Since the early 1990s general inflation rates within the UK, measured through the movement of either the Consumer Price Index (CPI) or the Retail Price Index (RPI), have hovered around the low single digits. Over 2022, the UK and many other countries have seen significant levels of inflationary pressure, largely driven by energy and fuel price increases because of the Russian invasion of Ukraine,1 but also more generally by post-pandemic global supply chain issues and currency depreciation.
This short paper considers and discusses ways in which health insurers may identify and measure inflation, monitor the impact, and finally manage its impact on their business. We look internationally at case studies from Turkey, India and Brazil, all countries with recent inflation much higher and more volatile than the UK, to see how health insurers in those countries have been operating in high inflationary environments.
The graph2 in Figure 1 provides a summarised view of historical and projected general inflation rates within the UK, Turkey, India and Brazil.
Figure 1: Historical and projected general inflation rates within the UK, India, Turkey and Brazil
Turkey is experiencing the highest level of inflation of all four countries so far in 2022, with inflation rates having risen considerably since 2021. We explore this further in the case study below. The UK inflation rates have been comparatively lower than the other countries since 2020, but in 2022 there is a spike, causing UK inflation rates to rise above those of India. At the time of writing, the UK Bank of England expects the inflation rate to fall by 2024.3 but there is considerable uncertainty over whether this will in fact happen. Insurers need to be prepared for alternative scenarios where inflation stays at a more elevated level for a period of time.
General inflationary impact on health insurers
Healthcare insurers are affected by inflation in many ways:
- Claims/medical inflation, which generally refers to the annual increase in the cost of medical treatment per insured life, encompassing changes in the average cost of treatment for the same basket of services and/or changes in the frequency of seeking treatment for a steady-state portfolio, as well as the costs of new treatments and technologies.
- Expenses inflation, which refers to the rate at which non-claims costs are increasing.
- In addition, for those medical insurers that are funding overseas treatment, exchange rate movements add an additional layer of complexity.
We discuss these items in more detail below.
Medical inflation can be complex to define. While there is a long-term link between RPI/CPI and medical inflation, in the short term the relationship is not always clearcut. Generally, the main component of medical inflation is the cost of medical services, so the unit cost of, for example, a hip surgery, or a specific dose of drugs. However, changes in case mix can also increase costs and it is not always straightforward to disentangle these effects. While a provider fee schedule index can indicate the inflationary increase to be applied to a specific set of services, it rarely provides the full impact from an insurer perspective, as it will not capture changes to treatment patterns. Changes in the frequency of claims per person within a steady-state portfolio can also be driven by selective lapsing, as well as by the emergence of new drugs and technological advances to address conditions that were previously undertreated, or untreated.
From the perspective of a medical provider, a large cost item is staff wages, with the remainder being the usual overheads, such as rent, utilities, equipment etc. In the UK specifically, private nursing labour cost increases may be closely correlated to National Health Service (NHS) pay awards, given that the NHS is the largest employer of medical staff by far. Increasingly insurers are also offering third-party medical services such as general practitioner (GP) online services and counselling from private providers. These private providers also tend to be large employers of medical staff and hence will be affected by medical labour costs, even where they are billed mainly as “technology solutions.”
Expense inflation is less challenging to define than medical inflation and can typically be considered with reference to standard wage inflation benchmarks in the wider economy. While some expenses are expressed as a proportion of claims costs, the staffing costs for the claims management function rarely increase as rapidly as the underlying claims for a health insurer. Expenses are largely driven by the cost of administrative staff, but also increasingly by the cost of third-party service providers, whether they are providing technology solutions to the insurer or service solutions directly to policyholders. For all providers, higher rent and utility bills are likely to impact their costs to serve.
Exchange rate movements can be a source of significant volatility for health insurers that fund treatment outside the UK. Different inflation rates in various countries mean additional monitoring and, while some exposure can be hedged, it is not always obvious how to monitor the likely claims line impact. Medical claims tend to be highly heterogeneous, particularly if the benefit package means that claims are low-frequency and high-cost in nature, which adds to the difficulty of measuring the inflation impact.
In addition to the points above, it is worth noting that changes to monetary policy to dampen inflation may also impact the assets side of the balance sheet, as most health insurers are likely to hold short-term investments to match their liabilities.
