Thursday, May 31, 2012

qotd: PwC predicts medical cost increases

PwC (PricewaterhouseCoopers)
Health Research Institute
May 2012
Medical Cost Trend: Behind the Numbers 2013

Healthcare spending growth in the United States has slowed considerably over the past three years. And despite expectations that the trend would bounce back up in 2012, it did not. In fact, we see no major change on the horizon for 2013.

Medical cost trend measures spending growth on health services and products—a critical factor in calculating insurance premiums for employers and consumers. For 2013 PwC's Health Research Institute projects a medical cost trend of 7.5%. Perhaps most notably, the historically large gap between healthcare growth and overall inflation has closed slightly.

As a result, the United States finds itself at a crossroads with respect to medical inflation. History suggests that the current slowdown is merely a dip mirroring broader economic trends and that medical cost growth will return to "normal" when the rest of the economy recovers fully. Looking even further out, if the Affordable Care Act is fully implemented, tens of millions of newly-insured Americans receiving care for the first time in years could cause a spike in spending in 2014 and beyond.

But across the healthcare landscape behaviors are beginning to change. Employers are pushing wellness programs with real enforcement muscle. Healthcare providers and drug makers are embracing the quest for value. And patients are becoming more cost-conscious medical consumers.

It is always dangerous to predict that medical cost trend could be approaching a more sustainable level. Yet if the structural forces in the industry take hold, the U.S. health system may be entering a "new normal."

Executive summary

The focus on medical cost containment strategies is continuing, aided by the sluggish economy, reforms in the healthcare industry, and efforts by employers to hold down costs.

More than half of the employers surveyed by HRI are considering increasing employees' share of health benefit cost and expanding health and wellness programs in 2013.

In estimating the medical cost trend growth for 2013, HRI relied on multiple sources including interviews with health plan actuaries and industry leaders, a review of available surveys and analyst reports, and PwC's own 2012 Health and Well-Being Touchstone Survey of 1,400 employers from more than 30 industries. In this year's report, we identified:

Four factors that will deflate medical cost trend in 2013:

* Medical supply and equipment costs abate under market pressure. Supplies can account for more than 40% of the cost of certain procedures. Recent hospital consolidation and physician employment are enabling administrators to move away from "physician preference" purchasing and negotiate for significant savings. In addition, insurers are pressuring hospitals to hold down these expenses.

* New methods to deliver primary care gain popularity. One of the slowest areas of cost growth has been in physician services, and this trend is expected to continue in 2013 as consumers choose alternatives to the traditional doctor's office visit. Lower-cost options such as workplace and retail health clinics, telemedicine, and mobile health tools continue to gain market share because employers and consumers view them as cost effective and convenient.

* Price transparency exerts pressure. As comparative cost information becomes more readily available, purchasers such as employers and individual patients can shop for non-emergency services such as tests and elective procedures. Providers meanwhile are under pressure to justify prices. More than 30 states require some reporting of hospital charges and reimbursement rates. Congress is considering legislation that would prohibit cost confidentiality clauses in insurance and hospital contracting.

* The pharmaceutical patent cliff continues to foster the use of cost-saving generics. Many blockbuster drugs have recently gone off patent, which will have a major effect on lowering drug spending in 2013.

Two factors that will inflate medical cost trend in 2013:

* Uptick in utilization trend is expected in 2013. The recession of 2007–2009 contributed to a significant slowing in healthcare consumption, as many people who lost jobs or were afraid of losing employment delayed care. As the economy continues to strengthen, utilization is expected to rebound.

* Medical and technological advances accelerate growth of higher-cost care. Remarkable new discoveries and technological advances let many in society live much longer—but often at a significantly higher cost. New technologies, such as robotic surgery and positron emission tomography services, have grown rapidly, with 36% of hospitals performing robotic surgery in 2010. Several health plans reported an uptick in high-cost cases, many surpassing the million-dollar mark.

What this means for your business

Employers and insurers will want to capitalize on the recent slowdown, while doctors, hospitals, and pharmaceutical companies will need to retool their business models to succeed in the new environment.

Comment:  This annual PwC projection of medical cost trends with employer-sponsored health programs seems to celebrate the slowing of cost trends at the 7.5 percent level for 2013. Yet that is well in excess of the rate of inflation. Our nation's employers and their private insurer partners have remained ineffective in controlling health care cost escalation.

PwC discusses four factors that they say should deflate the medical cost trend, but when you look closer at them, they would barely tweak costs.

* Hospital consolidation may place administrators in a better negotiating position for purchasing supplies and equipment, but since these are not services but rather products with relatively fixed production costs, negotiable margins will be quite narrow. Very little savings will be reflected in the bottom line of total costs.

* Retail health clinics might charge lower fees than primary care practices, but not much lower. Also, most health care still needs to be delivered within the traditional system of primary care professionals, specialists, and hospital and outpatient services. A discount on flu shots and exams for common colds in a convenience clinic will not make much of a dent in spending on the 80 percent who are relatively healthy, yet still receive most of their care through traditional health care professionals and facilities. It won't have any impact at all on the 80 percent of health care that is consumed by those with more significant health care problems.

* There is much discussion of price transparency, as if patient/consumers are going to drive down prices through health care shopping. Most prices paid are determined not by price checks but by administered rates of government programs or negotiated rates through third party payers, including private insurers and employers with self-insured programs. Ubiquitous price shopping is merely a dream of ideologues.

* It is true that many blockbuster drugs are coming off of patent and will be much less expensive as generics. But when you look at some of the newer agents and the research that is down the line, the quest of the pharmaceutical and biotech industry is for drugs and biologicals with five and six digit prices, or maybe four digits for products with low production costs and higher utilization. The PwC report mentions $300,000 and $400,000 drugs that are already on the market. The industry has no interest in producing new $20 drugs.

The report also mentions factors that will inflate health care costs, including increased utilization as the economy recovers, and increased spending on newer expensive technology. Also spending increases will occur if the states are successful in enrolling significant numbers of previously uninsured individuals in their insurance exchanges, and if employers increase coverage to avoid penalties should the Affordable Care Act survive its challenges.

Until we are ready to change to a much more efficient single payer national health program, we can anticipate that intolerable health care inflation rates will stay with us. As more of us suffer from the results - impaired access and financial hardship - we may finally reach a threshold wherein we are ready to act. Until then, don't get sick.

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