Medical Cost Trend: Behind the Numbers 2015
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Medical Cost Trend: Behind the Numbers 2015 June 2014 Health Research Institute Table of contents The heart of the matter 2 The five-year contraction in healthcare spending growth comes to an end next year as the stronger economy releases a pent-up demand for care. Despite some higher utilization and expensive new cures, the rise in the expected growth rate in 2015 is modest compared to prior increases. An in-depth discussion 4 For 2015, PwC’s Health Research Institute (HRI) projects a medical cost trend of 6.8%. Taking into account likely adjustments to benefit design such as higher deductibles, HRI anticipates a net growth rate of 4.8%. Executive summary 5 Medical cost trend in 2015 6 Factors affecting 2015 spending growth 8 What this means for your business 17 A stronger economy and newly insured Americans mean an uptick in spending growth for healthcare. But the fact that health spending continues to outpace GDP underscores the need for a focus on productivity, efficiency, and better value for purchasers. Employers 18 Providers 18 Health insurers 19 Pharmaceutical and life sciences 19 The heart of the matter The notable five-year contraction in healthcare spending growth comes to an end next year as the stronger economy releases a pent-up demand for care and services. Despite some higher utilization and the cost of expensive new cures, the rise in the expected growth rate in 2015 is modest compared to the double-digit annual increases seen throughout the late 1990s and early 2000s. PwC’s Health Research Institute (HRI) And major purchasers—namely projects a 6.8% growth rate for 2015, the federal government and large a slight uptick from the 6.5% projected employers—are tamping down the last year. HRI’s analysis measures spending growth rate analyzed in this spending growth in the employer- report, in part by demanding greater based market—the foundation of the value and in part by shifting financial US health system, covering about responsibility to consumers. 150 million Americans. Fluctuations in the individual market, including new Eighty-five percent of employers plans sold on public exchanges, are not in PwC’s 2014 Touchstone Survey within the purview of this analysis. have already implemented or are considering an increase in employee The story of 2015 is a nuanced one. At cost sharing through plan design first glance, the health sector appears changes over the next three years. to be reverting to historical patterns of And 18% of employers now offer a bouncing back as the nation recovers high-deductible health plan as the only from the economic doldrums. Whether insurance option for their employees. spending more freely because of the improved economy or shopping Millions of newly insured Americans with insurance provided through accessing care are causing an entirely the Affordable Care Act, consumers expected spike in 2015. But the influx triggered the first bump in growth in also marks a critical juncture in long- the first quarter of 2014. We expect term direction: Can the industry build that to continue through next year. on recent improvements to finally bring medical inflation in line with But other factors are helping the overall economy? Or will 2015 to moderate that growth. The represent the start of the next cycle of $2.8 trillion industry is becoming unsustainable growth? more efficient. Doctors and hospitals are adopting standardized processes that offer the prospect of better value for our health dollar. “At-risk” payment models that hold healthcare providers financially accountable for patient outcomes are beginning to take effect. One tangible sign of shrinkage: growth in healthcare system administrative and clinical employment has declined since 2011. The heart of the matter 3 An in-depth discussion For 2015, PwC’s Health Research Institute (HRI) projects a medical cost trend of 6.8%. Taking into account likely adjustments to benefit design such as higher deductibles, HRI anticipates a net growth rate of 4.8%. Executive summary role in the short run. But in some class of healthcare shoppers: price instances, potential long-term sensitive and willing to consider The improving economy demonstrates savings from these innovative new that less may be more. Families in that structural changes in the health cures could be substantial. high-deductible health plans use sector have taken the steam out of fewer brand name drugs, pursue run-away cost inflation. The challenge • Physician employment—Once lower-cost care venues such as for industry executives is to continue hospitals and health systems retail clinics and visit doctors to control spending even in the face acquire in-house physician less frequently.1 of countervailing winds such as practices, they have the ability to expensive new innovations, improved immediately escalate physician • Risk-based payments—The consumer confidence, and an aging charges to the higher hospital rate, industry is beginning to realize society