Millions more Americans are expected to join the ranks of the insured in 2014 under the Affordable Care Act (ACA) — and with the expansion in coverage will come additional expense. Even so, the rate of spending growth in the health sector will head in the opposite direction, continuing a slowdown that has lasted well beyond the 2009 recession.
In its eight annual report on health spending, PwC’s Health Research Institute (HRI) projects that 2014 medical cost trend will be 6.5 percent–a full percentage point lower than our estimate of 7.5 percent for 2013. Taking into account typical adjustments to benefit design such as higher deductibles, HRI projects a net growth rate of just 4.5 percent. That’s encouraging news for the people and companies purchasing care but presents enormous challenges for a sector already feeling a financial squeeze.
The recession and slow economic recovery have clearly affected health care spending. But we have identified other factors. More efficient care delivery combined with creative cost-reduction efforts by employers and the health industry, have acted to dramatically slow what had been double-digit growth for the sector. Early elements of the ACA are beginning to nudge down payments. What we don’t know yet is whether this slowdown represents early signs of the move away from fee-for-service medicine or merely the latest squeeze on the spending balloon in which costs pop up elsewhere.
For its 2014 forecast, HRI interviewed industry executives and health plan actuaries from insurers covering 95 million lives, and tapped results from PwC’s 2013 Touchstone Survey of more than 1,100 employers across 35 sectors to identify the factors shaping medical cost trend in 2014. Significantly, we see structural changes in how and where care is delivered and paid for that may lead to more sustained savings.
Moving care to lower-cost settings. Health care organizations already have adapted to slower growth rates by setting major cost-saving initiatives in motion. For instance, primary care will continue in 2014 to move outside the most costly settings such as hospitals to more affordable retail clinics and via mobile health, saving consumers as much as two-thirds the cost of a traditional health care site.
HRI’s analysis of the cost of care for simple conditions such as sinusitis or colds shows that visits to emergency rooms cost almost seven times more than retail clinics and 13 times more than e-visits. Businesses such as pharmacies are responding by offering more sophisticated services and chronic health management at retail clinics.
The Affordable Care Act. Gaining strength, the ACA will exert additional muscle next year to push medical inflation downward. The law’s new hospital readmission penalties curbed unnecessary return visits by nearly 70,000 in 2012 and the activity is expected to accelerate through 2014 as hospitals focus on discharge instructions and better hand-offs through the continuum of care.
Reducing hospital readmissions also reduces the costs of treating hospital-related problems such as infections, falls, and poorly managed follow-up. The ACA encourages hospitals to get treatment right the first time and the estimated savings from better care is $630 million in 2014 increasing to over $1 billion in 2015. (Hospitals that re-code a patient visit as “observational” are sometimes shifting cost rather than improving care or efficiency. The American Hospital Directory reports that observational claims have risen from 1.3 million in 2007 to 1.73 million in 2011.)
Employer trends. The new law also gives employers greater power to influence employee behavior through increased or discounted premiums of up to 50 percent. Consumers who pay more for their health care have more incentive to make cost-conscious choices. Health care organizations and government must provide sufficient information so that patients follow evidence-based guidelines on proper care and skip redundant, unnecessary or overpriced therapies.
Consumer-driven health plans will transform the landscape in 2014 as the high deductible option goes mainstream. Our survey of large employers found that 44 percent are considering offering only a high-deductible plan within the next two years. Given that, it is critical for insurers to team up with employers to provide workers information on their options and responsibilities. They can also encourage transparency of quality measures and information comparing different treatment options.
Employers meanwhile can ensure that their workers understand the benefits and responsibilities. For instance, studies have shown that some people in high-deductible plans forgo preventive care that is fully covered by the plan. “Health navigator” programs that guide employee decision-making can be a worthwhile investment for businesses.
Savvy employers are also combing the country looking for doctors and hospitals that can provide high-quality care at a lower price. High performance networks—often called “centers of excellence”—typically specialize in high-cost or high-risk procedures and illnesses, such as heart surgery or transplants. Early data suggests that the savings could be as high as 25 percent.
Major employers such as Walmart, Boeing and Lowes now contract directly with big-name health systems for expensive, complicated procedures such as heart surgery and spinal fusion. Smaller businesses and individuals should pursue these “high performance networks” even if they are far from home because, even with travel costs, these providers can still deliver overall savings and reduce return trips by getting care right the first time.
The 2013 PwC employer survey found that 33 percent of companies are considering the use of these new networks for next year. Insurers are also tapping these networks as a way to offer less expensive coverage for traditionally costly care.
With more individuals and small businesses entering the health arena, high quality care is taking many forms. The University of Kentucky Health System, for example, has built a “virtual high performance network” in which specialists travel to rural clinics to deliver care for complex cases such as cancer and transplants.
While numerous factors will “deflate” medical cost trend in 2014, we also note factors that will push the trend in the opposite direction.
Pushing costs up: fewer new generics and more specialty drugs. The growth rate in drug spending has been declining for years due to the widespread adoption of generic medications. Although generic drug use will remain high, there will be fewer new ones entering the market – and a major counter weight to the spending slowdown: an increase in the use of complex, expensive specialty drugs. Such drugs are poised to account for up to 60 percent of new approvals and seven of the top 10 best-selling therapies.
Marketing more costly prescription drugs to increasingly value-conscious purchasers — from individual patients to specialized cancer centers and larger insurers — will require a strong case on why the medication outperforms others on the market and how it might reduce the overall cost of care. A more effective drug can save money in other areas. In general, the new consumer will require far more price transparency than the medical field has offered.
It can be a confusing time for health care consumers. The slowdown in medical cost trend seems to contradict the headlines around rising premium prices. The answer lies in the fundamentals of insurance. Put simply, insurers cannot easily forecast who will enroll through the new state exchanges and what will be the health risk profile of the newly insured. Given the uncertainty, some health plans will raise premiums in the individual and small group markets to protect from the unknown risk.
Next year will be one of the most complex ones the health sector has encountered, as it faces significant uncertainty in a constrained financial environment. It appears the cost curve is starting to bend – now the question is whether the industry can implement a total transformation centered on value to the customer.