Study: Single-digit growth for health care costs will continue

Written on Jun 21, 2017

In the employer-sponsored insurance (ESI) market, swings between single-digit and double-digit growth in the annual cost to treat patients appear to be over, a new 2018 medical cost trend report by PwC says.

For 2018, PwC projects the total annual cost growth to treat patients in the ESI market at 6.5%. When accounting for the impact of expected benefit-design changes next year such as higher co-pays, net annual cost growth is forecast at 5.5%.

"The era of volatile swings and double-digit growth in employer medical costs appears to be ending. With medical cost trend hovering in the single digits for several years, the industry has been waiting for the inflection point when spending will take off. But that spike appears unlikely to happen," says the report, Medical Cost Trend: Behind the Numbers 2018.

Despite the health care industry's apparent achievement of establishing a single-digit cost trend over the long-term, more cost reduction is economically essential for the country, the report cautions.

"Even with medical cost trend between 6% and 7%, health spending continues to outpace the economy. From 2011 to 2016, the average health premium for family coverage purchased through an employer rose 20%. In the same period, wages increased just 11%. This gap erodes consumers' ability to pay for other goods and services. Nationally, as medical costs are projected to continue to grow faster than gross domestic product, healthcare will continue to take up a greater share of the economy."

With consumerism and other factors limiting health care service utilization, one of the PwC report's primary prescriptions for large employers to contain health care costs is to press providers on service pricing.

"For medical cost trend to sink lower than its 'new normal,' health organizations and businesses will have to consider tackling the price of services as well as the rate of utilization. Heading into 2018, employers should look to new contract arrangements with providers to tackle health care prices without shifting more costs to employees."

In 2018, PwC expects three factors to put upward pressure on healthcare spending:

  • Economy-wide inflation: The ongoing recovery from The Great Recession will likely boost general inflation rates, which would drive up prices of medical wages and services.
  • High-deductible health plan ceiling: Growth of high-deductible coverage is slowing in the ESI market, weakening a well-used tool to contain service utilization.
  • Generic drugs: Relatively few branded drugs are losing patent protection in 2018, which will limit opportunities for healthcare providers to contain costs through purchasing generic drugs.

After a rollercoaster ride over the past 30 years, the rate of healthcare spending appears to be entering a period of relative stability, the PwC report says.

Single-digit annual cost growth in healthcare is being maintained despite significant inflationary pressure from the broader economy, the report says. "Even as the economy now picks up steam, growth in cost trend has remained at historic lows."

In 2018, the report says hospital expenditures will account for the largest share of medical costs in the ESI market:

  • Hospital inpatient and outpatient spending: 49%
  • Physician spending: 29%
  • Prescription drug spending: 18%

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