2015 Medical Cost Trend

Slight uptick in expected growth rate ends five-year contraction

For 2015, PwC's Health Research Institute (HRI) projects a medical cost trend of 6.8%, up from 6.5% projected for 2014

At first glance, the health sector appears to be reverting to historical trends of bouncing back as the nation recovers from the economic doldrums. Several factors triggered the first bump in growth in the first quarter of 2014 and we expect that to continue through next year. Moderating that growth, however, the $2.8 Trillion industry is becoming more efficient. Read more.

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Projected 2015 private health insurance spending

As more people gain insurance under the Affordable Care Act (ACA), more money is spent—but this is not the same as higher costs per person. Inpatient and professional services are expected to account for the largest amount of private health insurance spending in 2015.

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Economic upswing finally reaches healthcare

Although the health economy shares a tight connection to the overall economy, its cycle generally lags behind broader economic fluctuations.

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No slowing down for specialty drugs

US specialty drug spending is forecast to quadruple by 2020, sparking anxiety and debate among purchasers over whether the high price tag will be offset by long-term medical savings.

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Physician-based payments become more lucrative hospital-based payments

Cancer drugs cost more when administered in a “hospital-outpatient” department rather than a doctor’s office.

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Provider consolidation, regulatory changes expose need for IT integration investment

After mergers or acquisitions, integrating health information technology between two systems becomes a necessary early investment that can better connect clinical care, business operations and technology and improve the consumer’s experience.

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Cutting costs through achieving ‘systemness’

Since 2012, hospital employment growth has slowed and is projected to continue -- evidence that providers are achieving efficiency.

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Consumers become cost-conscious healthcare shoppers

Survey feedback from employers shows a strong interest in increasing employee cost sharing through plan design changes. While increased cost sharing and high deductibles do not affect medical inflation directly, consumer behavior does.

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Risk-based contracts are beginning to reduce costs

Risk-based initiatives by the numbers: from the percentage of Medicare Accountable Care Organizations (ACO) that exceeded savings targets to how many public and private ACOs exist nationwide.

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Executive summary

The improving economy demonstrates that structural changes in the health sector have taken the steam out of run-away cost inflation. The challenge for industry executives is to continue to control spending even in the face of countervailing winds such as expensive new innovations, improved consumer confidence, and an aging society that requires more medical care and services.

HRI issues its projection for the coming year’s medical cost trend based on activity in the market that serves employer-based insurance—a projection that has become a key ingredient in setting insurance premiums for the past decade.

In compiling data for 2015, HRI interviewed industry executives, health policy experts, and health plan actuaries whose companies cover a combined 93 million members. HRI also analyzed results from PwC’s 2014 Touchstone Survey of more than 1,000 employers from 35 industries. In this year’s report, we identified:

Four factors that we expect to inflate the spending growth rate in 2015:

  • Economic upswing—Many have wondered when the economic upswing would kick in and push up the healthcare growth rate. Now, more confident consumers are visiting doctors and the number of people delaying care has notably declined.
    • Low unemployment rates are another indicator of economic health. In 2015, the national unemployment rate is expected to settle in at about 6.5%.
  • Specialty drugs—As exemplified by new high-cost Hepatitis C therapies, drug development continues to play an inflationary role in the short run. But in some instances, potential long-term savings from these innovative new cures could be substantial.
  • Physician employment—Once hospitals and health systems acquire in-house physician practices, they have the ability to immediately escalate physician charges to the higher hospital rate, which will likely trigger a rise in spending next year.
    • In April 2014a Pennsylvania-based insurance company, announced that it would no longer reimburse at the hospital-based rate for cancer treatments performed in outpatient offices. The insurer believes that it will subsequently reduce claims by $200 million per year.
  • Information technology investments—As more health systems go through large-scale mergers and acquisitions, they must make major investments in integrating data and information to capture potential efficiencies of scale. However these investments may increase hospital operating costs by up to 2% during integration before hospitals can realize any savings.

Three factors that we expect to deflate the healthcare growth rate in 2015:

  • “Systemness”—Understanding that a well-functioning whole is greater than its disparate parts, care teams are seeking to achieve more by working together. Similarly, hospitals within a large system strive to eliminate redundancies and reinforce common goals through administrative and clinical standardization. Reducing redundancies lowers operating costs and should act as a counterbalance on spending growth next year.
    • When hospitals and doctors work together to cut costs and share in savings, the result is reduced supply costs due to greater standardization and improved ability to negotiate prices. Scottsdale Healthcare saved $24 million by reducing its number of suppliers.
  • Healthcare price shopping—The prevalence of high-deductible health plans is spawning a new class of healthcare shoppers: price sensitive and willing to consider that less may be more. Families in high-deductible health plans use fewer brand name drugs, pursue lower-cost care venues such as retail clinics and visit doctors less frequently.
    • Aetna, Humana, and United Healthcare together with the Health Care Cost Institute, an organization that uses private health insurance claims data to analyze cost trends, recently announced they will create a consumer website that makes price ranges and average reimbursement for services available for consumer reference.
    • With more readily available price information, physicians may be more likely to consult with patients regarding treatment options. In addition to consumers making smarter decisions, a new report estimates that the industry having better access to price information could save $18 billion over ten years.
  • Risk-based payments—The industry is beginning to realize significant savings by holding physicians and health systems financially responsible for patient outcomes.
    • Government programs such as Medicare Accountable Care Organizations (ACOs) have shown promise in reducing costs. CMS released results for Medicare and pioneer ACO’s in early 2014 and reported more than $380 million in savings.
    • One of the largest and oldest commercial ACO-like programs between Blue Shield of California and CalPERS has recorded $95 million in net savings over a four-year period since its inception in 2010.

