Medical Cost Trend: Behind the Numbers 2013May 2012Health Research Institute
Table of contentsThe heart of the matter 1Medical cost trend in 2013 will surprise the industrywith another year of historically low growth. Thecontinued slowdown is the result of a sluggisheconomy, medical plans with greater cost sharing,and new care models that reward value over volume.An in-depth discussion 3PwC’s Health Research Institute projects medical costtrend will remain flat at 7.5 percent in 2013.Executive summary 4Behind medical cost trend 5Why medical cost trend matters 6Factors affecting 2013 trend 7What this means for your business 17Employers and insurers will want to capitalize onthe recent slowdown, while doctors, hospitals, andpharmaceutical companies need to retool theirbusiness models to succeed in the new environment.Employers 18Providers 19Health insurers 20Pharmaceutical and life sciences 21May 2012
The heart of the matterMedical cost trend in 2013 willsurprise the industry with anotheryear of historically low growth.The continued slowdown is theresult of a sluggish economy,medical plans with greater costsharing, and new care models thatreward value over volume.
Healthcare spending growth in the recovers fully. Looking even furtherUnited States has slowed considerably out, if the Affordable Care Act is fullyover the past three years. And despite implemented, tens of millions of newly-expectations that the trend would insured Americans receiving care forbounce back up in 2012, it did not. In the first time in years could cause afact, we see no major change on the spike in spending in 2014 and beyond.horizon for 2013. But across the healthcare landscapeMedical cost trend measures behaviors are beginning to change.spending growth on health services Employers are pushing wellnessand products—a critical factor in programs with real enforcementcalculating insurance premiums for muscle. Healthcare providers and drugemployers and consumers. For 2013 makers are embracing the quest forPwC’s Health Research Institute value. And patients are becoming moreprojects a medical cost trend of 7.5%. cost-conscious medical consumers.Perhaps most notably, the historicallylarge gap between healthcare growth It is always dangerous to predict thatand overall inflation has closed slightly. medical cost trend could be approaching a more sustainable level. Yet if theAs a result, the United States finds structural forces in the industry takeitself at a crossroads with respect to hold, the U.S. health system may bemedical inflation. History suggests that entering a “new normal.”the current slowdown is merely a dipmirroring broader economic trends andthat medical cost growth will return to“normal” when the rest of the economy The heart of the matter 2
An in-depth discussionPwC’s Health Research Instituteprojects medical cost trend willremain flat at 7.5 percent in 2013.
Executive summary • New methods to deliver primary care gain popularity. One of the Two factors that will inflate medical cost trend in 2013: slowest areas of cost growth hasThe focus on medical cost containment • Uptick in utilization trend is been in physician services, and thisstrategies is continuing, aided by the expected in 2013. The recession trend is expected to continue in 2013sluggish economy, reforms in the of 2007–2009 contributed to a as consumers choose alternativeshealthcare industry, and efforts by significant slowing in healthcare to the traditional doctor’s officeemployers to hold down costs. consumption, as many people who visit. Lower-cost options such as lost jobs or were afraid of losingMore than half of the employers workplace and retail health clinics, employment delayed care. As thesurveyed by HRI are considering telemedicine, and mobile health economy continues to strengthen,increasing employees’ share of health tools continue to gain market share utilization is expected to rebound.benefit cost and expanding health and because employers and consumerswellness programs in 2013. view them as cost effective and • Medical and technological advances convenient. accelerate growth of higher-costIn estimating the medical cost trend care. Remarkable new discoveriesgrowth for 2013, HRI relied on multiple • Price transparency exerts pressure. and technological advances let manysources including interviews with As comparative cost information in society live much longer—buthealth plan actuaries and industry becomes more readily available, often at a significantly higher cost.leaders, a review of available surveys purchasers such as employers New technologies, such as roboticand analyst reports, and PwC’s own and individual patients can shop surgery and positron emission2012 Health and Well-Being Touchstone for non-emergency services such tomography services, have grownSurvey of 1,400 employers from more as tests and elective procedures. rapidly, with 36% of hospitalsthan 30 industries. In this year’s report, Providers meanwhile are under performing robotic surgery in 2010.1we identified: pressure to justify prices. More than Several health plans reported an 30 states require some reporting of uptick in high-cost cases, many hospital charges and reimbursementFour factors that will deflate surpassing the million-dollar mark rates. Congress is consideringmedical cost trend in 2013: legislation that would prohibit cost• Medical supply and equipment confidentiality clauses in insurance What this means for your business costs abate under market pressure. and hospital contracting. Employers and insurers will want to Supplies can account for more capitalize on the recent slowdown, than 40% of the cost of certain • The pharmaceutical patent cliff while doctors, hospitals, and procedures. Recent hospital continues to foster the use of cost- pharmaceutical companies will need to consolidation and physician saving generics. Many blockbuster retool their business models to succeed employment are enabling drugs have recently gone off patent, in the new environment. administrators to move away from which will have a major effect on “physician preference” purchasing lowering drug spending in 2013. and negotiate for significant savings. In addition, insurers are pressuring hospitals to hold down these expenses. 