Can indexes help organizations manage the financial risk of healthcare costs?

Moving past the political debate around Obamacare, the news last month drove home a more important point – not only are healthcare costs high and increasing, but the rate at which these costs increase (trend) is also volatile. Walgreens made headlines when it announced that FY 2016 pharmacy earnings would drop by over $1.1 billion dollars. The fact that an organization with the healthcare expertise and resources of Walgreens can miss earnings by over a billion dollars shows how difficult the problem of managing healthcare cost trends can be. This problem is compounded because unlike many other industries, the healthcare industry has very few tools available for managing the financial risk of cost trends.

From the outset, the S&P Healthcare Claims Indices have been designed to support financial hedging tools that could allow organizations exposed to future healthcare cost trends to manage that risk. By providing a broad range of indices that track the key measures of healthcare cost trends (such as drug costs, hospital costs, regional trends and insurance plan trends), the indices can be tailored to allow organizations to track the specific cost trends that are critical to their own situation. In cases such as Walgreens, the ability to hedge exposure to the impact of future price changes in generic/brand drugs (or changes in utilization) could have provided a solution to the inherent risk of volatile trends. Although the S&P Healthcare Claims Indices have only been available since October 2013, some organizations such as health insurance carriers and employers are already beginning to look to the indices as a way to hedge financial exposure. The application of index based risk management tools to healthcare financing is an exciting development and could be a critical component in bringing healthcare costs under control.

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