Health costs worry CFOs: ‘Less predictable’ than other company expenses

A new report from Mercer has found that chief financial officers (CFOs) feel they have a good understanding of health care costs, but most are concerned about the unpredictability of those costs at a time when new therapies and drugs are often very expensive.

Mercer officials said that there hasn’t been a lot of surveys of CFOs about health care costs, but that those executives are expressing a desire to get a better handle on an area of spending that can rise unpredictably. The study found that 72% of CFO respondents said health care expenses were less predictable than other company expenses.

Sunit Patel, senior partner and chief health actuary at Mercer, said that CFOs have been getting more involved in the health care arena. “Given the significant costs associated with health care, especially with the unpredictably, we’re seeing more and more CFOs get involved. As they do, they want to understand how their peers are thinking about the space.”

Health benefit expenses have gotten the attention of CFOs

The CFO perspective on health study noted that health benefit cost growth is exceeding general inflation and the annual average health benefit cost per employee is approaching $16,000. “It’s not surprising that 67% of respondents with 500 or more employees indicated health care costs to be a significant or very significant concern,” the Mercer report said. “In addition, while inflation for other goods and services has subsided over the last year, the same is not true for health care, which may draw even more attention from finance and other stakeholders.”

High-cost claims are obviously a worry for companies—83% of survey respondents said high-cost claimants with claims of more than $100,000 but less than $1 million represent a very concerning/significantly concerning group. Very high-cost claimants—those with claims over $1 million—were just slightly less of a concern, at 67% saying this group was very or significantly concerning.

The explosion of GLP-1 drugs were also a concern. These higher-costing drugs were listed as very or significantly concerning by 40% of respondents.

“While claims of over $1 million are still relatively rare, the pace of pharmaceutical innovation and advances in medical technology is accelerating,” the report said. “Two-fifths of respondents find GLP-1 drugs to be very or significantly concerning. Here, benefit expense can be limited by coverage decisions and there may be offsetting benefits (lower morbidity for other diseases) from managing obesity.” The study also found that 57% of CFOs said they had been told by their benefits department to expect greater claims volatility in 2024.

CFOs say they have the information they need

The study found that most CFOs said their finance department receives the information needed to monitor their health costs effectively. Of the companies with self-funded health plans, 70% of CFOs said they had enough information to monitor costs effectively. And overall, 82% of CFOs said they have the right amount of input on benefits decisions.

However, plenty of uncertainty remains. The survey found that 36% of CFOs are not confident that long-term costs management strategies that require investment are actually saving the company money. Another 19% said they don’t have enough information to say.

Part of the uncertainty is reflected in the fact that many self-funded plans end up re-forecasting claims. While 25% of CFOs said their plans did not reforecast, another 25% said their company reforecast claims twice; 21% said they reforecast three times; and 19% said they reforecast four times or more. The study said that 10% of CFOs said their companies reforecast claims once a year.

A tolerable level of volatility

Suni noted that CFOs and HR departments have to work together to manage health care costs, but some variation in expenses is always going to be possible.

Related: Harnessing the power of predictive analytics to contain benefits costs

He added that it is key for the different stakeholders to get good information and have open channels of communication. “I think it’s important to have a conversation and not assume that the decisions the company made in the past will be the same decisions [for the future],” Suni said. “The situation may have changed, or there may be more pressures this year, or it may be a great year and the company is growing,” he said. “There are things both outside of health care and inside of health care that can impact those decisions.”

“Many companies have those upfront conversations; ‘let’s work together to figure out which strategy is needed to mitigate costs,’” he said. “It’s important to make sure all stakeholders understand those strategies. The message has to be simple, because it’s the execution of it is where things get more complex.”