PwC’s Health Research Institute (HRI) released its ninth annual Medical Cost Trend: Behind the Numbers report today. This forward-looking report is based on interviews with industry executives, health policy experts, and health plan actuaries whose companies cover a combined 93 million members. Findings from PwC’s Health and Well-being Touchstone Survey of 1,200 employers from 35 industries are also included.
HRI projects that after a five-year contraction in spending growth in the employer-sponsored market, the growth rate will rise to 6.8 percent in 2015, up from the 6.5 percent projected last year.
What are the biggest drivers of the growth in health care costs? We identify four cost inflators in this report, and I would like to highlight two. First, the economy. More than five years after the end of the Great Recession, the improved economy is finally translating into greater medical spending. Consumers are now addressing health issues they ignored or postponed previously.
Secondly, the high cost of specialty drugs. While only four percent of patients use specialty drugs, those medications account for 25 percent of total U.S. drug spending. And estimates are that U.S. specialty drug spending will quadruple by 2020.
While spending on specialty drugs is causing a spike in costs in 2015, it could result in extended life span, improved quality of life, and savings over the long-term through avoiding more costly procedures and treatments. Take, for instance, the much-publicized Hepatitis C therapies, which are expected to increase total Hepatitis C drug spending by 209 percent by 2015. $86,000 — the average cost for a course of the new therapy — is expensive, but it should be weighed against the $270,000 in treatment costs over a decade for patients with compensated cirrhosis, or the average $580,000 cost for severe patients who require a liver transplant.
So are we headed back to the double-digit increases in health spending that we saw for many years? Not at this juncture. We’re seeing signs that structural changes in the health sector have taken the steam out of run-away cost inflation. In this year’s report we highlight three factors helping to moderate the growth rate in 2015: health care providers gaining efficiencies through ‘systemness,’ cost-conscious consumer shopping, and risk-based provider contracts. These ‘deflators’ illustrate how all of the players in the new health economy– consumers, employers, providers, insurers and new entrants – are increasingly focused on cost savings and value.
Having said that, health spending continues to outpace GDP, so we do recognize the need for a heightened focus on productivity, efficiency, and better value for health care customers.
What effect are hospital purchases of physician practices, hospital mergers, and other forms of consolidation having in health care costs? It’s a mixed picture. On the inflationary side, we expect the shift to higher reimbursement rates for physician practices acquired by health systems will increase costs in 2015. The cost of information technology (IT) integration investments for large-scale health system mergers and acquisitions also increases spending growth. HRI estimates the cost for a comprehensive integration of clinical and business systems can run between $70,000 and $100,000 per hospital bed. For a 1,500-bed system, that translates into two percent per year in additional operating costs. It’s worth noting, however, that while IT investments may increase hospital operating costs over the short term, they add value in the long term by allowing health organizations to better monitor patients, share information among caregivers, report on quality and outcomes, and manage finances.
At the same time, ‘systemness’ — the streamlining of administrative activities and standardizing clinical programs — is holding down costs for some providers. The slowdown in hospital employment since 2012 shows that providers are achieving efficiency.
Are we starting to see cost reductions from ACOs and risk-based contracts? Yes. Insurers and employers are increasingly using risk-based payments in their physician and hospital contracts and most health plan actuaries that we interviewed reported that these strategies are starting to reap cost savings. Risk-based contracts can include quality bonuses and penalties, shared savings programs that encourage physicians to control costs, and patient-centered medical homes, which pay clinical teams to manage and coordinate care.
Government programs such as Medicare Accountable Care Organizations (ACOs) have also shown promise, with more than $380 million in savings reported to date.
How are employers reacting to cost pressures? In addition to the risk-based contracts with providers, employers are shifting more financial responsibility to employees.
Eighty-five percent of the employers in our Touchstone survey have implemented or are considering an increase in employee cost sharing, through plan design changes, increased employee contributions, and high-deductible health plans. High-deductible health plans continue to grow in popularity, with 18 percent of employers surveyed now offering a high-deductible plan as the only insurance option for their employees and 44 percent considering them as the only offering.
Employers are also considering private exchanges and wellness initiatives in addition to traditional cost-shifting measures.
Are consumers becoming more price sensitive? Consumers are becoming cost-conscious health care shoppers. Forty percent of consumers surveyed by HRI in December said that health care expenses put a strain on their budget. The number and type of health services purchased is directly impacted by employees having to shoulder more of the financial responsibility for their health plan costs. In fact, a study published in Health Affairs showed that families enrolled in high-deductible plans used fewer brand-name drugs, had fewer doctor visits, and spent less per visit.
As consumers become more engaged in making health decisions, they need information to make wise choices. Increased price transparency can play a role in driving down prices and is a real area of growth. In three years, venture capital firms have invested $400 million in start-ups targeting price transparency, while 86 percent of insurers report having a cost calculator tool that shows members’ out-of-pocket costs.
What was the most unexpected takeaway of the HRI report? We were definitely impressed by the degree of consensus around the impact — and the magnitude — of the short term spike in specialty drug costs. Managing these costs is a big concern for the actuaries, insurance executives and employers we spoke to. While some of the spending pressure will be offset by big-name branded drugs losing patent protection, we expect continued debate around pricing strategies in 2015.