PWC Projects a 9% Bump in Employers' Medical Costs, Greater Employee Cost-shifting in 2011

While the healthcare reform laws that went into effect this year focused on expanding enrollment, they're not expected to do much about containing costs in the short-term. That fact was brought home in a new report  from PricewaterhouseCoopers LLP Health Research Institute, which predicts that the nation's employers can expect their medical costs to increase by 9% in 2011.

That represents a decrease of .5% from the 2010 growth rate, but it will also fuel anxiety and anger among workers, who'll almost certainly see their premiums rise while benefits drop and their wages stagnate.

"We deliver American healthcare in an expensive way, and we pay for it," says Cyril F. Chang, director of the Methodist Le Bonheur Center for Healthcare Economics in Memphis. "Nine or 9.5% is extremely high especially compared to zero inflation in the economy. Healthcare is again dancing to its own tune." For the first time, PWC says, most American workers will have a health insurance deductible of $400 or more, as more employers return to cost-sharing by raising out-of-pocket limits, replacing co-pays with co-insurance, and adding high-deductible health plans.

"The value of these benefits is becoming an even more visible part of overall compensation as medical costs grow, and, by 2014, health insurance benefits will shift from being a voluntary benefit to an individual mandate, enforced by new tax levies," says Michael Thompson, principal, Human Resource Services, at PWC. "Companies are now working with their health plan providers for new post-recession, post-health reform strategies to sustain their programs and promote health and well-being as their next competitive advantage."

To offset cost increases the PWC survey of more than 700 employers in 30 industries representing 47 million workers and their families found that:

• 67% of companies will expand or improve wellness programs.
• 42% will increase employee contributions for health insurance.
• 41% will increase cost-sharing, including higher deductibles and co-pays, and 26% will raise drug cost-sharing.
• More employers are dropping health benefits for retirees. One-third of employers with more than 5,000 workers subsidize pre-65 retiree medical coverage, down from 47% in 2009. Only 22% of employers with more than 5,000 employees subsidize post-65 retiree medical coverage, down from 37% in 2009.

The report identified three strategies that employers will use to hold down medical costs, including:

• Moving toward pre-managed care benefit design by increasing deductibles and replacing co-pays with co-insurance, thus reducing utilization.
• Increased use of generic drugs. About $26 billion in annual sales are expected to go off patent in 2011, including Lipitor. Generics account for 80% of prescriptions.
• A return to normal levels for COBRA costs. COBRA subsidies passed by Congress in 2009 created a 1% increase in the medical cost trend. Falling unemployment and the expiration of the subsidies are expected to reduce COBRA enrollment.

PWC says the biggest drivers of the medical trend in 2011 will be in hospital and physician costs, which represent 81% of premium costs. Hospitals shifting costs from Medicare to private payers and employers is seen as the primary reason for higher medical costs. In 2011, Medicare will reduce payment rates to hospitals for the first time after seven years of increases. Most hospitals are likely to shift costs to commercial plans, PWC says.

In addition, provider consolidation is increasing, which is expected to increase their bargaining power. The number of physicians involved in mergers or acquisitions in 2009 was 2,910, nearly twice that of 2008. There has been record consolidation activity in 2010, and PWC expects the trend to accelerate in 2011.

Hospitals in 2011 are expected to invest billions of dollars in certified electronic health record systems, and the government's new regulations dramatically condensed their timelines to invest in technology, IT staff, training and process redesign.

While investments in infra-structure, efficiencies, and consolidation may eventually prove to be cost effective, Chang says acting on cost containment will prove to be problematic.

"A lot of people's livelihood depends on the continuous growth. Everybody wants to get rid of the fat in the system, but one man's fat is another man's income," Chang says. "You are talking about threatening somebody else's job."

Rather than containing costs, Chang says the government and other payers are trying to contain payments.

"Right now it seems to me the major instruments they are using to slow down the growth of cost are Medicare cutbacks. But given the history of Medicare cutbacks, it's not easy," he says.

The long-term view has not been made clearer with the knowledge that nobody has figured out how to pay for medical care under the healthcare reform law. "A lot of the payment reforms are pilot studies, and we have not figured out how to do it," Chang says. "We have a lot of good ideas on the drawing board but they will not bear fruits anytime soon."