Rising Healthcare Costs and Drivers: An Aon Study

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2 Rising Healthcare Costs and Drivers: An Aon Study Doug Gibbons, Principal Global Benefits

3 1 The rising cost of healthcare 3

4 The global healthcare crisis in numbers Global healthcare spending estimated as USD8.7 trillion equivalent to 12% of global GDP Global healthcare inflation grew at 8.8% in 2015 equivalent to 5.5% higher than global price inflation For 2016, healthcare inflation globally expected to be 9.1% which is 5.6% higher than global price inflation Cliff edge faced by employees leaving employment 580m People worldwide over the age of m Diabetes sufferers in India and China 7.5m Deaths pa due to tobacco which is 10% of all deaths 17% Of US GDP is in the healthcare industry 30 year increase in percentage aged 60 years or over At these inflation rates the nominal costs of healthcare doubling every 10 years Rising costs being driven by: Rapidly ageing population The rise of chronic lifestyle disorders Overuse of medical services Expensive treatment advances Source: World Health Organization 4

5 Global medical inflation statistics Region & Country Annual General Inflation Rate (%) Annual Medical Trend Rates Annual General Annual Medical Trend Rates Inflation Rate (%) Gross (%) Net (%) Gross (%) Net (%) Global North America Latin America & Caribbean Europe Middle East & Africa Asia UK Source: Aon s medical inflation study times the ratio of UK price and medical inflation 4 years the time for medical costs to double in LATAM 5

6 2 Corporate awareness of the issue 6

7 Aon s Global Governance Study About the study Second of an ongoing study conducted by American Benefits Institute and Aon Hewitt. In-depth analysis of how companies make and execute strategic benefits design, financial and operational decisions. Focused on following key areas of corporate benefits governance and operations: Drivers of corporate oversight and control Effectiveness of governance and operations Correlation between business outcomes and best practice Participant profile 205 participants headquartered in: North America: 58% Europe: 35% Rest of the world: 7% Worldwide employees: 100,000 or more: 23% 25, ,000: 31% Less than 25,000: 37% Operational complexity: 40% with more than 7 business lines 44% operate in more than 50 countries Almost all have 50% or more employees outside HQ country Most respondents are HR leaders with responsibilities for managing benefits in HQ country and international locations 7

8 Which of the following business issues is your company facing? Active cost management and cost cutting Reengineering operating model to better serve customers and address competitive pressures 42% 40% 60% 77% Flat or sluggish organic growth 12% 55% Ageing population 9% 54% Growth due to mergers and acquisitions Workforce diversity Reengineering business/expanding into new products and services Restructuring/divesting/spin-offs Talent shortage 17% 48% 47% 46% 31% 44% 33% 40% 40% 46% Investing for growth 36% 64% Increased focus by regulators and credit rating agencies Workforce contraction/lay offs 31% 16% 24% 5% Mature markets Emerging markets Significant organic growth Low engagement and productivity/undesired employee turnover Negative growth 18% 15% 14% 15% 3% 48% 11% Significant hiring/workforce expansion 24% Source: Aon s global governance study

9 What are the most important reward issues facing your company? Healthcare cost increase/containment 34% 77% Employee appreciation of benefits programs 46% 69% Changes in health care legislation 19% 61% Financial risks of defined benefit plans Retirement cost increase/containment Competitiveness of benefit programs Negotiations with labor representatives (eg, unions, work councils) Administration of benefit programs Changes in retirement legislation 9% 14% 13% 20% 61% 60% 52% 48% 46% 45% 35% 44% Financial literacy of employees Low savings rates in defined contribution plans Changes to social benefits programs Demands for new or increase in benefits Salary inflation due to talent shortage 44% 33% 32% 21% 28% 27% 27% 36% 14% 38% Mature markets Emerging markets Source: Aon s global governance study

10 What actions will you take to tackle key employee benefit issues? Improve compensation programs and long-term incentives to attract and retain talent Redesign benefits to promote individual responsibility and flexibility of choice Provide/improve supplementary or private health insurance Address age-related aspects of benefits (eg, longevity issues, elder care, coverage for ageing parents etc.) Provide/improve risk benefits such as life insurance and disability benefits Provide/improve retirement benefits to improve employees' financial security Implement health/wellness strategies Implement financial wellness strategies Provide/improve other benefits such as allowances Improve work environment and career development benefits Improve communications of benefits and employee education Review benefits for non-unionized workforce Negotiate benefit plan changes/reductions with employee representatives such as unions, works council De-risk pension plans Settle pension risks via actions such as lump sum payments or buy-out/ins Finance benefits through captives, multinational pools, etc. Implement stricter oversight and control at corporate level for design changes or when establishing new plans Implement stricter oversight and control at corporate level for financial decisions such as investments and funding of plans Leverage global purchasing scale to reduce cost of operations 37% 31% 56% 27% 21% 31% 27% 10% 31% 28% 26% 24% 67% 45% 42% 18% 12% 12% 44% 38% 67% 52% 29% 20% 37% 10% 56% 15% 42% 8% 49% 41% 60% 52% 51% 42% 57% 53% Mature markets Emerging markets Source: Aon s global governance study

11 3 Key global medical cost drivers 11

12 Medical cost drivers major claim areas Q What are the most common claim causes globally? Top 3 claim categories by region Global Europe UK Cardiovascular Cardiovascular Musculoskeletal / back Cancer Cancer Cancer Gastrointestinal Diabetes Mental health 12

13 Medical cost drivers lifestyle risk factors Q What are the most common lifestyle factors globally? Top 3 lifestyle factors by region Global Europe UK High Blood Pressure High Blood Pressure Obesity Cancer Smoking Poor Stress Management Gastrointestinal Poor Stress Management High Blood Pressure 13

14 Medical cost drivers lifestyle risk factors Q What are the most expensive medical treatments globally? Top 3 most expensive treatments by region Global Europe UK Hospital Clinics Hospital Clinics Hospital Clinics Physician services Physician services Administration 14

15 4 Mitigating healthcare costs 15

16 Mitigating rising healthcare costs cost sharing with employees Q How many medical plans have a cost sharing arrangement with employees? 16

17 Mitigating rising healthcare costs analysing claims data Q What level of claims information is available from the major insurance carriers? 17

18 Mitigating rising healthcare costs health initiatives Q What are the most common health initiatives globally? Tactical interventions by category Detection Employer wellness Education Advanced assessment Physical check-up Quit smoking General health communication Heart health Vision screening Employer Assistance Web based information Advanced check-ups Mammograms Physical activity Wellness kits Nutrition 18

19 Call to action every employer needs a targeted strategy Healthcare inflation will remain high and above price inflation well into the future Global companies are waking up to this situation at the highest levels of management An increasing burden of healthcare provision will fall to the private sector in most countries Lifestyle factors are the key lever that employers and individuals can influence to impact medical costs A range of mitigating strategies exist to tackle rising healthcare costs Proposed Actions Companies should consider some or all of the following; Review the design of programs for optimization opportunities and the ability to share costs with employees Work with consultants and carriers to get a better understanding of specific claims patterns and underlying issues Design a program of initiatives aimed at tackling the specific risk factors of your programs 19

20 About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: Copyright Aon Consulting Limited 2016 No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any way or by any means, including photocopying or recording, without the written permission of the copyright holder, application for which should be addressed to the copyright holder. Aon Consulting Limited is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales. Registered No: Registered Office: Briarcliff House, Kingsmead, Farnborough, Hampshire GU147TE