What will drive medical costs in 2017

Retail clinics, behavioral health and the increasing popularity of narrow health networks will add up to a 6.5 percent growth in medical costs in 2017, the same as in 2016, according to a new report from PricewaterhouseCoopers’ (PwC) Health Research Institute.

The study, which measures spending growth in employer-sponsored health plans, said there’s a sort of tug-of-war evident in the medical cost trend between greater utilization increasing spending and insurers of employer-sponsored plans becoming more aggressive in their search for value.

“2017 will be a tough balancing act for the health industry,” the report stated. “Healthcare organizations must simultaneously increase access to consumer friendly services while decreasing unit cost. Employers, worried that this current trend is at an inflection point that could turn back up, will demand more value from the health industry. When medical growth outpaces general inflation, a flat trend is not good enough.”

The report specifically named four factors that are inflating or lowering costs.

• Convenient care: PwC said 88 percent of consumers surveyed are likely to seek out treatment at retail health clinics in the future. This leads to increased utilization and spending by potentially drawing in consumers who have foregone care in the past, though PwC said “health insurance benefit design and the right mix of cost sharing” may be able to control costs.
• Behavioral health access: Noting the public push for behavioral health services to be covered by insurance plans, PwC said the share of employer health spending on mental health has trended upward since 2005, with expanded access likely to continue inflating costs in the short-term.
• Narrow networks: Limiting providers and emphasizing value-based payments are putting downward pressure on the growth rate, according to PwC, with 43 percent of employers saying they’ll implement a high-performance network-type plan in 2016, up from 37 percent in 2015.
• Aggressive pharmacy benefit managers (PBMs): Seeing an opportunity to control costs, employers and their PBMs are more willing to narrow their drug formularies to a single treatment option—if they can negotiate a big enough discount.

The report also looked at what particular components of healthcare are driving up costs for employers. Physician services continue to make up the biggest chunk at 30 percent, but its share is down from 36 percent a decade ago. While inpatient hospital services’ share remained level, outpatient and prescription drug costs now make up a larger piece of total costs than in 2007.

Overall, PwC said growth rates for medical costs are at historic lows.

“Compared with the past six decades, healthcare costs appear to be in a prolonged period of relatively low growth: The average trend from 1984 to 1994 was 10.0%; from 1994 to 2004, 7.9%; and from 2004 to 2014 (a time that includes the Great Recession and reflects fewer people enrolled in employer plans), just 4.2%.”

But that may not last much longer. The report said in the 56 years private health insurance expenditures have been tracked by the federal government, annual growth tends to rise and fall in 10-year cycles. If that pattern holds, costs are likely to return to double-digit growth sometime in the near future.