Considerations for health insurers to measure, monitor and manage general inflationary impacts
The low historical levels of general inflation within the UK have meant most health insurers are not fully equipped to consider and implement the management strategies required. Actuarial models are not always designed to measure inflationary impacts in the level of detail required in a fast-moving inflationary environment. Whereas in the past it had been acceptable to look at historical trends and extrapolate into the future for the next two to three years, now a more forward-looking and agile monitoring and forecasting process is required if an insurer wants to fully understand the impact of future inflationary changes. This will require a detailed split by provider and type of service and between utilisation and unit cost, all while adjusting for the impact of changes in portfolio mix.
We discuss some potential methods to measure, monitor and manage inflationary impacts in Figure 2.
Figure 2: Addressing inflationary impacts
Global case studies
Below are overviews of how health insurers in countries dealing with high inflation currently, or historically, have measured, monitored and managed these situations, alongside some of the key challenges that are unique to each market.
Turkey’s recent experience with high inflation for health insurers
Over 2022, Turkey has experienced unprecedented levels of inflation, with official figures quoting within the regions of 60% to 70% between March 2022 and April 2022,4 Unofficially, the levels of inflation experienced are believed to be much higher than the official figures.
The main tool used by health insurers within Turkey is to raise premium rates quickly, and often. Where possible, health insurers may increase premium rates on a monthly basis, or even more frequently, to reflect the changing inflationary rates. A key challenge for health insurers in Turkey is to maintain market share amid a fast-moving market where competitors are also changing prices frequently.
To raise premiums quickly, other processes such as reserving and experience analysis need to be completed within a couple of days of each month end, to get a good idea of emerging trends at the earliest possible point. This requires extremely agile IT systems and efficient processes to get trend information into the hands of decision-makers at the earliest possible point, and then fast governance to execute pricing decisions rapidly and frequently.
Other methods that health insurers use to manage the impact of high inflation on their books include more stringent medical underwriting to select a healthier and lower-cost risk pool, and hospital network management to steer customers towards hospitals with preferred pre-agreed rates with longer tie-in contractual periods.
Medical inflation rates in Turkey are higher than the current consumer price indices, driven by rising hospital costs such as rent, transport and fuel, exchange rate drops causing an increased cost of imported medical equipment and increasing salary costs for medical professionals. Turkey’s hospitals are also experiencing a drain of medical professionals aboard5 leading to a limited supply of nurses and other medical staff and hence increasing labour costs for hospitals.
India’s ongoing experience with high inflation for health insurers
The annual medical inflation experienced by health insurers in India has been in the double digits for most of the last decade. COVID-19 further added to the inflation, with providers charging separately for personal protective equipment (PPE) kits, COVID-19 tests etc. Although the impact of COVID-19 is gradually declining, insurers are still struggling with containing high medical inflation.
Each insurer is employing its own strategy to dampen the impact, but in general insurers are pulling the following levers to contain the impact of medical inflation:
- Provider contracting: Insurers are constantly trying to rationalise the cost of treatments by asking providers to agree to ever higher discounts to fee schedules. The negotiation power of a given insurer is dependent on the size of its portfolio and the percentage of total revenue it is promising to a given provider.
- Premium increases: Given the challenges related to regulatory approvals, competition, unhappy customers etc., raising rates is not a preferred choice for the insurers. Unlike in Turkey, it is not an option to raise prices frequently on existing portfolios. However, most insurers in India have had to increase premiums significantly to pass on some of the impact of inflation to the insured lives, raising the risk of selective lapsing.
- Medical underwriting: Insurers are implementing stringent medical underwriting practices (relative to the pre-COVID-19 period), particularly for group (employer-paid) portfolios. This has helped insurers to price group covers appropriately and according to the underlying risks and increases the average health of the portfolio.
- Claims management: Insurers are implementing various technology solutions, including artificial intelligence (AI) to identify and mitigate fraudulent activity and manage claims costs.
Brazil’s experience dealing with high inflation
The annual medical inflation experienced by health insurers in Brazil is significantly higher than its Consumer Price Index (IPCA), which calculates the country's general inflation.
