'New Normal' for Healthcare Cost Trend: Single-Digit Growth

In the employer-sponsored insurance market, swings between single-digit and double-digit growth in the annual cost to treat patients appear to be over, a new 2018 medical cost trend report says.

Single-digit growth is the "new normal" for healthcare cost in the employer-sponsored insurance (ESI) market, according to a PricewaterhouseCoopers report published today.

For 2018, PwC projects the total annual cost growth to treat patients in the ESI market at 6.5%. When accounting for the impact of expected benefit-design changes next year such as higher co-pays, net annual cost growth is forecast at 5.5%.

"The era of volatile swings and double-digit growth in employer medical costs appears to be ending. With medical cost trend hovering in the single digits for several years, the industry has been waiting for the inflection point when spending will take off. But that spike appears unlikely to happen," says the report, "Medical Cost Trend: Behind the Numbers 2018."

Despite the healthcare industry's apparent achievement of establishing a single-digit cost trend over the long-term, more cost reduction is economically essential for the country, the report warns.

"Even with medical cost trend between 6% and 7%, health spending continues to outpace the economy. From 2011 to 2016, the average health premium for family coverage purchased through an employer rose 20%. In the same period, wages increased just 11%. This gap erodes consumers' ability to pay for other goods and services. … Nationally, as medical costs are projected to continue to grow faster than gross domestic product (GDP), healthcare will continue to take up a greater share of the economy."

With consumerism and other factors limiting healthcare-service utilization, one of the PwC report's primary prescriptions for large employers to contain healthcare costs is to press providers on service pricing.

"For medical cost trend to sink lower than its 'new normal,' health organizations and businesses will have to consider tackling the price of services as well as the rate of utilization. Heading into 2018, employers should look to new contract arrangements with providers to tackle healthcare prices without shifting more costs to employees."

2018 Medical Cost Trend Drivers

In 2018, PwC expects three factors to put upward pressure on healthcare spending:

Economy-wide inflation: The ongoing recovery from The Great Recession will likely boost general inflation rates, which would drive up prices of medical wages and services
High-deductible health plan ceiling: Growth of high-deductible coverage is slowing in the ESI market, weakening a well-used tool to contain service utilization
Generic drugs: Relatively few branded drugs are losing patent protection in 2018, which will limit opportunities for healthcare providers to contain costs through purchasing generic drugs

After a rollercoaster ride over the past 30 years, the rate of healthcare spending appears to be entering a period of relative stability, the PwC report says.

"Cost trend has risen and fallen in cycles, peaking after several years of double-digit increases, falling for several years, hitting a trough and then rebounding back to double digits. These cycles have tended to span about 10 years. … The latest downward trend to single-digit annual growth began even before the lower economic growth surrounding the 2009 recession and subsequent recovery. With medical cost growth hanging in the single digits for over a decade now, many employers have been expecting an inflection point when costs will once again grow at double digits. However, that spike doesn't appear to be coming."

Single-digit annual cost growth in healthcare is being maintained despite significant inflationary pressure from the broader economy, the report says. "Even as the economy now picks up steam, growth in cost trend has remained at historic lows."

In 2018, the report says hospital expenditures will account for the largest share of medical costs in the ESI market: