While the health insurance landscape is causing angst amongst business owners and employees alike, the complexity isn't unfamiliar to companies like Meridio. With years of experience guiding businesses in untangling the web of health benefits our CEO provides perspective on the history of healthcare benefits in our country, and the ongoing challenges as a result. In case you missed it here’s a take from Meridio's CEO, Bobby Sain.

I've always been a bit of a sycophant regarding “innovation at the edges” and felt that lately, the topic gets my brain buzzing more than usual, so why not drag you along for the ride?

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Today, we're diving into a topic that I think about constantly: reducing healthcare costs through technology. More specifically, we're discussing how the commercial circus built around healthcare distribution and access is affecting us regular folks (and trust me, it's a wild ride with more twists than a pretzel factory). We won’t go into all of the nitty-gritty today. I did, however, find a good starting point.

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Ernst & Young released a report in June of 2024 that is focused on how Commercial Benefits are evolving. Buckle up, because we're about to unpack this beast.

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Why Commercial Benefits?

In the grand carnival of American healthcare, commercial benefits are the main attraction - the roller coaster that swoops most people through the system. It's a uniquely American ride where your job isn't just your source of income, it's your ticket to healthcare. About 155 million Americans - that's nearly half the country - get their health insurance through their employer. This isn't just a perk; it's the primary way most folks under 65 access healthcare.

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This system has been chugging along since World War II, turning employers into reluctant healthcare middlemen and making "benefits package" one of the most stress-inducing phrases in the English language. Understanding this wild ride is key to grasping why American healthcare looks the way it does—and why changing it is about as easy as herding cats on roller skates.

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How We Got Here: A World at War

Let's hop in our time machine and zip back to World War II. Picture this: it's the 1940s, the war effort is in full swing, Americans are off to war, and there's a glut of demand for goods and services and not enough workers back home to do these jobs. Wages are rising faster than ever as companies compete for talent, and Uncle Sam is worried about runaway inflation. So, what does the government do? They slap a freeze on wages. Companies can't attract workers by waving fatter paychecks anymore. But here's the kicker - this wage freeze had a loophole big enough to drive a tank through: it didn't cover fringe benefits.

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Cue the lightbulb moment. Employers, crafty as ever, realized they could lure workers by offering health insurance instead of higher wages. And the cherry on top? The IRS decided not to tax these benefits. Suddenly, offering health insurance became cheaper for employers than raising salaries and a tax-free perk for employees. It was a win-win for employers that stuck around long after the war ended.

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This wartime workaround became the foundation of our modern employer-based health insurance system. What started as a temporary fix became a permanent fixture -forming a multi-trillion dollar industry (yes, with a “T”), and shaping how most Americans get their healthcare coverage for decades to come.

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The Cost Crunch: A Catalyst for Change

There is no single solution to healthcare costs in the United States. Anyone suggesting that a simple solution will get the job done is either not arguing in good faith or is woefully under-informed. However, there is a significant opportunity to innovate around the inefficiencies of commercial benefits and its distribution model.

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One of the key insights from Ernst & Young’s report, is the elephant in the room: rising costs. It's become such a cliché at this point, we might as well make it a drinking game. The EY survey drops this nugget: “employers are bracing for premium hikes of 6.1% annually over the next 3-5 years”. That's more than double the average inflation rate of 2.9%. Double.

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What's driving this surge? The report points to several factors:

• Healthcare workers want to be paid more (the audacity, right?)
• New drugs that cost more than a small island
• Hospitals increasing their prices from one-off events that stay permanent (prices increased by 17.5% from 2020 to 2022 due to COVID)

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Since there isn’t any one single reason the increases are continuing, there are so many areas you can point fingers at. Ironically, as healthcare improvements increase - we also see prices increase. I like to call this the Healthcost paradox.

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The Healthcost Paradox: When Efficiency Meets a Labyrinth Distribution System

So, we're getting better at curing diseases, solutions to medical problems are getting better and more efficient. We have fewer sick people yet our medical bills are going up. Welcome to the Healthcost Paradox, where more efficient healthcare solutions paradoxically leads to higher costs. But here's the twist – it's not just about the medicine, it's about the maze it has to travel through to reach you.

