"The health spending rate is slowing. It has been slowing for a long time in a very incremental way, but we are not able to declare victory here," says the director of PwC's Health Research Institute.
PwC's projections for healthcare cost growth in 2016 provide a mixed review of cost containment.
The good news is that the projected 6.5% increase in healthcare inflation in 2016 is almost half the cost growth of 11.9% in 2007, when PwC first started making its annual projections. The bad news is that 6.5% cost growth is wildly outpacing wage growth and is unsustainable over the long run in a country that already spends close to 18% of its gross domestic product on healthcare.
To put that growth in perspective, the overall rate of inflation in the larger economy over the past year was 0%. "You can see what I would call a little bit of good news, but not enough good news to celebrate yet," Benjamin Isgur, director of PwC's Health Research Institute, said during webcast detailing the findings.
"The health spending rate is slowing. It has been slowing for a long time in a very incremental way, but we are not able to declare victory here. It is one of those things where we are winning a few battles but the overall war of health growth is still there. In fact, when we compare that to our national health expenditures as a percentage of gross domestic product, over these last several decades you see a larger and larger part of our economy spent on health services."
That's not necessarily a bad thing, Isgur says.
"Every economy gets to decide what they are going to spend their money on, but as it rises now past 15% of GDP, it does call into question the crowd out effect. Does that mean there are less resources to spend on things like education and transportation? The healthcare growth rate is still rising faster than general economic inflation."
PwC says the key "inflators" for healthcare cost growth in 2016 are expected to include the rising cost of specialty drugs such as Sovaldi, the Hepatitis C therapy from Gilead Sciences; and cybersecurity measures to prevent or mitigate increasingly sophisticated and aggressive large-scale breaches.
Preventive cybersecurity measures are particularly cost effective, PwC says, costing about $8 per patient record, while post-breach measures, including HIPAA fines and customer restitution, can cost about $200 per patient record.
Cost Deflators
The key "deflator" for healthcare cost growth is expected to be the "Cadillac tax" on insurance premiums that will take effect in 2019. To avoid the 40% excise tax, employers are already altering their benefits designs to increase by shifting more of the expense onto employees. The percentage of employers who are only offering high-deductible health plans has grown from 13% in 2012 to 25% in 2015.
"We are starting to see more and more employees share in the cost of their health plans," Isgur says.
Other deflators identified by PwC include the growing use of virtual care, with larger employers relying upon telehealth to provide access to primary care, and hospitals using remote monitoring to improve post-discharge outcomes; and the rising use of health advisors, often in retail settings, to steer customers to lower-cost and more efficient healthcare.
It also appears that the long-awaited return on investment for the billions spent on healthcare information technology over the past decades is materializing.
"We are starting to see, really for the first time, technology which has often been a contributor to trend and all the innovation that comes with that, now is starting to actually take some of the cost out of the system," Isgur says.
Hospital Execs Chime In
I shared the PwC projections with a couple of hospital executives to see if the trends identified are mirrored in the real world.
Chris Van Gorder, president and CEO of Scripps Health, says the San Diego-based health system is feeling the effects of higher drug and implant costs.
"Our current estimates for inflation for the next year is 5% for pharmaceutical expenses in the hospitals, 10% in the ambulatory environment, and 5% for high cost implants," Van Gorder says.
"The increasing costs in pharmaceuticals also impact readmissions, since a study by AHRQ found that 19% of Medicare discharges are readmitted, and two-thirds are due to drug events that are mostly caused by non-compliance with meds."
Tim Putnam, president and CEO of Margaret Mary Community Hospital in Batesville, IN, says the projected rise in medical inflation "seems like it ought to be lower."
"It always surprises me that the rate increase is that high," he says. "Community hospitals probably have a different mindset on this. I guess a lot of it has to do with stuff I am not involved with, the pharmaceutical industry and things like that."
Putnam says Margaret Mary has been working for years to minimize its rate increases.
"I can't say we are doing it a whole lot differently than five or 10 years ago," he says. "For years our board would look at a rate increase for basic services and the discussion was always around what kind of rate increase they need to stay viable. It wasn't about how much can we get. We went several years without a price increase."
Van Gorder says the lack of affordability is the biggest reason why patients don't comply with their post-discharge meds.
"We are working on new transition programs, including providing medications to patients' bedside prior to discharge, to assist patients in obtaining their discharge medications," he says. "We are also in the process of implementing a drug use management program that will focus on disease management across the care continuum to improve the value to our patients by providing high quality care in a cost effective manner."
Margaret Mary is also contending with the cost-shift to consumers.
"The physician is giving best practice for treating a disease and the patient is asking if there's a way we can do it cheaper," Putnam says. "The docs try to accommodate the needs of the patients. They understand the affordability. If they put the patient on a medication that they have no ability to pay for, then that is not going them any good."
Strip Mall Scans
Putnam says Margaret Mary is also starting to see the arrival of niche players who can undercut hospital prices.
"The classic example is the strip mall CT scanner of who knows what caliber or quality, but from the insurance company's perspective and the patients' perspective it is a CT scan," he says.
"Now a CT scan that wasn't shot well with poor equipment and wasn't read well comes back to my physicians and they are supposed to figure out what to do with the patients based on all of that, which can really be daunting," Putnam says. "The best diagnostic facility you have is now taken away, insurance has already paid for it so they won't pay for another one to be done that's good quality. We are starting to see a lot of that."
Van Gorder says ROI on HIT won't be fully realized until there is greater connectivity between providers. "We are very close to achieving that in the San Diego community with the Regional Beacon HIE (San Diego Health Connect)," he says.
"This will both provide great information to care providers to treat patients and assist in the elimination of duplicate tests. Scripps will be exchanging information later this month followed by Sharp. As we replace our best-of-breed systems with a best-of-suite system, we will be leveraging Epic's Community Connect offerings and achieve greater levels of connectivity and data exchange tailored to varying degrees of affiliation.
Putnam says Margaret Mary is not there yet, either.
"It seems like my bill for IT keeps getting higher and higher every year," he says. "What I do see, when a patient comes in the ER and they've gone to a physician who has an electronic record and all their labs and imaging for what happened over the past few years is available to the ER physician electronically, they are starting to look at that information and having a better understanding that they rule out a lot of possibilities that could be going on with the patient."
"They are able to get a quicker diagnosis without running the full gamut. I see positive benefits for that. It just still costs a lot to get all of that information down."
John Commins is the news editor for HealthLeaders.