1 MedPAC, Report to the Congress—Medicare Payment Policy; http://www.medpac.gov/ documents/Mar12_EntireReport.pdf. An in-depth discussion 4
Figure 1. Medical cost trend, 2010−2013Source: PwC Health Research Institute AnalysisNote: “What we predicted” will not available for 2013 until the following year’s look back.Behind medical plan would cost in the following year. Medical trend does not take into medical costs have come in lower than expected. Taken together, Figure 1cost trend account benefit changes, which were shows the trend is estimated to be in reduced by 1% to 2% over the period the relatively low range of 7% to 7.5%Medical cost trend could be defined reviewed.2 for the entire period 2010–2013, raisingin several ways; for this report, it the possibility that we have entered alooks at the projected increase in PwC’s Health Research Institute (HRI) “new normal.”3costs of medical services assumed in estimates the medical cost trendsetting health insurance premiums. for 2013 will be 7.5%. HRI has also The net cost trend after accounting forCommercial insurers and large, self- recalibrated its trend estimates down changes in plan benefits, such as higherinsured businesses use medical cost for the three previous years as the deductibles and cost sharing, is also in atrend to estimate what the same health latest available information indicates narrow range of 5.5% to 6%. 2 PwC estimates that the wedge between medical cost trend before health plan changes and the net trend after changes is typically 1.5% to 2%, as was estimated in 2010 and 2012, and is expected in 2013. The small adjustment in 2011 is the result of the enactment of the Affordable Care Act, which included new benefit requirements (e.g. removing lifetime limits), that offset other reductions. Some analysts also argue that low 3 HRI’s changes in the 2011 and 2012 estimates wage increases may have increased resistance were based on this year’s look back including to plan changes. By the end of 2013, HRI interviews with officials from health plans. estimates that the typical relationship between Unlike premiums, which are directly observed medical trend before and after plan changes in the marketplace, the medical cost trend is will return, yielding a medical trend of 5.5% based on estimates from health plans, large after accounting for plan changes. employers, and other analysts.5 Behind the Numbers 2013
Figure 2. 2011 Private health insurance benefits by spending category 10% growth 8% 18% growth Curren t 15% Outpatient Curren t Drugs 6.1% Othe r 4% growth Curren t Physician Inpatien t 32% 31% Curren t 5.4% 8.2% Curren t growth growthSource: PwC Health Research Institute analysis of Milliman Medical Index 2007−2012.Note: “Other” category includes services such as ambulance, home health and durable medical equipment.Growth rates are average annual growth rates between 2007 and 2012.Why medical cost Physician care, as shown in Figure 2, is the largest component and accountstrend matters for one-third of employer benefit costs, with hospital inpatient costs accountingMedical cost trend is the leading for an additional 31%. The trend isfactor in setting insurance premiums. affected not only by the share of eachInsurance actuaries rely on the medical component, but also by how fast it iscost trend, coupled with other factors growing. Outpatient costs grew at ansuch as benefit design changes and average of 10% from 2007–2012, whileprofitability targets, to set the following physician services, at 5.4%, were theyear’s premium levels. slowest growing of the major categories.While anticipating cost trend is To estimate medical cost trend, HRIimportant, employers also want to conducts research each year to identifyknow what’s driving it. Medical cost new and relevant factors that acceleratecan be broken down into five broad cost trend (i.e., “inflators”) or reducecomponents: physician care, inpatient, cost trend (i.e., “deflators”). Based onoutpatient, drugs, and other. Figure interviews with health plans, providers,2 shows the breakdown of these and employers, as well as a review ofcomponents for a typical PPO plan. financial analyst reports, government spending data, and other published sources, HRI anticipates medical cost trend in 2013 will remain relatively flat. An in-depth discussion 6
