COVID-19 and Health Plan Experience: A Framework for Developing Cost Projections

Among the many financial consequences of the COVID-19 pandemic on US businesses will be its impact on 2020 self-insured health plan costs. As there are many uncertainties (such as the prevalence rate, the development of a treatment, and so on), reviewing multiple future-state scenarios will be essential as the situation evolves both in the macro environment and in your own organization.

To update your 2020 claims estimate, you will need to start with your current 2020 estimate and make three adjustments. The first adjustment covers the costs related to individuals who receive a test, the second is for those who test positive and require treatment, and the last is an adjustment to reflect changes in how we are consuming other non-COVID-19 related medical services. Specifically, we’re seeing a reduction in non-critical ‘elective’ services that could offset total costs.

Costs estimates related to COVID testing and treatment can be constructed by looking at the expected frequency and the unit cost for these services, under various scenarios. For testing frequency, you will need to take into consideration factors such as supply levels, ease of access and the evolving criteria around who should be tested. For treatment, you will need to look at those individuals that need treatment in a hospital setting, and estimate those costs.

Lastly, we need to consider what we’ve all likely heard anecdotally or experienced ourselves, the cancellation of non-critical, elective services. This could meaningfully impact 2020 claims costs. Duration is a key factor, as the longer this event goes on, the less months in 2020 to experience the ‘rebound’ in care that will occur when this is some greater sense of normalization. We know from studying experience after other natural disasters (though not directly comparable, informative nonetheless), that some services will come back while others will be ‘lost forever’.

At this time, most employers have not yet landed on a new assumption for 2020. In an ongoing employer poll with 251 respondents to date, only 5% say they already have a financial impact assumption, although 21% say they have begun modelling it. Among those that provided their working assumption, for about half it’s 5% or below, and for half it’s 6% or higher. 

As you begin to consider cost impacts, recall the importance of looking at various cost scenarios, and keeping an eye out on how experience emerges, as well as company specific considerations – be it geography, demographics, risk tolerance – as you narrow in on the financial implications of COVID 19, over the coming weeks and months.

Sunit Patel
by Sunit Patel

Partner, Chief Actuary, Mercer

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