Inflation’s Impact on Employee Benefits 

By R. Edward Johnson

As the pandemic phase of COVID-19 tapers off and society begins its return to normalcy, the impacts of demand for goods and services outpacing supply has led to a significant rise in inflation. For example, the annual rate of inflation in the United States reached 6.8% in November 2021, the highest in more than three decades, as measured by the Consumer Price Index, and more recent data suggests the rate of inflation will continue to be a concern. 

What is the relationship between inflation and employee benefits? Why would inflation be important when employers are considering impacts to employees? When revisiting benefit offerings for 2022, leaders of many corporations list ongoing stress to their employees due to the pandemic, rising inflation, a hot job market, and rising costs of health benefits as their main concerns. And one could argue that the four of those are well correlated: a hot job market leads to higher compensation offerings which contribute to but may not outpace inflation, inflation in turns leads to higher compensation needing to be offered to attract and retain employees, and round and round it goes. In addition, these forces along with supply issues for medical equipment and materials lead to ever increasing health care costs, with health care costs being one of the most expensive benefits an employee or an organization pay for each year.

We can expect the reaction in the employee benefits space to be one where organizations begin to focus more and more on how to avoid adding to their employee financial burdens, and in turn how to retain the quality employees that they have. One of the problems, however, is C-level executives lack the confidence—due to the absence of solid data—to believe that a lot of their long-term strategies save their employees money. 

In general, companies that take a multi-pronged approach to cost management seem to have the most success. Claim trend management, higher than average historical compensation adjustments, absorbing health care cost increases instead of passing them on to employees and holding back on reducing benefits are just some of the ways that employers are attempting to keep their employees from absorbing more of a financial burden during this tight labor market and period of inflation.

Projected National Health Expenditure, 2019-2028

• National health spending is projected to grow at an average annual rate of 5.4% for 2019-28 and to reach $6.2 trillion by 2028.

• Because national health expenditures are projected to grow 1.1 percentage points faster than gross domestic product per year on average over 2019–28, the health share of the economy is projected to rise from 17.7% in 2018 to 19.7% in 2028.

• Price growth for medical goods and services (as measured by the personal health care deflator) is projected to accelerate, averaging 2.4% per year for 2019–28, partly reflecting faster expected growth in health sector wages.

• Among major payers, Medicare is expected to experience the fastest spending growth (7.6% per year over 2019-28), largely because of having the highest projected enrollment growth.

• The insured share of the population is expected to fall from 90.6% in 2018 to 89.4% by 2028.

Health Care Costs

With more and more C-level executives becoming aware of the unsustainability regarding health care costs—exacerbated by the other market forces mentioned—more and more companies are becoming offensive as well as defensive when it comes to benefit offerings. With an eye on employee retention as well, more companies are offering arrangements such as student loan subsidies, remote working arrangements, and more flexibility in work scheduling. Companies benefit as well when they can cut down on leasing costs or employ individuals who live in areas with a lower cost of living. The bottom line is that taking some sort of action, along with rigorous plan management, is key to navigating the current economic situation. 

As always, working closely with your employee benefits consultant is the best course of action to navigate these unprecedented times. Your consultant is the expert, acting as an extension of your own team, who can help you map out all the alternatives to managing costs and maximizing the value of your plan.