Employer Healthcare Costs Expected to Jump 8.5% in 2012

Employers will see healthcare costs increase by 8.5% in 2012, up slightly from 2010, as the economy continues to rebound, according to the annual Behind the Numbers report on medical cost trends from the PwC Health Research Institute.

That financial hit could be "contained" to about 7%, however, with increased cost-shifting to employees, PwC Principal Michael Thompson told HealthLeaders Media.

"There are three levers that employers are looking at. One is certainly cost-sharing. It has been demonstrated that cost sharing does influence how people use services," Thompson says. "On the negative side, part of the reason they mandated that cost sharing be eliminated for preventative services was so that people would use preventative services.

"Secondly is education on how to use the system more effectively. Thirdly, there has been a dramatic and continued focus from employers on making employees much more conscious and accountable for their own health behaviors," he says.

Containing healthcare cost growth to 7% will likely puts it on a track that is more than double that of overall inflation as measured by the Consumer Price Index, which grew at 3.2% between April 2010 and April 2011.

Healthcare inflation has been slowed over the last two years by the weak economy, Thompson says, but as the economy recovers, costs are increasing too. "To some degree we have found that healthcare costs actually grow as a percentage of the economy during down cycles," Thompson says. "Interestingly though, this year we found more of a reaction than we typically find. That has been reflected in somewhat decreased levels of utilizations, more than we have seen in past recessions. We attribute some of that to the fact that there has been much more cost sharing in the plans than we've had in years. As a result, employees have experienced more of the cost of services during the downturn and consequently have used fewer services during the last year or so."

Based on interviews with health plans, PwC had projected a 9% increase in employer medical costs for recession-wracked 2010 and 2011. However, low utilization led to adjusted estimates in the medical cost trend to 7.5% for 2010 and 8% for 2011 before benefit plan changes.

The end of subsidized COBRA coverage in 2010 is offsetting otherwise rebounding utilization growth rates so far in 2011, but employers and health plans expect pent-up demand to put upward pressure on the medical cost trend to continue into 2012, the PwC report said.

"Employers in particular continue to be very concerned about healthcare costs that are growing at substantially higher than the economy or their businesses or their wages," Thompson told HealthLeaders Media. "As a result they are continuing to focus efforts to dampen the increases that they are seeing."

The PwC report includes survey data from 1,700 employers in 32 industries, and interviews with hospital executives, health plan actuaries, and other healthcare sector executives. The medical cost trend is the projected increase in the cost of medical services assumed in setting premiums for health insurance plans.

PwC identified three factors that will inflate the medical cost trend in 2012:

1.    Consolidation among hospitals and physicians. This trend is expected to accelerate as health reform incentivizes hospitals and physicians to align and form Accountable Care Organizations. Health plans are concerned that consolidation will reduce competition among providers and drive up payment rates.

2.    Increasing cost shifting from Medicare and Medicaid. In 2012, the increase in Medicare inpatient hospital rates is expected to be 3.3 percentage points below the expected growth in their costs. Hospitals and health plans agree that much of the difference shifts to private payers.

3.    Post-recession stress on workers. Money, work, and the economy -- found by the American Psychological Association to be the top three causes of stress among the American workforce between 2007 and 2010 -- are taking a toll. Health plans and employers interviewed by PwC say they are beginning to see more claims for stress-induced illnesses, which are highly correlated to unhealthy behavior and adverse health conditions such as heart disease.

Several factors will deflate medical costs for health plans and employers in 2012 -- but not necessarily for consumers. These factors are:

• More cost shifting. Employers are increasingly shifting the burden of rising medical costs to employees through higher cost sharing. High deductible plans were the fastest growing plan designs in 2011, according to PwC's Touchstone survey. Seventeen percent of employers surveyed said high deductible plans were their most common benefit design, up 4 percentage points from 2010. The PwC study also notes that healthcare reform could contribute to cost shifting by further discounting Medicare rates for inpatient care. 
• Blockbuster brand-name drugs going off patent. In 2012, the cumulative sales of drugs going off patent will be the largest in history, representing approximately $28.1 billion in pharmaceutical sales according to PwC estimates. Increased use of generics will moderate health spending growth.
• Tiering on out-of-network providers. Employers are increasing deductibles, making it far less attractive for workers to use out-of-network physicians and hospitals. Forty-four percent of employers in 2011 compared to 29% of employers in 2010 said that their out-of-network deductible had crossed the $1,000 threshold. In some markets, payers are becoming more selective about which providers are in the network, choosing to exclude higher-cost and premier hospital systems.

Thompson says the federal health reform law will have minimal effect on the medical cost trend in 2012. Provisions of the Patient Protection and Affordable Care Act that took place prior to 2012 were small changes for which employers already have fully accounted. Medicaid expansions, health insurance exchanges, subsidies to buy private insurance, mandates for employers to offer insurance and mandates for individuals to buy insurance don't take place until 2014 or later.

See Also:
3 in 4 Employers to Increase Health Plan Deductibles or Copays
Milliman: Annual Healthcare Costs Doubled in Under Nine Years
Health insurers making record profits as many postpone care
Medicare Trustees Deliver Grim Outlook