Three Factors Inflating Medical Cost Trend

June 19, 2018
Tracey Walker

A new annual report from PwC as reveals how employers struggle to contain employee coverage costs.

The medical cost trend will plateau at 6% in 2019, according to a new report.

PwC’s annual report, “Medical Cost Trend: Behind the Numbers 2019,” found that even though the growth rate is flat, medical costs are increasing and remain unsustainably high as employers struggle to contain employee coverage costs.

The report is based on information through May 2018. PwC’s Health Research Institute (HRI) conducted interviews in February, March, and April 2018 with 16 health plan executives (whose companies cover more than 130 million people) about their estimates for 2019 and the factors driving those trends. Also included are findings from PwC’s 2018 Health and Well-being Touchstone survey of more than 900 employers from 37 industries, PwC’s national consumer survey of more than 1,500 US adults, and PwC’s national clinician survey of 1,000 clinicians (physicians, physician assistants and nurse practitioners). HRI also examined government data sources, journal articles and conference proceedings in determining the 2019 growth rate.

“Efforts to cut utilization have run their course. In 2019, players across the healthcare services and biopharma industries will have to address pricing to reduce medical cost trend,” says Ben Isgur, PwC Health Research Institute leader

In addition to the economy-wide drivers, PwC found three factors inflating medical cost trend in 2019:

  •  Increased access to care
  • Provider megamergers
  • Physician consolidation and employment

Factors tempering the spending increase are:

  • The impact of the flu
  • Increase in use of care advocacy services
  •  High-performance networks

“The pace of recent provider deal activity has picked up, and new combinations have created a lot of excitement,” Isgur says. “However, the future effects of these new combinations on medical cost trend are still unknown. While in the future, provider consolidation may help spread costs and help organizations to better serve the community, we have yet to see this impact. For now, we’re seeing increased prices-as the larger systems acquire smaller ones, the smaller organizations may to adopt the rates of the larger acquirer, which are often higher.”

With regard to consolidation, Isgur has also seen an increase in physicians working as employees of hospitals and health systems. “There’s often a different payment structure under this arrangement, and this is increasing costs for the consumer,” he says. “While we’ve seen bits and pieces of these trends before, we have not seen this much consolidation all at once.”

The Trump Administration’s new drug pricing plan is in the early stages and will likely be impacted by legislative action and legal challenges, according to Isgur. “It remains to be seen which of these initiatives will be implemented, making it unlikely that his plan will have a significant effect on medical cost trend in 2019,” he says.

The 2017 to 2018 flu season is a deflator unique to this year, according to Isgur. HRI found that flu spending as a percentage of total healthcare spending rose significantly this past year, and based on historical trend, the upcoming flu season is expected to be milder, so therefore we expect a decrease in the flu costs as a percentage of total spending.

“This deflator is a reminder that pandemics and the spread of disease can have a large impact on our healthcare system and costs,” he says.

For more on the impact of the flu, readHow the Flu’s Severity Will Affect Healthcare Spending

Based on the study, Isgur offers three top takeaways:

  • The focus is shifting from utilization to prices. Healthcare providers, drug companies, and payers should develop plans to address the ongoing and intensifying focus on prices from consumers, lawmakers, and the media, according to Isgur. “This could mean developing more affordable options, embracing true price transparency, or demonstrating the provided service’s value,” he says.
  • Many employers have shifted more of the cost burden to employees through high-deductible health plans. “In an effort to help their employees get the most out of their benefits, employers, are adding health advocacy to health and wellness benefits,” Isgur says. “Health advocates help patients evaluate treatment options to make the best medically-appropriate and financially-sound decisions. All health system players should understand how to best partner with health advocates who are tasked with helping patients navigate the complexities of the healthcare system in a cost-effective manner.”
  • The feeding frenzy of consolidation over the past decade has changed the healthcare landscape. Health systems are getting larger, says Isgur. “But consolidating to protect and increase market share and negotiating power won’t guarantee success; understanding the consumer’s point of view is critical. Companies that are armed with knowledge about the populations they serve can target investments strategically,” he says.