Electronic Health Reporter

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.

In Behind the Numbers, HRI examines the factors that serve to inflate or deflate the spending growth rate.  The ninth annual report also includes findings from PwC’s 2014 Health and Well-being Touchstone Survey of 1,200 large employers and interviews with health plan actuaries whose companies cover a total of 93 million members. Some key findings from the Touchstone Survey include:

•          Employers are continuing to shift financial responsibility for health plan costs to employees through plan design and increased contributions. High deductible health plans are growing in popularity, with 18 percent of employers surveyed now offering a high-deductible plan as the only insurance option for employees

•          Wellness continues to be a major investment for employers, with 71 percent offering programs, up from 68 percent in 2013

•          Other than traditional cost savings efforts geared towards cost shifting, employers are considering private exchanges more often than other new and emerging strategies

“Major purchasers such as the federal government and large employers are helping to contain spending growth, in part by demanding greater value and by shifting more financial responsibility to consumers,” said Michael Thompson, principal, PwC’s human resource services practice. “Indeed 85 percent of the employers we surveyed have implemented or are considering an increase in employee cost sharing, with high deductible health plans the highest enrolled plan for 26 percent.  When you consider that the in-network deductible is $1,000 or more for 40 percent of employers – up from 16 percent in 2010 – it’s no wonder that employers are exploring other cost saving efforts such as private exchanges and wellness initiatives.”

To explore the findings and watch video commentary, visit: www.pwc.com/us/MedicalCostTrend

About the Research

Each year, HRI provides estimates on the growth of private medical costs over the next year and what the leading drivers of that shift are expected to be. Insurance companies use medical cost trend to help set premiums by estimating what the same health plan this year would cost the following year. In turn, employers use the information to make adjustments in benefit design to help offset cost increases.

This forward-looking report is based on the best available information through May 2014. HRI conducted interviews in late 2014 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 also examined government data sources, journal articles, and conference proceedings in determining medical cost trend.

Behind the Numbers 2015 is the ninth report in this series.

About PwC’s Health Research Institute (HRI)

PwC’s Health Research Institute (www.pwc.com/hri) provides new intelligence, perspectives, and analysis on trends affecting all health-related industries. The Health Research Institute helps executive decision makers navigate change through primary research and collaborative exchange. Our views are shaped by a network of professionals with executive and day-to-day experience in the health industry. HRI research is independent and not sponsored by businesses, government, or other institutions.

About PwC’s Health Industries Group

PwC’s Health Industries Group (www.pwc.com/us/healthindustries) is a leading advisor to public and private organizations across the health industries, including healthcare providers, pharmaceuticals, health and life sciences, payers, employers, academic institutions and non-health organizations with significant presence in the health market. Follow PwC Health Industries at @PwCHealth.

About PwC US

PwC US helps organizations and individuals create the value they’re looking for. We’re a member of the PwC network of firms in 157 countries with more than 184,000 people. We’re committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com/US. Gain customized access to our insights by downloading our thought leadership app: PwC’s 365™ Advancing business thinking every day