Analysts project that employer health insurance costs could rise by as much as 12% during 2020 as a result of the COVID-19 outbreak. A jump of that size could hit the hospice industry hard, with smaller, community-based organizations being most vulnerable.
The firm of Willis Towers Watson conducted an actuarial analysis of self-funded employers to gauge the estimated annual increase in health insurance costs for employees. As the outbreak began to take shape, the firm revised its initial estimate of a 5% increase for 2020 by adding another 7%.
“Despite employers and employees taking the right precautions at this perilous time, the coronavirus continues to spread and place enormous pressure on our nation’s health care system,” said Trevis Parson, chief actuary, Willis Towers Watson. “This spike in the demand for care is likely to lead to a significant jump in employer health care costs beyond previous expectations. However, the ultimate financial impact will depend on many factors, including the portion of the population infected and the severity of their illness.”
The firm based the 12% projection on an infection level of 30%. The costs would be driven by factors such as medical care and prescription drugs. Other costs, such as those for dental and vision insurance, could actually fall due to employers eliminating some discretionary care, according to Willis Towers Watson.
“That certainly will have an impact [on hospices]. Health insurance cost is a big budget item for all of us every year,” Liz Fowler, CEO of Kentucky-based hospice provider Bluegrass Care Navigators, told Hospice News. “We’re still at the beginning of this [pandemic], we can anticipate a lot of what our costs might be, but we are still learning what the impacts are.”
The Willis Towers Watson projection is contingent upon the rate of infection. The higher the number of infections, the most costs could swell. A 10% infection level could lead to a 6% to 8% increase, whereas a 50% level could lead to increases as high as 10% to 14%.
“That’s a big increase for us to swallow and deal with, as it would be for our employees in terms of the portion they have to pick up,” Jim Sturm, CEO of Aberdeen Place Hospice, told Hospice News. “We try to look for efficiencies in how we do things and see if we can cut costs. We’re always looking for efficiency, because our margins can be eroded very quickly in this segment. It’s going to have an impact, but I think we’ll be able to deal with that.”
A significant rise in employer costs in the hospice space could also have an impact on the burgeoning hospice mergers and acquisitions market. Demographic tailwinds are driving a robust M&A market in the hospice space, which is seeing record-high multiples.
If hospices get hit with substantial cost increases, it could start to bring down some of those valuations.
“The biggest impact of an increase in health costs will probably come out in the valuations,” Cory Mertz, managing partner of the M&A advisory firm Mertz Taggart. “Hospices in today’s market will typically sell for between 5-10x EBITDA (cash flow), so for every $1,000 extra a company will be spending on health insurance will translate to a $5,000 – $10,000 hit to purchase price.”