Figure 3. Percentage change in average price of implants December 2010 to February 2012 6% 4% 4.9% Cardiac resynchron - 2% Hip implan t Shoulder ization 2.0% therapy- Drug-e luting Cochlear acetabular Implantabl e Spinal cord implan t- pacema ker stents implants shell pacema ker stimulat or humera 1.0% 0% -1.3% IVD end Knee Biological plate implan t- hear t valve femoral-2% -3.4%-4% -5% -5.6%-6% -7.3%-8% -8.8 % -8.7%-10%Source: PwC Health Research Institute analysis of the Modern Healthcare/ECRI Institute Technology Price Index.8Factors affecting because they purchased a large variety of medical supplies to accommodate Government transparency initiatives may be having an effect as well. The2013 trend physician preferences. Physicians Department of Justice now requires have traditionally been independent five manufacturers of orthopedic of hospitals, but according to a recent implants to report online the royaltyMedical supply survey by HRI, 46% of doctors said and consulting payments they make they were interested in employment to individual physicians.7 Theseand equipment by hospitals.5 In fact, physician companies, representing a large portioncosts, new forms employment by hospitals increased of the knee and hip implant market, had by 32% between 2000 and 2010.6 been accused of overpaying orthopedicof primary care Employment shifts the purchasing surgeons for consulting services anddelivery, price control from individual physicians providing perks in exchange for the to hospitals. surgeons’ recommendation of theirtransparency, and products. Other payers are creating What’s more, hospitals’ negotiatinggeneric drugs will power multiplies as they merge and additional pressures to reduce markups at the point of service for medical“deflate” cost trend become larger—another trend in supplies and equipment. recent years. Once purchased, hospitals are wielding sophisticated inventoryMedical supply and management systems with bar codesequipment costs are and radio frequency technology to trackabating under market and use their most expensive suppliespressure and equipment efficiently. Figure 3 shows the percentage of change inSupplies can account for 40% of the average prices for high-cost medicalcost of certain procedures.4 In the implants.past, hospitals have had little leverage 5 HRI, “From Courtship to Marriage,” 2011. 6 Fierce Healthcare: Daily News for Healthcare4 E.S. Schneller and L. Smeltzer, “Strategic Executives: http://www.fiercehealthcare. 7 American Association of Orthopedic Surgeons, Management of the Health Care Supply Chain,” com/story/hospitals-employing-32-more- “Orthopedists and industry: Working together 2006, San Francisco: Jossey-Bass, as cited in: physicians/2012-01-09. at arm’s length;” http://www.aaos.org/news/ Premier, “Economic Outlook,” September 2011. 7 American Association of Orthopedic Surgeons, aaosnow/oct08/cover2.asp. Accessed at: https://www.premierinc.com/ “Orthopedists and industry: Working together 8 http://www.modernhealthcare.com/section/ costs/economic-outlook/attachments/Public- at arm’s length;” http://www.aaos.org/news/ technology-price-index?Feb-2012#supply; EO-Fall-2011.pdf. aaosnow/oct08/cover2.asp. accessed May 2012.7 Behind the Numbers 2013
Figure 4. Percent of survey respondents that have sought treatment in a retail clinicSource: PwC Health Research Institute Consumer Survey, 2012. N=1,001 respondents, survey dataavailable for only 2007, 2010, and 2011.New delivery methods Cost and price transparency are integralfor primary care gain for consumers choosing these centers. One study looked at three commonpopularity conditions and found that retailOne of the slowest areas of cost clinics charged 30% to 40% less thangrowth has been in physician services, private physician offices—and 80%and that’s expected to continue as less than emergency departments.10consumers choose alternatives to the HRI’s analysis found that the cost oftraditional office visit. Because so Tdap, a common childhood vaccine formany workers now have deductibles of diphtheria, tetanus, and pertussis, is$1,000 or more, they are particularly $232 in a hospital but advertised by onecost sensitive to healthcare purchases. large retail clinic chain for $100.11Workplace clinics, retail health clinics, Technology is also supplanting thetelemedicine, and mobile strategies traditional office visit. Many activitiescontinue to gain market share because such as history review, psychiatricemployers and consumers view them as evaluations, and ophthalmologycost effective and convenient. assessments can be conducted remotely,Retail clinics, which are typically producing similar outcomes with lowerstaffed by nurse practitioners, are cost. Almost half of physicians surveyedbecoming a standard option for by HRI said a significant portion oflow-cost, high-volume care. As seen in office visits could be eliminated throughFigure 4, nearly one in four consumers mobile health, which could alsosurveyed by HRI said they had sought improve access for patients.12 Insurerstreatment at a retail clinic in 2011. such as Aetna, Cigna, UnitedHealthcare,The United States has more than 1,300 and various Blue Cross Blue Shieldclinics today.9 plans have begun to pay for electronic consultations, increasing the likelihood of physician participation.13 10 “Comparing Costs and Quality of Care at Retail Clinics With That of Other Medical Settings for Three Common Illnesses,” The Annals of Internal Medicine, 151, 2009, p. 321-328. 11 HRI analysis of retail clinic advertised prices on April 17, 2012, and 2009 hospital MEDPAR data sets; accessed May 2012. 12 HRI “Healthcare unwired: New business models delivering care anywhere,” 2010.9 Merchant Medicine, Retail Clinics in the United 13 The Wall Street Journal, “Doctor is in— States; http://www.merchantmedicine.com/ Online;” http://online.wsj.com/article/ home.cfm. SB124977187174117097.html. An in-depth discussion 8
