Medical Cost Trend: Behind the Numbers: PwC Health Research Institute Projects Uptick in Healthcare Spending In 2015

After a five-year contraction in employer healthcare spending growth, medical inflation in the U.S. is projected to rise to 6.8 percent in 2015, according to PwC’s Health Research Institute (HRI). In its annual report, Medical Cost Trend: Behind the Numbers, HRI projects that the stronger economy is now reaching the health sector, releasing a pent-up demand for care and services. Despite some higher utilization and the cost of expensive new cures, the higher expected growth rate in 2015 is modest compared to the double-digit annual increases seen throughout the late 1990s and early 2000s. However, the fact that health spending continues to outpace GDP underscores the need for a renewed focus on productivity, efficiency and ultimately delivering better value for healthcare customers.

Confident consumers are spending more freely on healthcare because of the improved economy, as well as increasing numbers of newly insured, and HRI expects that trend to continue through next year. In addition, the high costs of specialty drugs will increase the healthcare spending growth rate, according to HRI. As exemplified by new Hepatitis C therapies, which are estimated to have a big cost impact next year – responsible for a 0.2 percent increase in spending growth – drug development continues to play an inflationary role in the short run. However, over the long-term, these innovative new therapies may improve quality of life and reduce other medical costs. Other inflationary factors identified by HRI are shifts to higher payments for physician practices acquired by hospitals and health systems, and IT integration investments for large-scale health system mergers and acquisitions.

“Due to a demand for value and increased efficiency in the healthcare industry, medical inflation will be modest this year” said Kelly Barnes, PwC’s U.S. health industries leader. “It is still too early to tell whether the drive for transparency and better value for each healthcare dollar – the cornerstone of the new health economy – will be able to temper spending growth once millions of newly insured access the healthcare system.”

The report notes that additional factors are helping to moderate the growth rate. Three factors holding down spending growth include:

•          Healthcare providers gaining efficiencies through ‘systemness’ – streamlining administrative activities and standardizing clinical programs to eliminate redundancies and lower operating costs

•          Cost-conscious consumer shopping brought about by employees shouldering more of the financial responsibility for their healthcare

•          Risk-based contracts in which healthcare providers are held accountable for patient outcomes

After accounting for likely changes in benefit design, such as higher deductibles and narrow networks, HRI projects a net growth rate of 4.8 percent in 2015. Benefit design changes typically hold down spending growth by shifting financial responsibility to consumers, who often choose less expensive options.

Continue Reading