employers that fully-insure their plans, higher premium quotes in 2021 should be expected.
For self-insured employers, a decision must be made on whether to cover those costs. Employers attempting to estimate the cost of COVID-19 should also consider employee cost sharing that will be forgone should a similar program be put in place. However, the length of time this cost waiver is implemented should also be considered.
Other Plan Costs
Although claims costs represent the majority of plan expenditures for self-insured employers, stop-loss premiums can also represent a significant expense. As noted above, hospitalization costs are not currently estimated (on average) at high enough levels to hit specific stop loss levels for large employers. However, for smaller self-insured employers, there could be risk of claims exceeding specific deductibles, which will cause a resulting increase in specific stop loss premiums going into 2021.
Assumptions used for valuing employer liabilities related to retiree healthcare benefits should also be scrutinized. Municipal bond rates as of March 31, 2020 varied from 2.27%-2.94%; however at the same time in 2019, these ranges were 3.29% - 3.92%5. Employers that do not fund their OPEB liabilities or have liabilities determined by a blended discount rate including the municipal bond rate can likely expect an increase in liabilities. Other assumptions such as per capita costs and healthcare trend rates also warrant additional consideration.
Thoughts from Nyhart
A few takeaways from our team to our partners and clients as of the writing of this article:
- Cost estimates should not be isolated to only the impact for the 2020 plan year. Decisions and adjustments being made in 2020 will impact 2021 renewals. The aforementioned cost estimates will only be useful if an employer completes the estimates in conjunction with its renewal analyses. A minimum two-year outlook is being suggested for our projections in order to fully understand the potential impact. Self-insured employers should consider the estimated cost of waiving employee cost sharing requirements.
- COVID-19 has unfortunately had a significant impact on employers, their employees, and their customers/clients in many different ways. This impact develops a level of urgency in cost estimates that in many cases cannot be ignored. However, with any model that you may come across as of time of this writing (including ours), most, if not all, are caveated with disclaimers, assumptions, and statements of uncertainty. As more employer claims data becomes available in April-May, more informed decisions can be made.
Nyhart has developed a tool that, as of this writing, can help employers and their consultants develop cost estimates in conjunction with the overall outlook for their plan. For a short demo, please contact one of the Nyhart actuaries below.
There is still a substantial amount of unknown with respect to COVID-19. The difficulty in estimating the unknown and potential risk is the root of what an actuary does. Overall, there are still many unknowns as we face this crisis. Nyhart will continue to monitor the situation and provide updates as they become available.
We hope all our clients, partners, and their families are all staying healthy and safe during these unprecedented times.
- Begley, S. (2020, March 16). Coronavirus model shows individual hospitals what to expect in the coming weeks. Retrieved March 29, 2020, from https://www.statnews.com/2020/03/16/coronavirus-model-shows-hospitals-what-to-expect/
- Rae, M., Claxton, G., Kurani, N., McDermott, D., & Cox, C. (2020, March 13). Potential costs of coronavirus treatment for people with employer coverage. Retrieved March 27, 2020, from https://www.healthsystemtracker.org/brief/potential-costs-of-coronavirus-treatment-for-people-with-employer-coverage/
- Interim Guidance for Healthcare Facilities: Preparing for Community Transmission of COVID-19 in the United States https://www.cdc.gov/coronavirus/2019-ncov/hcp/guidance-hcf.html?CDC_AA_refVal=https%3A%2F%2Fwww.cdc.gov%2Fcoronavirus%2F2019-ncov%2Fhealthcare-facilities%2Fguidance-hcf.html
- The Potential National Health Cost Impacts to Consumers, Employers and Insurers due to Coronavirus (COVID-19) https://hbex.coveredca.com/data-research/library/COVID-19-NationalCost-Impacts03-21-20.pdf
- Nyhart independently tracks three different 20-year bond indices to develop these ranges.
- The Families First Coronavirus Response Act: Summary of Key Provisions https://www.kff.org/global-health-policy/issue-brief/the-families-first-coronavirus-response-act-summary-of-key-provisions/