Figure 5. State efforts toward price transparency States with no significan t laws regarding transparency or disclosure States with basic healthcare price disclosure laws enacted States with advanced healthcare price disclosure laws enacted WA MT ND ME MN OR VT NH ID SD WI NY MA WY CT MI RI IA NE PA NV NJ OH MD IL IN DE UT CO WV DC KS VA CA MO KY NC TN AZ OK NM AR SC MS AL GA TX LA AK FL HI States with no significant transparency laws:13 States with basic transparency laws: 24 States with advanced transparency laws: 13Source: PwC Health Research Institute analysis of National Conference of State Legislatures.14Note: State legislation enacted between 1984 and 2010. States with advanced healthcare price disclosure laws enacted have web based information regardingspecific prices at the facility level.14 National Conference of State Legislatures, State Actions Relating to Transparency and Disclosure of Health and Hospital Charges;http://www.ncsl.org/issues-research/ health/transparency-and-disclosure-health- costs.aspx.9 Behind the Numbers 2013
Several health plans report they make more informed choices aboutare increasingly investing in and their care, especially for services thatcollaborating around mobile strategies can be planned.15 Knee-replacementor mHealth tools that provide care surgery at several Colorado hospitals,outside of the doctor’s office or hospital. for example, has ranged in price fromMany are partnering with technology $33,000 to $101,000, according to acompanies to help patients virtually 2011 Government Accountability Officemanage their weight, analyze physical report.16 Many states now have lawsactivity, and report medication intake. requiring the public posting of charges and prices, which many believe willBeginning in October 2012, Medicare enable consumer choice (see Figure 5).will no longer pay for preventablehospital readmissions and will publish The insurer Cigna unveiled a newreadmission rates. Remote monitoring feature on its website in March thatof patients using mobile devices will be allows customers to compare pricesespecially effective at reducing hospital for 200 common medical procedures.readmissions and keeping patients out Rather than using broad price rangesof the hospital altogether. or averages, the site provides estimates based on actual claims payments soPrice transparency patients can get a valuation of not only the doctor’s fee, but also relatedexerts pressure services such as diagnostics andAmericans know the price of almost anesthesia, as well as hospital or facilityevery major purchase except their costs. “We want to help our customersmedical care. But as more consumers get the most out of every healthcareenroll in high-deductible plans, they’re dollar,” explained Jim Nastri, Cigna’smore likely to seek out cost information. vice president for cost and quality“Price transparency would be a transparency.17powerful source of cost control if people Publishing prices is affecting theknew about it,” said Mark Duggan, behavior of both consumers andprofessor of business and public policy insurers. Several health plans told HRIat the Wharton School at the University that price transparency had armedof Pennsylvania. them to negotiate lower prices withIt isn’t easy to find, but government and providers through reference pricing. Forhealth plans are publishing prices more example, an insurer can use a low-costoften—and finding wide variation. imaging center in its network as theWhen accompanied by information reference price or benchmark for anon the quality of care, transparent MRI. If a patient chooses a provider thatprice information may help consumers charges more, he is responsible for any costs above the reference price. 15 Paul Ginsburg, “Shopping for Price in Medical Care,” Health Affairs, vol. 26, no. 2 (2007). 16 GAO, “Health Care Price Transparency— Meaningful Price Information is Difficult for Consumers to Obtain Prior to Receiving Care;” http://www.gao.gov/new.items/d11791.pdf. 17 Cigna, “Cigna Provides Highly Accurate Prices for 200+ Procedures and Health Professional Quality Informatics to its U.S. Customers;” http://newsroom.cigna.com/NewsReleases/ cigna-provides-highly-accurate-prices-for- 200+-procedures-and-health-professional- quality-information-to-its-us-customers.htm. An in-depth discussion 10
Figure 6. Branded pharmaceutical sales revenue at risk as a result of patent expiration = 1 $billion brande d pharmaceutical revenue $2 8.2 $2 6.2 $2 5.5 $18.6 $19.0 2011 2012 2013 2014 2015Source: PwC Health Research Institute analysis of US Patent and Trademark Office data.Revenue in 2011 dollars.The pharma patent cliff drug’s manufacturer can challengecontinues to increase use the branded drug’s patent(s) well before expiration, gaining six monthsof cost-saving generics of generic exclusivity. “Single source”In 2011 drugs going off patent generics are typically closer in price torepresented more than $28 billion in the original branded drug (about 20%US pharmaceutical sales.18 This was less for the illustrative drug shown infollowed by an additional $26 billion Figure 7). Only after the exclusivityworth of pharmaceuticals going off period can other manufacturers offer apatent in 2012 (see Figure 6). The generic. As more manufacturers enterimpact of those two years is only the market, prices fall over time (bynow being fully felt as more generics 60% for the illustrative drug shown inenter the market, making 2012 and Figure 7).2013 record years for generic drugs Physician prescribing habits andsupplanting or replacing branded consumer acceptance of generics aredrugs on health plan formularies. factors in either slowing or acceleratingA number of factors combine to the uptake of a generic equivalentmove the major impact of a drug of a branded drug. Generic drugsgoing off patent into the next year now account for about 80% of alland beyond. In some cases, a generic prescriptions in the US.19 19 IMS Institute for Healthcare Informatics, “The Use of Medicines in the United States: Review of 2011;” http://www.imshealth.com/ims/ Global/Content/Insights/IMS%20Institute%2018 US Patent and Trademark Office; http://www. for%20Healthcare%20Informatics/IHII_ uspto.gov/patents/resources/terms/156.jsp. Medicines_in_U.S_Report_2011.pdf.11 Behind the Numbers 2013
