Healthcare Cost Growth 'Slows' to 5.4%

Although the 5.4% growth is the lowest cost increase since the Milliman Medical Index began keeping track in 2002, it also represents the ninth straight year in which annual costs have increased by at least $1,100.

First the good news.

The 14th annual Milliman Medical Index reports that healthcare cost growth continues a decade-long slowing trend for a family of four enrolled in an employer-sponsored preferred provider plan.

Now the bad news.

Even with slower growth, healthcare costs for that family will increase 5.4% in 2014, which represents an average bump of $1,185 per family and a total cost of $23,215, with employers paying $13,520 and employees paying $9,695, according to Milliman, the Seattle-based healthcare actuarial firm.

Although that 5.4% growth is the lowest cost increase since MMI began keeping track in 2002, it also represents the ninth straight year in which annual costs have increased by at least $1,100. In 2013 growth was 6.3%, and in the past decade the cost of healthcare for that family of four as measured by MMI has increased by 107%, from $11,192 in 2004 to $23,215 in 2014.

"It's a shocking amount of money," MMI co-author Chris Girod said in a telephone interview. "At some point how can a family afford this stuff? Their costs keep going up $1,100 a year. They aren't paying for all of it, but as we saw in this recent economic slowdown that is a time when employers may push more of the costs onto their employees."

Regardless of the pace of cost growth, Girod says these inevitable annual increases have "built up from a lot of different components. At a fundamental level, we have a problem in this country of people, all of us, spending and not always being directly accountable for the costs."

One of the biggest factors slowing cost growth of late has been the slow economy.

"As the economy tightens up, people cut back on their spending and become more conservative," Girod says. "Also, as the economy slows down, employers cut back a little on their healthcare spending and push more costs onto employees. It also creates an incentive for people to spend less because they have more out-of-pocket expenses."

 The MMI measures total cost, including out-of-pocket expenses paid at time of service, and it separates the costs into portions paid by employer versus employee. The index found that since 2010, the total employee cost, which includes both payroll deductions and out-of-pocket expenses, has increased by around 32% while employer premium contributions have increased by 26%.

Healthcare costs are increasing at about three times the rate of growth for private sector wages and salaries, which increased 1.7% over the year ending in March, as measured by the Bureau of Labor Statistics. The rate of growth in healthcare costs also far outpaces inflation in the overall economy, which grew 2% over the past year, BLS reports.

In almost every year in the past decade, growth rates have slowed. Since the MMI began calculating healthcare cost growth in 2002, the annual increase in cost ranged from a high of 10.1%, in both 2003 and 2004, to a low of 5.4% in 2014. The rate of increase dropped by nearly a full percentage point, from 6.3% in 2013 to 5.4% in 2014.

Because MMI measures larger employer-based PPO costs, Girod says it's difficult to determine how the Patient Protection and Affordable Care Act is affecting cost growth. Also, PPACA hasn't been around long enough for its major provisions to affect costs.

"Obamacare so far has really all been about expansion of coverage, getting people into the market," Girod says. "What this country really needs is a phase two that focuses on cost control now that we have more people covered. It hasn't really happened yet."

If the weak economy and cost-shifting to consumers are the main drivers for slowing healthcare cost growth, then what—if anything—are healthcare providers and payers doing to reduce costs?

"That's a good question," Girod says. "Some of the movements that we think are helping to possibly control costs are providers taking on risks again through accountable care organizations. We don't know what sort of an impact that is having, but it is sort of managed care lite and a way for providers to start getting their feet wet."

"There are also some programs pushing bundled case rates, and lots of providers, at least on the West Coast, are talking about capitation even more than ever. They are wanting to come to the table to try to manage the costs, too."

Girod says it's not clear when, or if, healthcare spending growth will top out or consumers will reach a breaking point.

"We were having the same discussions back when healthcare spending in this country was 12% or 14% of Gross Domestic Product and now it's up at 18%," he says. "How much of the production pie can it consume? Nobody really knows, but at some point the tail is going to start wagging the dog."