Health Insurance Conundrum: Balancing Surging Costs and Talent Retention

Until recently, says Tim Dwyer of risk, retirement and health solutions company Aon, the issue of employee health and well-being was seen in Asia in terms of the “year-on-year increase in medical plan cost.” The finance function worked with HR on keeping a lid on the explosive growth of healthcare expenses.

Not anymore, says the CEO, Health & Benefits, Asia Pacific at Aon. “As I meet with senior executives in industry sectors as diverse as manufacturing and professional services,” he writes in the introduction to Aon’s inaugural report, Asia Healthcare Trends 2017/18, “our discussions concerning employee health encompass productivity, absenteeism, employee engagement and talent attraction & retention.”

CFOs should plan on paying more in healthcare insurance premiums in the short and medium term. Across Asia, Aon estimates the regional median medical inflation at 9.6% in 2017 and 10.7% in 2018

This is not surprising in a fast-growing region that faces an imminent labor shortage of 12.3 million workers by 2020, according to the latest Korn Ferry Global Talent Crunch study. The research’s economic modelling also forecast an acute talent shortage by 2030 across Asia – there will be 3.7 positions in financial and business services that will not be filled and 2 million in telecommunications, media and technology.

Focusing on employee health is a smart way in winning the talent war, including in the finance function. Still, CFOs will be remiss in their duties if they neglect managing the financial costs of healthcare obligations. The challenge is to make sure company spending on staff health and well-being is in line with market rates – and generates a return on investment in recruitment and retention, employee engagement and productivity.

Rise of Non-Communicable Diseases

The Aon report provides basic information that is useful to finance and HR departments in 11 markets in Asia. The data includes the medical inflation outlook for each economy, which is actuarially modelled on 2017 and 2018 medical inflation estimates and forecast three years out.

Aon then examines what drives medical inflation, whether it is hospitalization (inpatient) or general practitioner/specialist visits (outpatient). “This information is important,” it notes, “because it provides valuable insights into questions relating to the appropriateness of where treatment is being delivered for chronic illnesses and whether there is excessive utilization of outpatient facilities for acute care, e.g. respiratory conditions.”

If you’re an Asia CFO, you already know that “there are substantive variations between markets related to regulatory environment, infrastructure, health risk factors, cost drivers and cultural norms that impact upon healthcare delivery and financing,” as the report puts it. Thus, in your planning, budgeting and risk management, it is important to view insurance and other risk management solutions “through the prism of each individual market to ensure relevance.”

But it seems that some trends are applicable across the region. For example, non-communicable diseases, particularly cancer and cardiovascular conditions, are now the leading causes of death, a remarkable change in the space or one or two generations – infectious diseases such as tuberculosis, malaria and typhoid used to be more deadly.

Yet there is little evidence that companies are managing the cost of the chronic illnesses that dominate their claims registers, says Aon. Only a minority of insurance carriers are tracking inpatient readmission rates or working with healthcare providers on managing chronic diseases. “There is an urgent need for all stakeholders to reassess the status quo and implement systemic improvements,” urges the report.

Medical Inflation

In their budgeting, CFOs should plan on paying more in healthcare insurance premiums in the short and medium term. Across Asia, Aon estimates the regional median medical inflation at 9.6% in 2017 and 10.7% in 2018. Medical inflation is particularly high in Vietnam (forecast at 19% in 2018), Malaysia (15%), and Pakistan (13%). It is below the median in Hong Kong (8.4%) and Taiwan (7.8%), and right about the median in Singapore (10.7%) and Indonesia (10.2%).

Robust economic growth is also bringing lifestyle changes, characterized by “adaptation of western diets, increased alcohol & tobacco consumption and lack of exercise

Why? Aging populations – the majority of Hong Kong’s 7.3 million inhabitants are 50 to 59 years old, with 15.8% older than 65 – means more chronic diseases. According to the Aon report, the number of new cancer cases in Hong Kong in the decade to 2013 rose at an annual average rate of 3.1%, outstripping population growth of 0.7%. In 2013, a fifth of the population suffered from at least one chronic illness, compared with 16.7% in 2007.