Medical inflation also needs to be analysed separately for individual contracts and corporate contracts. Premium increases for individual portfolios are set by the local health insurance regulator (ANS), which typically makes contracts onerous, as medical inflation is often higher than the price increases allowed by the regulator. For corporate contracts, the index is defined by free negotiation between contracting legal entities and insurance companies. However, for contracts with fewer than 30 lives, the local regulator determines that the rule of “grouping contracts” is applied. This rule, also known as “risk pooling,” obliges operators of private healthcare plans to form a distinct category with all their collective agreements with fewer than 30 beneficiaries to calculate the percentage of adjustment that will be applied to this portfolio.
Premium increases for corporate contracts occur annually and are generally based on two factors: the variation in prices of treatments and services in general health, which we can consider to be equivalent to financial indices; and the variation in frequency and demand for healthcare services. There is significant variability in medical inflation between insurers, because this will depend on several factors, such as the insured population characteristics and negotiation with healthcare service providers.
Medical inflation by corporate contracts in recent years has shown high variability, largely due to the impact of the COVID-19 pandemic, which has resulted in a large and rapid reduction in the volume of events, leading to medical inflation at extremely low rates. However, the impact of COVID-19 is gradually declining and instead there is a recovery in service utilisation, mainly due to a rebound in demand for services that were not available during critical points of the pandemic.
Each insurer with corporate contracts is employing its own strategy to dampen the impact, with operators negotiating with service providers and reevaluating contracts, but in general the most common strategy to contain the impact of rising medical inflation is the total or partial transfer of the costs with increased premiums to employers and beneficiaries. In addition, health insurers are always readjusting corporate plans based on the loss ratio balance clauses provided for in the contract, and also based on clauses where it is possible to make contributions by the beneficiary companies to achieve breakeven and rebalance the contracts.
For individual plans, as price adjustments are regulated, there is a focus on the tight management of claims through data integration, provider reimbursement strategies and reducing events of higher cost with the use of new technologies. In addition, health insurers have been seeking to create vertically integrated supply chains, buying hospitals and applying new remuneration models in addition to the fee-for-service, capitation and remuneration based on the results of care.
Health insurers in the UK and those operating globally will ultimately feel the impacts of increased general inflation in their day-to-day operations impacting expenses as well as through increased medical inflation, which has a direct impact on claims costs. Implementing a methodology and plan to help incorporate proper management of inflation impacts to their business now will help insurers stay ahead of potential issues such as sudden high premium increases, which may lead to selective lapsing. The ability to measure and monitor impacts accurately and rapidly and then have IT and governance procedures in place to execute strategies will be critical to success. Models that can incorporate external future-looking benchmarks are also vital in a fast-moving macroeconomic environment where historical experience on claims and price elasticity provides only part of the picture. Understanding the inflationary pressures of the medical supply chain in detail is helpful, as well as algorithms and models to provide insights into trends at a granular level and address these pressures through tighter claims management and targeted contracting strategies.
In the UK we have been used to a significant degree of macroeconomic stability over the past decade. There has been heavy investment in good governance processes, and a strong focus on good customer outcomes, driven by regulatory concerns. However, to survive and thrive in an unstable and fast-moving environment also requires the ability to analyse changing circumstances and make good business decisions, with execution measured in days and weeks rather than months. This will be challenging for a lot of health insurers but will stand them in good stead for many years into the future and not just in the current circumstances. In the event that inflation stays at a higher-than-expected level for the medium term, UK health insurers will need to learn lessons from other countries that have invested in the technology and processes to make rapid pricing adjustments and control claims costs to ensure their plans remain affordable.
1 Office for National Statistics. Recent drivers of UK consumer price inflation: March 2022. Retrieved 15 November 2022 from https://www.ons.gov.uk/economy/inflationandpriceindices/articles/priceseconomicanalysisquarterly/march2022.
3 Bank of England (3 November 2022). Why is inflation expected to fall from the middle of 2023? Retrieved 15 November 2022 from https://www.bankofengland.co.uk/knowledgebank/will-inflation-in-the-uk-keep-rising.
4 Statista. Inflation rate for the Consumer Price Index (CPI) in Turkey from July 2016 to October 2022. Retrieved 15 November 2022 from https://www.statista.com/statistics/895080/turkey-inflation-rate/.
5 Kissel, T. (9 February 2022). Turkey’s Doctors Are Leaving the Country Because of Inflation. Greek Reporter. Retrieved 15 November 2022 from https://greekreporter.com/2022/02/09/turkey-doctors-leaving-inflation/.