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Viewpoints from Adam Okun
Just over a decade ago, as the Great Recession was beginning to take form, I was working for a prestigious human capital consulting firm that began circulating an ominous set of slides to its client base. The frightening message (supposedly backed by two decades of data) was clear: beware of the coming spike in healthcare claims. That’s right – this organization, with nearly 20,000 of the most brilliant minds in the industry, concluded that the recession of 2008 was going to lead to a spike in healthcare claims costs and their clients needed to be prepared in taking aggressive action to head it off. And those slides were circulated to thousands of clients along with self-testaments of the firm’s expertise in offering solutions (which of course would come with more billable work!).
The only problem was that there was a major flaw in the methodology – in fact, the data from prior recessions that suggested a claims spike was actually postdated 12 to 18 months and told the exact OPPOSITE story. Claims recede in recessions and their immediate aftermath as members consume less care. Once you are in the recession, claims are already on their way down without any great intervention. The spike in claims precedes the recessions as the economy is in overdrive, then the recessions come and blunt healthcare spending – a close look at the data demonstrated this consistent pattern in each prior recession.
After I discovered this methodological flaw and initially brought it to the attention of the local lead actuary, I was advised to bring it to the very top of the firm’s national brain trust. And though the creative minds behind the flawed recession narrative conceded I was correct (it was largely indisputable) they continued to keep the slides in circulation, selling more consulting work in the process. And sure enough, the Great Recession brought some of the slowest healthcare cost growth in 50 years (see here and here).
In reading the recent Willis Towers Watson projection of a 7% employer plan claims spike due to coronavirus, I find myself living in a scene from the movie Groundhog Day. To quote Mark Twain, “history doesn’t repeat itself, but it often rhymes.”
While it’s true this recession is different because it’s predominantly a healthcare crisis that’s driving the economic one; all data and intuitive thought suggest this is another whopper for our industry.
There is no doubt that COVID-19-related costs will drive some unforeseen healthcare spend BUT there are two key counterarguments: COVID-19 costs are largely concentrated in the elderly and non-working population and, even more significantly, what about all the countertrends of care rationing and social isolation suppressing much of the healthcare claims ecosystem? Dermatology? Outpatient surgery? Physical therapy?Cardiology? Pediatrics? Elective procedures? Activity-related accidents? Not to mention the standard unit cost suppression that recessions always have on spend as members become far more cost-conscious and constrained consumers.
And don’t think this doesn’t have real-world consequences. In a conversation with a client of mine the other week, they expressed some reluctance to absorb the cost for members seeking COVID-19 care because of the supposed claims spike they were reading about from other consulting firms.
I hate to impugn other people’s motives – and I’m going to assume in this case it’s just a flaw in a model or overly myopic thinking – but I’ve seen enough of these headline-grabbing “projections” over the last 15 years to always question them with a healthy dose of skepticism and independent thought (see a recent blog from my colleague, Dave Wiesner, about COVID-19 cost models). I continue to maintain 2020 will be as expected for most clients and more likely than not, a moderately lower claims-cost year. Pick your consultant at your own peril!
Northeast Region Employee Benefits Practice Leader – New York, NY