PwC: Healthcare spending projected to dip

Healthcare inflation in the U.S. is projected to dip to 6.5 percent in 2014, according to PwC’s Health Research Institute (HRI) in its annual report, Medical Cost Trend: Behind the Numbers. The ongoing slowdown in the healthcare growth rate defies historical post-recession patterns and is likely to be sustained even as the Affordable Care Act (ACA) adds millions more newly-insured Americans to the health system in 2014.

The decline in spending growth is a signal of progress in the quest to bend the cost curve.  At the same time, the slowdown presents financial challenges for the industry as it attempts to navigate in a rapidly changing environment.  According to HRI, structural changes within the industry are helping to contain costs and deliver care more efficiently. Consumers, meanwhile, who are paying a greater share of the cost, are making spending adjustments.  Many are delaying care, using fewer services and choosing less expensive options such as retail clinics, urgent care centers and mobile health devices.

“The health industry is at an inflection point as it rebalances, realigns and prepares for full-scale transformation from fee-for-service medicine to consumer-centered, accountable care,” said Kelly Barnes, PwC’s U.S. health industries leader. “Change of this magnitude takes time and will come in stages. Health organizations should learn to adapt to a market in which growth may be lower in the near term, and pursue new sources of growth often in unlikely places.”

The trend is a key ingredient in setting insurance premiums. After accounting for likely changes in benefit design, such as higher deductibles, HRI projects a net growth rate of 4.5 percent in 2014.

According to HRI, health organizations that already have been hurt by a squeeze on reimbursement and a recession hangover should brace for additional financial pressure. Uncertainty about the impact of ACA implementation and what to expect from a largely unknown, newly-insured population are manifested in seemingly contradicting themes: a declining medical cost trend and rising insurance premiums, particularly in the individual market.

“Healthcare cost increases continue to exceed overall growth in wages, but the gap appears to be shrinking. The long-term trends suggest that as the economy improves, the cycle of runaway cost increases will be broken,” said Michael Thompson, principal with PwC’s human resource services practice. “This is critical as employers strategically reevaluate the role of healthcare benefits to their organizations and step up efforts to engage employees more directly in value-based healthcare decision making.”