that requires more medical which will likely trigger a rise in significant savings by holding care and services. spending next year. physicians and health systems financially responsible for HRI issues its projection for the • Information technology patient outcomes. coming year’s medical cost trend investments—As more health based on activity in the market that systems go through large-scale What this means for your serves employer-based insurance—a mergers and acquisitions, they projection that has become a key must make major investments in business integrating data and information ingredient in setting insurance A stronger economy and millions to capture potential efficiencies of premiums for the past decade. of newly insured Americans mean scale. However these investments an uptick in spending growth for In compiling data for 2015, HRI may increase hospital operating healthcare organizations. That may interviewed industry executives, costs by up to 2% during integration be a welcome respite from recent health policy experts, and health plan before hospitals can realize years of budgetary pressure. But the actuaries whose companies cover a any savings. combined 93 million members. HRI fact that health spending continues also analyzed results from PwC’s Three factors that we expect to deflate to outpace GDP underscores the need 2014 Touchstone Survey of more than the healthcare growth rate in 2015: for a renewed focus on productivity, 1,000 employers from 35 industries. In efficiency, and, ultimately, delivering • “Systemness”—Understanding this year’s report, we identified: better value for purchasers. that a well-functioning whole is Four factors that we expect to inflate greater than its disparate parts, care As employers continue to shift the spending growth rate in 2015: teams are seeking to achieve more financial responsibilities to their by working together. Similarly, employees, the cost-conscious • Economic upswing—Many have hospitals within a large system consumer will exert greater influence wondered when the economic strive to eliminate redundancies in the new health economy. Savings upswing would kick in and push and reinforce common goals that come from standardization can up the healthcare growth rate. through administrative and help position health businesses for Now, more confident consumers clinical standardization. Reducing the value-driven future. But real are visiting doctors and the redundancies lowers operating success and profitability will go to the number of people delaying care has costs and should act as a insurers, drug makers, and healthcare notably declined. counterbalance on spending growth providers that deliver highly next year. personalized customer experiences at • Specialty drugs—As exemplified a competitive price. by new high-cost Hepatitis C • Healthcare price shopping—The therapies, drug development prevalence of high-deductible continues to play an inflationary health plans is spawning a new An in-depth discussion 5 Medical cost trend in 2015 What is medical cost trend? Medical cost trend is the PwC’s Health Research Institute year’s projected uptick is a change in projected percentage increase (HRI) projects 2015’s medical cost direction from years of significantly in the cost to treat patients from trend to be 6.8%— a modest increase slower growth, but it does not one year to the next. While it can over our 2014 projection of 6.5%.2 guarantee a return to the double- be defined in several ways, this This projection is based on HRI’s digit increases of the past. In fact, the report estimates the projected analysis of medical costs in the large contained growth is evidence that increase in per capita costs of employer insurance market, which structural changes aimed at delivering medical services that affect covers about 150 million Americans.3 better quality care at lower costs are commercial insurers and large, By comparison, Medicare serves starting to hold healthcare spending self-insured businesses. The 52 million beneficiaries and a little growth in check. projection is used by insurance over 8 million Americans enrolled in companies to calculate health plan premiums for the coming the public exchanges this year.4 Although total US health spending will likely increase as more people year. For example, a 10% trend The net growth rate in 2015, after gain insurance under the Affordable means that a plan that costs accounting for benefit design changes Care Act (ACA), it may have little $10,000 per employee this year such as higher deductibles and narrow effect on employer health spending. will cost $11,000 next year. The provider networks, is expected to The increase in utilization under cost trend, or growth rate, is be 4.8%. Benefit design changes the ACA will likely drive up total influenced primarily by: typically hold down spending growth national health expenditures without • Changes in the price of by shifting costs to consumers, changing prices for those with medical products and services, who often choose less expensive employer coverage.