Figure 7. Generic exclusivity price slopeImpact of the patent cliff for an illustrative drugA medication that sells for $100 before patent expiration is sold for $80 during the first sixmonths that a single company manufactures the generic. However, over the next six to 18months, as more companies are allowed to produce the generic, the price drops to $40.Source: PwC Health Research Institute analysis.Uptick in utilization Historically consumption has risen as the economy recovers. The theory, asand expensive Helen Darling, president and CEO ofadvances push the National Business Group on Health, put it, is that “healthcare is a consumertrend up good, and more money in the pockets of consumers equals more healthcare utilization.” In a stronger economyMedical utilization typically employees feel more secure in takingtracks economic growth off work for medical appointments, which boosts utilization, she added. IfThe recent recession and subsequent the US economy continues to recover asslow recovery have been characterized forecast, an uptick in utilization wouldby a surprising slowdown in the growth be expected.in utilization of most medical servicesand products. Some health sectors As they did last year, several of theeven experienced a drop in utilization. industry executives interviewedDoctor office visits, for instance, for this report expect utilization todecreased by 4.2% in 2010 and 4.7% rebound in the coming year. Somein 2011.20 pointed to a slight uptick in acute care at hospitals for late 2011 and early20 IMS Institute for Healthcare Informatics, “The Use of Medicines in the United States: Review of 2011;” http://www.imshealth.com/ims/ Global/Content/Insights/IMS%20Institute%20 for%20Healthcare%20Informatics/IHII_ Medicines_in_U.S_Report_2011.pdf. An in-depth discussion 12
Figure 8. Surgical cosmetic procedures in US(Procedures in millions)Source: American Society for Aesthetic Plastic Surgery. 212012 as proof that trends are picking Medical advances driveup. Cosmetic surgery could also be an growth in high-cost careearly indicator of utilization rebound. and catastrophic claimsFigure 8 shows that cosmetic surgeriesfell during the recession, but are now Continuing advances in high-coston the rise and increased by 10% from medical technology combined with thethe low in 2009. Since cosmetic surgery low cost to insured patients have been ais not generally covered by insurance, major inflator of US medical cost trendit is typically more sensitive to over the decades. New technologies,economic fluctuations, and the recent such as robotic surgery and positronuptick may foreshadow a utilization emission tomography (PET) services,rebound in the rest of the healthcare have grown rapidly, with 36% ofindustry. However, it will take a large hospitals performing robotic surgeryincrease in cosmetic surgeries to return in 2010.24 Signs are that even in thisto pre-recession levels. slow-growth environment, high-cost treatments are pushing up the medicalUtilization of laboratory services cost trend. Medical advances areappears to be increasing as well. First- leading to cures, albeit at a higher cost.quarter 2012 financial results for thetesting firm Quest Diagnostics indicate At the same time, executives at severala 3.4% increase in volume of clinical health plans said they have experiencedtesting orders.22 A recent survey by a higher-than-normal rate of catastrophicthe Joint Commission, a not-for-profit claims. Claims surpassing the $500,000accreditation group, found that 51% and million-dollar marks rose steadilyof laboratory representatives expect between 2004 and 2008, and there’s noan increase in demand for services in end in sight as Americans live longerthe next three to five years, driven by with increasingly complex medicalfactors such as an aging population, conditions (see Figure 9).25new test development, and a pushtoward personalized medicine basedon genetic makeup.2321 The American Society for Aesthetic Plastic Surgery, Statistics; http://www.surgery.org/ media/statistics.22 Quest Diagnostics, Press Release—Quest 24 Medpac, Report to the Congress—Medicare Diagnostics Reports First Quarter 2012 Payment Policy; http://www.medpac.gov/ Financial Results; http://ir.questdiagnostics. documents/Mar12_EntireReport.pdf. com/phoenix.zhtml?c=82068&p=irol- 25 The number of high-cost claims has not been newsArticle&ID=1684292&highlight=./ adjusted to reflect rising medical costs. Some investor. of the increase in catastrophic cases reflects23 The Joint Commission Lab Focus; http:// the fact that $500,000 in 2008 is not what it www.jointcommission.org/assets/1/18/Lab_ was in 2004. This distortion is limited by the Focus_1_2012.pdf. relatively short period under consideration.13 Behind the Numbers 2013
