Healthcare's Next Cost Challenge: Tackling Rising Prices

The employer medical cost trend has stabilized at about 6% annually through 2019, but that's still unsustainable and well out of line with the Consumer Price Index and wage increases, PwC says.

The annual rate of growth in employer medical costs has plateaued at about 6%, which is half the rate of growth seen a decade ago, thanks largely to the rise of high-deductible health plans.

However, squeezing cost reductions from reduced utilization that come with high-deductible plans may have played itself out, according to a new study from PwC, which means that employers and health plans looking to slow cost growth will have to focus on medical pricing.

Rick Judy, a partner at PwC, says high-deductible plans largely accomplished what they set out to do, as employer annual medical costs trends have fallen from 11.9% in 2008 to around 6% most recently.

"When you have very low-deductible health plans, consumers operate within the healthcare ecosystem in a way that doesn’t allow them to take costs or utilization into the equation," Judy says.

"As health plans and employers have put high-deductible health plans in place, consumers are becoming better shoppers with their healthcare dollars, and the healthcare medical cost trend has seen a steep decline over the past decade because of the utilization changes," he says.

Now, that savings generated by reduced utilization from high-deductible plans "has sort of played out," Judy says.

"We've seen a plateauing of the adoption of those and the impact that they can have on the overall utilization has run its course as well," he says. "That means that we have to tackle next is prices, and hopefully that won't take 10 years."

Judy identified key "inflators" of medical costs through 2019.

• The rise of care venues: "As we put a lot of new care venues in place, whether those are virtual, or alternatives to emergency rooms or other high-cost venues of care, we are finding there is a slight uptick in how readily accessible care is and because of that consumers are utilizing the healthcare system more and more as that care is more readily available," Judy says.
   
• Provider mega mergers: "We are continuing to see that. We've moved to where 93% of metro markets are going to be highly concentrated with providers in 2019," Judy says. "In these larger mergers we saw 10 provider deals over $1 billion this past year. That gives providers better negotiating leverage around prices. So, that is going to continue to put upward pressure on medical cost trends into 2019.
   
• Physician consolidation: "A greater percentage of physicians being employed by hospitals versus being in stand-alone situations," Judy says. "Those situations typically bill out at a higher rate than a stand-alone physician. Also, there is a decrease in efficiency. On an average day, a stand-alone physician sees about 23 patients a day and an employed physician sees about 20 patients per day."

Working to contain costs are "deflators," which Judy identified as:

• The rise of care advocates: Employers and health plans are offering their employees and policy holders consumer advocates to who can help them navigate the healthcare landscape to the best care at affordable prices.
   
• High-performance Networks: Limited networks will emphasize quality and patient satisfaction along with savings. Employers are leveraging their buying power to negotiate directly with providers to create these high-performance networks.

In addition, Judy says the just-completed flu season was the worst in years and contributed to rising utilization and care costs. The 2018-19 flu season is projected to be closer to average and should slightly dampen the flu's effect on trend in 2019.