Dr. Daniel Chan, founder and deputy group CEO at Fullerton Healthcare Corp. in Singapore, also points to “increases in the professional fees of medical specialists and, secondly, growth in private hospital fees.” In markets where the private hospital sector has many listed entities, such as Malaysia and Singapore, there is investor pressure on providers to increase fees to deliver revenue growth, he adds.  

In emerging markets like Vietnam, medical inflation is coming from new expectations from a rising middle class, whose members demand better medical care and are willing to pay for it. Robust economic growth is also bringing lifestyle changes, characterized by “adaptation of western diets, increased alcohol & tobacco consumption and lack of exercise,” causing a sharp rise in cardiovascular diseases, cancers and Type 2 diabetes – and medical inflation.

What Can CFOs Do?

All this does not mean that the CFO and the finance team simply give in to the trends. There are ways to design the healthcare program to balance the desire to pay cost-effective premiums and the need to strengthen talent recruitment, retention, engagement and productivity. Among them:

Co-payment arrangements. People tend to seek medical care even if they don’t need to because they don’t have to pay for it. Studies have shown that requiring co-pay from the insured reduces usage of services and prescription drugs, such as those for the common cold.

Co-pays can also be imposed for visits to doctors that are not members of the insurance provider’s network, who may charge higher fees. Going forward, the company may be able to negotiate lower premiums or better terms and coverage if employee usage is controlled.

The key, though, is to set the co-pay levels at nominal rates. High co-pays can be counterproductive as they may affect employee health and weaken talent retention. The aim of co-pay arrangements is to prevent moral hazard and lower premiums going forward, not to claw back healthcare payments.

Pre-authorization of high-cost procedures. This is actually standard in company healthcare plans, but insurance providers differ on pre-authorization guidelines, what conditions require pre-authorization, the wording of the specific diagnosis, the medical-necessity grounds that would result in approval, and other issues.

CFOs should work with HR and risk consultants (including insurance brokers) in negotiating with insurance providers about which procedures should require pre-authorization and other guidelines. The objective is to promote understanding and ease of use by employees, which should help with recruitment and retention, at the same time that premiums remain at cost-effective levels.

Usage of data. According to the Aon report, the majority of insurers say they provide claims reporting to clients, but clients are failing to use the data to positive effect. The reporting may also lack “the necessary granularity to be effective in developing risk and cost management strategies,” concedes Aon.

The use of macro, industry- and company-specific data can help finance and HR understand the key diseases that are most likely to hit employees and their dependents, for example, and the efficacy of generic drugs versus more expensive brand-name medicine. Data analytics can also help in customized health care plans for millennials who may want to swap maternity benefits with wellness elements such as gym membership.  

Wellness programs require funds, time and effort, but if done right, they can improve employee health, productivity and engagement – and eventually slow the rise of premium costs

Wellness Programs

Employee wellness initiatives are arguably the most important course of action that companies in Asia can take in relation to healthcare programs. “Given the linkages between employee health, productivity and talent management,” says Fullerton Healthcare’s Dr. Chan, “it is a no-brainer that employers need to take the lead on this subject.”

But the Aon study reports that companies in Asia are adopting “a largely superficial approach” to wellness programs. Most initiatives, agrees Dr. Leena Johns, Medical Director at Global Healthcare at insurer MetLife, “do not present a sustained, consistent ‘365-day approach’ to wellness” – including the two most popular initiatives: the annual health screening exercise and health promotion campaigns through paper materials.

“Such a spotty approach cannot work for a non-communicable disease where the success lies in creating good consistent habits that include a behavioral change component,” she argues, “as well as in adopting a regimen that includes recording of values (blood sugars, blood pressure), which are critical for condition maintenance.”

Wellness programs require funds, time and effort, but if done right, they can improve employee health, productivity and engagement – and eventually slow the rise of premium costs for the company because fewer employees will suffer from chronic diseases and seeking treatment at hospitals and seeing medical specialists.