Figure 9. Increase in high-cost insurance claims (Number of claims per million) Source: Munich Re America HealthCare Newsletter, Summer 2009. 26 In Northern California, hospital stays Life-saving pediatric care can be over $1 million rose sevenfold over extremely expensive as well. One health the past decade, according to data plan interviewed by HRI recently paid from the California Office of Statewide its single largest pediatric claim at $8 Health Planning and Development. million and has seen a rise in Cumulatively, these charges came to $1 million-plus claims. Neonatal $5.2 billion in 2010, or roughly 7% of all intensive care units, with average daily statewide hospital charges.27 costs of $3,000,30 are used more often because more babies—1 in 8—are born One of the most expensive medical premature and require round-the-clock procedures is organ transplantation, care, temperature-controlled beds, which can range from $200,000 to $1.7 special feedings, or interventions for million for multi-organ transplants. The complications.31 demand for transplantation is expected to rise sharply as the population ages While generics decrease the cost and scientific advances allow more of pharmaceuticals, new specialty people to benefit from transplants. drugs act as a counterbalance. Soliris, Higher rates of chronic disease a medication that treats a rare, leading to higher rates of organ failure potentially life-threatening form of are also fueling demand. Intestine anemia, made headlines when Forbes transplants, the most expensive single magazine called it “the world’s most organ transplant at $1.2 million, have expensive drug.”32 Annual treatment is increased from 52 cases in 2004 to 77 about $400,000. Several specialty drugs in 2011,28 while most transplants are targeting rare diseases have average expected to increase 1% to 6% over the annual costs up to $300,000 year.33 next year alone.29 27 The Sacramento Bee, “Million-Dollar Hospital Bills Rise Sharply in Northern California;” 30 Managed Care, “How Plans Can Improve http://www.sacbee.com/2012/03/11/4328036/ Outcomes and Cut Costs for Preterm Infant million-dollar-hospital-bills.html. Sacramento Care;” http://www.managedcaremag.com/ Bee analysis of California OSHPD data. archives/1001/1001.preterm.html. 28 Milliman Research Report, US Organ and Tissue 31 March of Dimes, Mission; www.marchofdimes. Transplant Cost Estimates and Discussion; com/mission. http://publications.milliman.com/research/ 32 Forbes, “The World’s Most Expensive Drug;” health-rr/pdfs/2011-us-organ-tissue.pdf. http://www.forbes.com/2010/02/19/expensive- 29 HRI analysis of Milliman’s 2011 Organ and drugs-cost-business-healthcare-rare-diseases. Tissue Transplant Cost Estimates and html.26 Munich Re America, Newsletter Summer 2009; Discussion finds that most transplant rates 33 Genzyme, “The Cost of Enzyme Replacement http://www.mrahc.com/newsletter/MRAHC_ are projected to increase between 1% and 6% Therapy;” www.genzyme.com/commitment/ Newsletter_Summer_09.pdf. based on past rate increases. patients/costof_treatment.asp. An in-depth discussion 14
Figure 10. Percentage of individuals with employer-sponsored coverage enrolled in a high-deductible plan with a savings optionSource: The Kaiser Family Foundation and Health Research and Educational Trust.34The ‘new normal?’ president of the Healthcare Leadership Council, a coalition of chief executivesOverall health spending in the US grew across the healthcare system. “Thismore slowly in 2009 and 2010 than recession is different than before.”in any of the previous 51 years thefederal government has been tracking In 2013 the unemployment rate ishealth expenditures. And instead of expected to remain above 8%, and itincreasing, the percentage of US GDP will not fall to the natural rate of nearbeing spent on healthcare leveled off in 5.5% until the end of 2017, according2010 at 17.9%.35 to projections by the nonpartisan Congressional Budget Office.36In years past, medical cost trend wasrelatively immune to recessionary Unemployment and the overalleffects and any slowdown in healthcare economic environment have had agrowth historically bounced back with direct connection to the health industry.the economy. Many experts interviewed Between 2005 and 2010, more thanby HRI anticipate a similar pattern. 9 million Americans lost employer- sponsored coverage,37 and many otherBut others observe that the most recent businesses have shifted more costsrecession—and slow recovery—has to employees. For example, averagecreated a new dynamic in the health emergency room copays have increasedindustry. “I don’t see this economy and are now $125 or more, according tobouncing back as quickly as it should— the latest PwC Health and Well-Beingpeople are not aware how long it will Touchstone Survey.take to get jobs back,” said Mary Grealy,34 The Kaiser Family Foundation and HRET, Employer Health Benefits 2011 Annual Survey; http://ehbs.kff.org/pdf/2011/8225.pdf.35 Anne B. Martin, David Lasman, Benjamin Washington, Aaron Catlin, and the National Health Expenditures Account Team, Growth in US Health Spending Remained Slow in 2010; Health Share of Gross Domestic Product Was 36 Congressional Budget Office, “The Budget and Unchanged From 2009, Health Affairs, 31, no. Economic Outlook: Fiscal Years 2012–2022;” 1 (2012): 208-219. Note: US health spending www.cbo.gov/publication/42905. is a broader measure than medical cost trend 37 Census Bureau, “Table HIB-4. Health Insurance and includes all government expenditures, Coverage Status and Type of Coverage by private spending, medical costs and State All People: 1999 to 2010,” Current administrative costs. Population Survey, 2011 March Supplement.15 Behind the Numbers 2013