What this means for your business:

A stronger economy and millions of newly insured Americans mean an uptick in spending growth for healthcare organizations. That may be a welcome respite from recent years of budgetary pressure. But 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 purchasers.

As employers continue to shift financial responsibilities to their employees, the cost-conscious consumer will exert greater influence in the new health economy. Savings that come from standardization can help position health businesses for the value-driven future. But real success and profitability will go to the insurers, drug makers, and healthcare providers that deliver highly personalized customer experiences at a competitive price.

Inflators

Four factors that we expect to inflate growth rate in 2015:

  • Economic upswing – Many have wondered when the economic upswing would kick in and push up the healthcare growth rate. Now, more confident consumers are visiting doctors and the number of people delaying care has notably declined.
  • Specialty drugs – As exemplified by new high-cost Hepatitis C therapies, drug development continues to play an inflationary role in the short run. But in some instances, potential long-term savings from these innovative new cures could be substantial.
  • Physician employment – Once hospitals and health systems acquire in-house physician practices, they have the ability to immediately escalate physician charges to the higher hospital rate, which will trigger a rise in spending next year.
  • Information technology investments – As more health systems go through large-scale mergers and acquisitions, they must make major investments in integrating data and information to capture potential efficiencies of scale. However, these investments may increase hospital operating costs by up to 2% during integration before hospitals can realize any savings.

Deflators

Four factors that we expect to deflate growth rate in 2015:

  • “Systemness” – Understanding that a well-functioning whole is greater than its disparate parts, care teams are seeking to achieve more by working together. Similarly, hospitals within a large system strive to eliminate redundancies and reinforce common goals through administrative and clinical standardization. Reducing redundancies lowers operating costs and should act as a counterbalance on spending growth next year.
  • Healthcare price shopping – The prevalence of high-deductible health plans is spawning a new class of healthcare shoppers: price sensitive and willing to consider that less may be more. Families in high-deductible health plans use fewer brand name drugs, pursue lower-cost care venues such as retail clinics and visit doctors less frequently.
  • Risk-based payments – The industry is beginning to realize significant savings by holding physicians and health systems financially responsible for patient outcomes.

Business Impact

A stronger economy and millions of newly insured Americans mean an uptick in spending growth for healthcare organizations. That may be a welcome respite from recent years of budgetary pressure. But 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 purchasers.

As employers continue to shift financial responsibilities to their employees, the cost-conscious consumer will exert greater influence in the new health economy. Savings that come from standardization can help position health businesses for the value-driven future. But real success and profitability will go to the insurers, drug makers, and healthcare providers that deliver highly personalized customer experiences at a competitive price.

About our research

HRI issues its projection for the coming year’s medical cost trend based on activity in the market that serves employer-based insurance—a projection that has become a key ingredient in setting insurance premiums for the past decade. In compiling data for 2015, HRI interviewed industry executives, health policy experts, and health plan actuaries whose companies cover a combined 93 million members. HRI also analyzed results from PwC’s 2014 Touchstone Survey of more than 1,000 employers from 35 industries. Additionally, HRI analyzed the findings of a survey of more than 20 health plans belonging to the Health Plan Alliance. HRI also examined government data sources, journal articles, and conference proceedings in determining the 2015 growth rate.

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

For further reading

Highlights

The story of 2015 is a nuanced one. At first glance, the health sector appears to be reverting to historical patterns of bouncing back as the nation recovers from the economic doldrums. Whether spending more freely because of the improved economy or shopping with insurance provided through the Affordable Care Act, consumers triggered the first bump in growth in the first quarter of 2014. We expect that to continue through next year.

But other factors are helping to moderate that growth. The $2.8 trillion industry is becoming more efficient. Doctors and hospitals are adopting standardized processes that offer the prospect of better value for our health dollar. “At-risk” payment models that hold healthcare providers financially accountable for patient outcomes are beginning to take effect. One tangible sign of shrinkage: growth in healthcare system administrative and clinical employment has declined since 2011.

And major purchasers—namely the federal government and large employers—are tamping down the spending growth rate analyzed in this report, in part by demanding greater value and in part by shifting financial responsibility to consumers.

Eighty-five percent of employers in PwC’s 2014 Touchstone Survey have already implemented or are considering an increase in employee cost sharing through plan design changes over the next three years. And 18% of employers now offer a high-deductible health plan as the only insurance option for their employees

Millions of newly insured Americans accessing care are causing an entirely expected spike in 2015. A little over 8 million Americans enrolled in the public exchanges this year.