Medical Cost Trend

Behind the Numbers 2017 - PwC projects 2017 medical costs will continue to rise at the same rate as 2016. Signs point to larger increases in the future.

2017 will be a year of equilibrium for medical costs. The forces that increase health costs are being tempered by a demand for value in the New Health Economy.

  • PwC’s Health Research Institute projects the 2017 medical cost trend to be the same as the current year – a 6.5% growth rate.
  • There are signs that the decade’s slowing medical cost growth rate could tick back up as new healthcare access points increase utilization.
  • Healthcare organizations must increase access to consumer friendly services while decreasing unit cost.

Medical cost trend over the years

Although next year’s growth rate is the same as last year’s, it still outpaces general economic inflation. This suggests a possible recalibration on cost-saving strategies – as the ones deployed over the last few years have run their course and may not be able to bend the cost curve with new inflators on the horizon.

Price, not utilization, is the force behind historical medical cost trend

In the early 2000s, price and utilization contributed to growth in healthcare costs. Since then, use of services has declined and higher prices are driving the growth. However, a close focus on both prices and healthcare delivery and access changes are needed to contain medical costs.

Roughly half of employer health costs are from hospital inpatient and outpatient spending; but prescription drug share is increasing

Not all components of healthcare contribute equally to employer costs. Roughly half of all medical costs come from hospital spending: 30% from hospital inpatient and 19% from hospital outpatient. Physicians account for about 30% and prescription drugs 17%.

Drug spending is still a relatively small portion of overall health spending, and, as such, concerns of ever-increasing cost growth from new cures may trigger false alarms.

  • Inflator:
    has a cost
  • Inflator:
    Increased access for
    behavioral health
  • Neutral:
    Specialty drugs –
    loosening their grip
  • Deflator:
    High performance
  • Deflator:
    PBMs get

Inflator: Convenience has a cost

The proliferation of convenient ways to get care – such as retail clinics and urgent care centers – has led to higher utilization. Even if higher use of these alternative sites reduces spending in the future, the savings may not reduce the short-term cost of more visits.

Inflator: Increased access for behavioral health

Behavioral healthcare – once on the back burner of health treatments – now has the regulatory push and mainstream recognition to be a crucial part of employer’s health benefits.

Neutral: Specialty drugs – loosening their grip

2017 will see slower specialty drug cost growth. For the first time in several years—since being stunned by high cost Hepatitis C drugs—these specific types of drug costs are not growing as fast.

Deflator: High performance networks

We expect employers to explore new benefit strategies that shift the focus from cost sharing to leveraging high-performing networks with higher quality and lower costs.

Deflator: PBMs get aggressive

New and more aggressive strategies from pharmacy benefit managers (PBMs) will help deflate the medical cost trend. In addition, we expect political pressure also may keep some of the largest drug cost increases in check.

What this means for your business


Employers are looking for new ways to reduce costs. Benefit strategies may switch from a focus on cost sharing to new provider networks.

Actions to consider:

  • Realign cost sharing on ambulatory services.
  • Consider high performance network arrangements.
  • Evaluate PBM arrangements.

Healthcare providers

Facing competition from new sites of care, healthcare providers are exploring consolidations or affiliations with other health systems to grow market share.

Actions to consider:

  • Consider partnerships with insurers.
  • Provide convenience.
  • Collaborate with PBMs.

Health insurers

Finding it difficult to keep premiums low while controlling costs, health insurers must transform business models and steer patients to lower-cost, high quality providers while being transparent.

Actions to consider:

  • Leverage alternative therapies.
  • Create a framework for high performance networks.
  • Review PBM relationships.

Pharmaceutical and life sciences

With pressure on the pharmaceutical industry increasing as a result of the high-profile pricing strategies of some manufacturers, the need for innovative, cost-effective medicines continues to rise.

Actions to consider:

  • Develop a pricing strategy that takes into account competitors and price resistance.
  • Discuss new products with insurers and PBMs before they come on the market.
  • Consider the impression made by pricing decisions.

Contact us

Kelly Barnes
US Health industries and Global Health industries Consulting Leader
Tel: +1 (214) 754 5172

Rick Judy
Principal, Health Services
Tel: +1 (415) 498 5218

Benjamin Isgur
Health Research Institute leader
Tel: +1 (214) 754 5091

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