Figure 11. Percentage of consumers delaying care because of costSource: 2011 PwC Health Research Institute Consumer Survey. N=1,000 respondents.38 Overall deductible amounts have procedures or possibly delay care. A also crept up. Twenty-two percent of recent HRI survey found that 46% of employers said their most common plan consumers had delayed care at least had an in-network deductible of $1,000 once in the previous year, and 10% or greater in 2012—a 14 percentage had delayed care five or more times point rise since 2008. More employers (see Figure 11).40 said their out-of-network deductible had crossed the $1,000 threshold— The sluggish economic recovery may 43% of employers in 2012, up from 21% be complementing efforts to constrain in 2008. Half of the employers in PwC’s medical cost trend. Stakeholders across survey are considering increasing cost the healthcare landscape, forced to do sharing through plan design, and an more with less, have begun embracing additional 34% said they had already new strategies and habits that have the done so.39 potential to be longer lasting. Hospitals are using sophisticated technology to High-deductible plans, which typically create “just-in-time” staffing models include a tax-preferred savings account, and new relationships with physicians have grown significantly in recent to pressure suppliers for lower years. Seventeen percent of individuals prices. Employers and insurers are with employer-sponsored coverage are encouraging comparison shopping by currently enrolled in such a plan, up patients, coordinated care that pays for from only 4% in 2006 (see Figure 10). better health outcomes, and promotion of healthier lifestyles. If these efforts This shift is changing behavior and spread widely, the United States may ultimately utilization; some employees be entering a “new normal.” are learning to shop around for needed care, while others forego elective 38 HRI, “Top health industry issues of 2012: Connecting in uncertainty,” 2011. 39 PwC 2012 Health and Well-Being Touchstone 40 HRI, “Top health industry issues of 2012: Survey. Connecting in uncertainty,” 2011. An in-depth discussion 16
What this means for your businessEmployers and insurers willwant to capitalize on the recentslowdown, while doctors, hospitals,and pharmaceutical companieswill need to retool their businessmodels to succeed in the newenvironment.
Employers Things to consider • Collect, analyze, and act on healthcare program data. Take theWhat they are doing now time to assess your investment—is your workforce getting healthier?Employers continue to wrestle withhow many and what kind of cost- • Communicate, educate, andshifting strategies are most effective. facilitate wellness. PersonalizeThe appropriate blend of incentives, the message and leverage mobilecost shifting, and wellness programs technology to provide real-timecan motivate employees to stay healthy support.and productive. Yet the science of whatworks best isn’t getting the attention it • Promote value by tapping low-costneeds. If labor markets tighten—and options such as workplace clinicsthey are already in some industries— and telehealth. Employer-sponsoredthis will become critical. More than half clinics have shown they can improveof employers surveyed by PwC spend the overall health of an employeemore than 1% of total medical costs on population, with the added benefit ofwellness programs, but 88% of these increasing productivity and reducingsay they either do not measure or have absenteeism.insufficient data to measure a return onthe investment. • Deploy value-based distinctions in benefit design. Value-based benefitWhile many employers have learned designs rely on incentives to useto drive participation with financial services more wisely, and theyincentives (e.g., cash, gift cards, raffles), increase the likelihood that patientsthose with significant wellness program will comply with treatment plans andexperience are emphasizing outcomes engage in healthy behaviors. Value-rather than just participation. And based designs are primarily intendeda select few employers are looking to stretch healthcare dollars, butbeyond traditional incentives and are they may not necessarily decreaseoffering discounts on health insurance actual costs.premiums for employees who showprogress on basic health measures suchas body mass index. Some employershave recently made news by refusing tohire obese job applicants, or banningsmokers from their payroll entirely. What this means for your business 18
Providers Things to consider • Prepare for increased scrutiny and accountability. Conduct in-depthWhat they are doing now reviews to ensure pricing is defensible. Competitive servicesAs the largest and fastest-growing such as lab tests, imaging, andsegment of medical costs, hospital outpatient therapies shouldreimbursement is being aggressively take into account any local free-targeted for savings by government and standing competitors and be pricedcommercial insurers. Even as hospital accordingly.systems push for rate increases, theyknow that what insurers really want is • Change care models to reflect newto avoid the hospital altogether. reimbursement models. The overall agenda of accountable care is forUnder every scenario, hospitals and delivery of service and patientphysicians are increasingly accountable engagement to be seamlesslyfor the cost and quality of healthcare working