Rate of Medical Inflation Critical to Insurance Industry According to Assured Research

Share Article

Administration argues for favorable ACA impact; looming inflection point in new data is a concern.

The impact of the Affordable Care Act is a leading concern for insurance executives.

While there are still major uncertainties confronting the outlook for national health care expenditures and medical price inflation, property-casualty insurers should avoid the temptation to reduce the medical trend factors in their reserve development.

“Inflection points matter,” William Wilt, President of Assured Research, a firm that analyzes the property-casualty industry said in a recent report, “and while insurers are generally good at discounting macro trends into their ratemaking and reserving formulas, the health inflation outlook is still too uncertain to presume it will remain as low as it has been for the last few years.”

“We wouldn’t suggest that insurers should build the historic 8-10% medical trend into their reserves, but, should actuaries lower their assumption to today’s low single digit level on the belief that the ACA will keep medical inflation lower-for-longer? No way” he argues, “Why? Because 25 million people are forecast to enter the system over the next two years and we know what increased demand does to prices.”

After rising rapidly for many years, health care spending has slowed in the last few years. So the question is whether the slowdown reflects some structural changes in the delivery of healthcare, and thus, will remain in check, or was the slowdown driven by cyclical factors such as the recent recession, and, therefore, will revert back toward the higher growth levels of the past?

The Federal government definitely has mixed views. On one hand, there is a tendency to ascribe part of the slowdown to the impact of changes stemming from the Affordable Care Act. But, while the political rhetoric argues for a continued slowdown, the actual forecast from the Centers for Medicare & Medicaid Services projects that costs will grow faster than the economy over the next decade and consequently expand once again as a percentage of GDP.

“However, as we discuss in this report, the CMS projections in the past have been well off the mark, so this tempers our confidence in the current forecast,” said Alan Zimmermann, a Managing Director of Assured Research and a co-author of the report.

“While the future of healthcare spending is uncertain, there remains the possibility that the rate stays low,” said Zimmermann. “If that were the case it clearly would be positive for the economy and additionally lower spending by the Federal Government on various health care programs would ease the pressure on the deficit to a degree that it could affect national political agendas. We calculate that if health care spending only grows at a 4% rate over the next decade instead of the government’s 6% projection the Federal deficit could be 30% lower than currently forecast a decade from now.”

Share article on social media or email:

View article via:

Pdf Print

Contact Author

William Wilt

Alan Zimmermann
Assured Research, LLC

Visit website