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Here's how this works:

1. Medical Marvels: We're cooking up new technology that works better than ever.
2. Longevity Boom: People are living longer, often with chronic conditions that used to be a one-way ticket to the afterlife.
3. Demand Explosion: More people needing more care for longer? You bet that drives up demand.
4. The Distribution Labyrinth: Here's where things get spicy. All these amazing treatments have to navigate an increasingly complex distribution system (remember WWII?).
   • Middlemen : From pharmacy benefit managers to insurance companies to brokers to healthcare providers, everyone needs an incentive to drive the products through the system.
   • Regulatory Obstacle Course: Each step in the distribution chain comes with its own set of rules and regulations, adding costs.
   • Information Asymmetry: Patients often don't know the real cost of care, leading to inefficient consumption. (can you think of another system where you have so little control over pricing?)
5. Cost Amplification: Each layer of the distribution system amplifies costs.
6. Innovation Ain't Cheap: Developing new treatments costs big bucks, and guess who foots the bill? (Spoiler: It's us.)
7. Sky-High Expectations: As medicine improves, we all want the latest and greatest – and we expect our insurance to cover it at the same price as last year.

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The result? We're getting better at keeping people ticking, but we're spending more money to do it. This paradox flips the script on our assumption that efficiency equals savings. In healthcare, our medical victories are driving up costs as more distributors working on percentages enter the market, creating a system that's both more effective and more expensive. And our byzantine distribution system? It's the turbo booster on this cost rocket.

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Note: the Healthcost Paradox isn't a legitimate term from an econ textbook – I made it up. This is my way of wrapping my head around the issue. Think of it like Braess’s Paradox: as you increase the number of roads, you get more traffic jams.

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Given that healthcare is distributed through an employer framework, this distribution system is incenvitized to negotiate without the buyers at the table. These costs get passed along to us. This is driving the conversation around changes in healthcare. In fact, 66% of employers say they're likely to "radically adjust" their benefits strategy if premiums increase by 7-9.9%, and based on the trends in the EY report - they are.

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The Shift from Cost-Cutting to Value Creation

Here is where the free market works on behalf of the insured. Despite the cost pressures, employers aren't looking to cut benefits. The EY report shows a notable shift in priorities:

• 42% of employers now place greater weight on improving employee satisfaction, health, and productivity (good news - your employer is incentivized to care about your health. If they don't, you're likely to find one who does)
• Only 35% prioritize reducing medical and pharmacy costs

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This represents a significant pivot. Employers are recognizing that health benefits are mandatory; a strategic tool for attracting and retaining talent, especially in competitive industries. Not surprising, considering that health insurance is the primary way employers attract employee’s these days.

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The Push for Personalization

One of the most striking findings is the demand for more personalization. Employers are looking beyond traditional group insurance where there is one plan and everyone subscribes to whatever their employer picks, to a newer standard that prioritizes personalized care.

1. AI: While current adoption is low, there's significant interest in leveraging AI for better health outcomes and cost management. AI is likely on an exponential curve.
2. Care Navigation and Advocacy: Ushering people through our complex system is more effective at changing behavior compared to traditional approaches.
3. On-site Clinics and Narrow Networks: These options are gaining traction as ways to control costs while improving access to care.
4. Stop-loss and Reference-based Pricing: These financial tools are associated with the highest perceived ROI across all available solutions. (shameless plug for my day job: Meridio is building its platform on Reference-based Pricing)

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What all This Means for People

It’s simple really. The healthcare landscape is at an inflection point. Costs must stabilize and complexity needs to go down. We are on a path in the United States that the demand for better and cheaper healthcare is paramount to continuing the American dream. If not, what other option do we have?

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— Bobby Sain, Meridio CEO

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About Meridio

Our mission is to help small businesses - like yours - more effectively and affordably offer health benefits to their teams. We are here to assist you in navigating the marketplace uncertainty and the overall rising healthcare premiums and how they will impact your business. With the ability to help you turn this uncertainty into actionable steps to move your business forward. If you’d like to learn more about our strategic approach and offerings, reach out for a quick 30 minute call today.