PwC: Medical costs to increase 8.5 percent in 2012
Healthcare costs are expected to rise by 8.5 percent in 2012, compared with an increase of 8 percent in 2011, according to a report on medical cost trends published by PricewaterhouseCoopers (PwC) Health Research Institute.
“However, mitigating changes in health benefit plan designs, including increased cost-sharing with employees, could keep employers’ cost increases to an average of 7 percent next year,” the New York City-based researcher stated.
The report, “Behind the Numbers,” includes findings from PwC’s 2011 Touchstone Health and Well-being Employer Survey of approximately 1,700 U.S. employers from 32 industries, as well as interviews with hospital executives, health plan actuaries and other executives whose companies provide health insurance for more than 80 million covered lives.
“Given the unsettled nature of the economy [during] the past three years, employers have feared the worst about their health benefit costs,” the report stated. “However, just as the recession slashed consumer spending, it dramatically slowed the growth in medical spending in 2010, surprising nearly everyone.”
PwC had projected a 9 percent increase in employer medical costs for 2010 and 2011. However, low utilization led to adjusted estimates in the medical cost trend to 7.5 percent for 2010 and 8 percent for 2011 before benefit plan changes.
PwC identified factors that are likely to inflate the medical cost trend in 2012:
On the other side of the cost equation, PwC cited several factors that will deflate medical costs for health plans and employers in 2012. These include:
PwC’s projected medical trend does not reflect changes in benefit plans, which typically reduce the trend by 1.5 to 2 percentage points. Employers and health plans made benefit plan design changes in 2010 that reduced the medical cost trend from PwC’s adjusted projection of 7.5 percent to 6 percent. But benefit changes in 2011 reduced the trend by only 0.5 percent, from the projected 8 percent to 7.5 percent, because of mandates imposed by the health reform law, the organization concluded.
“However, mitigating changes in health benefit plan designs, including increased cost-sharing with employees, could keep employers’ cost increases to an average of 7 percent next year,” the New York City-based researcher stated.
The report, “Behind the Numbers,” includes findings from PwC’s 2011 Touchstone Health and Well-being Employer Survey of approximately 1,700 U.S. employers from 32 industries, as well as interviews with hospital executives, health plan actuaries and other executives whose companies provide health insurance for more than 80 million covered lives.
“Given the unsettled nature of the economy [during] the past three years, employers have feared the worst about their health benefit costs,” the report stated. “However, just as the recession slashed consumer spending, it dramatically slowed the growth in medical spending in 2010, surprising nearly everyone.”
PwC had projected a 9 percent increase in employer medical costs for 2010 and 2011. However, low utilization led to adjusted estimates in the medical cost trend to 7.5 percent for 2010 and 8 percent for 2011 before benefit plan changes.
PwC identified factors that are likely to inflate the medical cost trend in 2012:
- Consolidation among hospitals and physicians. Hospitals and physicians are aligning through mergers, acquisitions and other arrangements, the report stated. This trend is expected to accelerate as health reform incentivizes hospitals and physicians to align and form accountable care organizations (ACOs). Provider consolidation is seen as a way to increase efficiency and reduce costs in the long term; however, health plans are concerned that it will reduce competition among providers and drive up payment rates.
- Increasing cost-shifting from Medicare and Medicaid. In 2012, Medicare and Medicaid payment rates are expected to decline relative to private payment rates, the report predicted. The increase in Medicare inpatient hospital rates is expected to be 3.3 percentage points below the expected growth in their costs.
- An increase in stress-induced illness. Health plans and employers are beginning to notice post-recession stress taking its toll on workers’ health, as well as increased medical utilization for stress that was deferred during the depth of the recession, according to the report.
On the other side of the cost equation, PwC cited several factors that will deflate medical costs for health plans and employers in 2012. These include:
- Increased cost-sharing. Employers are increasingly shifting the burden of rising medical costs to employees through higher cost-sharing. High-deductible plans were the fastest-growing plan designs in 2011, according to the Touchstone survey. High-deductible plans were the most common benefit design for 17 percent of employers surveyed--up 4 percentage points from 2010.
- Brand-name drugs go off-patent. In 2012, the cumulative sales of drugs going off-patent will be the largest in history, representing approximately $28.1 billion in U.S. pharmaceutical sales, according to PwC estimates. Increased use of generics, spurred by financial incentives to tier pricing, will moderate health spending growth.
- Tiering on out-of-network providers. Employers are increasing deductibles, making it far less attractive for workers to use the services of physicians and hospitals that are out of a plan’s network. In 2011, 44 percent of employers said their out-of-network deductible had crossed the $1,000 threshold, compared with 29 percent of employers in 2010. In some markets, payors also are becoming more selective about which providers are in the network, choosing to exclude higher-cost and premier hospital systems.
PwC’s projected medical trend does not reflect changes in benefit plans, which typically reduce the trend by 1.5 to 2 percentage points. Employers and health plans made benefit plan design changes in 2010 that reduced the medical cost trend from PwC’s adjusted projection of 7.5 percent to 6 percent. But benefit changes in 2011 reduced the trend by only 0.5 percent, from the projected 8 percent to 7.5 percent, because of mandates imposed by the health reform law, the organization concluded.