toward improved healththey provide. and prevention. To meet these goals, it is essential to maximize information exchange among different care providers. Alignment with physician groups can benefit providers on several fronts, whether acquiring a physician practice or focusing on enhanced integration of existing groups. • Develop a culture of collaboration. Teamwork will be especially critical in achieving lower Medicare readmission rates set to take effect in October 2012. Simple efforts to improve the discharge process such as proactively scheduling follow-up appointments, educating patients and their caregivers, and initiating pill reminders will decrease chances these patients return. Collaboration should also extend to engaging patients in their own care. • Predictive modeling can help identify patients at higher risk for readmission. These models can be added to electronic medical records, elevating them from mere record keeper to intelligence tool that can help provide better care.19 Behind the Numbers 2013
Health insurers Things to consider • Align incentives and empower consumers. If the 2010 health reformWhat they are doing now law is fully implemented, insurers will look for increased market shareAs health insurers brace for an in the new age of health insuranceanticipated rebound in utilization, they exchanges, subsidies, and mandates.also need to closely monitor market Health plans will have to educateperceptions that influence employers consumers, build plan awareness,and policymakers. Rate hikes are and distinguish themselves bynow front-page news as insurers must creating meaningful connectionsdisclose more information to the with members. This may includepublic and regulators in justifying bundling complementary productslarge rate increases. Over the past with insurance or financialyear, some states have stepped up their institutions or reaching consumersexamination of rate hike proposals, in the places people frequent—knocking back a majority of requests hospitals, clinics, grocery stores,and putting millions of dollars back in and retail outlets.consumers’ pockets. • Build trusted relationships.As of March 2012, the justifications According to HRI research, 11% ofand analysis of 186 double-digit rate consumers will purchase insuranceincreases for plans covering 1.3 million through state-based exchanges, andpeople have been posted at HealthCare. few of them expect to purchase theirgov, resulting in a decline in rate insurance without help.43 Buildingincreases.41 New medical loss ratio trust with consumers will be a largerebates are also getting press, as recent factor in influencing purchasingprojections estimate insurers will owe decisions. One way to build trust isemployers and consumers $1.3 billion to meet their expectations aroundin rebates in 2012.42 mobile and digital communicationIn addition to managing reputational and engagement. For an in-depthrisk around future rate increases, discussion on how social media ishealth insurers can take an active changing the nature of healthcare inrole in health system transformation the United States, see Social mediaby sustaining the lower cost trend. likes healthcare. (http://www.pwc.Insurers will want to accelerate efforts com/us/healthsocialmedia)to promote transparency, support • Collaborate with stakeholders.wellness and realign provider roles Insurers should work withand incentives to help support a “new employers to improve value-basednormal” environment. design, influence behaviors, and enhance consumer engagement. Coordinating and analyzing healthcare information will be key to working with providers, as insurers hold vast amounts of patient data that could improve care coordination and allow hospitals and physicians to participate in new government payment systems such as accountable care organizations.41 HealthCare.gov; http://www.healthcare.gov/law/ resources/reports/rate-review03222012a.html.42 Kaiser Family Foundation, “Kaiser Analysis: Estimated Health Insurance Rebates Under the Health Reform Law Total $1.3 Billion in 2012;” 43 PwC Health Research Institute, “Change the http://www.kff.org/healthreform/hr042612nr.cfm. Channel,” 2011. What this means for your business 20
Pharmaceutical and Things to considerlife sciences • Strengthen internal capabilities to conduct health economic studies, pragmatic or “real-world” clinicalWhat they are doing now trials, and better partnerships with diagnostics technologies to improveTo retain its share of medical revenues the pharmaceutical contribution toin an era of constrained growth, health system performance.the pharmaceutical industry mustpursue strategies that highlight the • Team with providers and purchasers.additional value a drug contributes to Demonstrating outcomes requirescare. Emphasis will be on drugs that collaboration on drug design anddemonstrate cost effectiveness, such as payment methodology.helping people avoid additional doctor’s • Drug makers will need tovisits or minimizing adverse effects. continuously apply data andFor an in-depth discussion on pharma, findings back to R&D processes,see Unleashing value: The changing and evolve their evidence-gatheringlandscape for the US pharmaceutical and product launch strategy toindustry. (http://www.pwc.com/us/ emphasize education, adherence,pharmavalue) and population health.Two ways pharmaceutical companiesare accomplishing this are by investingmore in clinical informatics for clinicaltrials and post-marketing studies, andcreating comparative effectiveness orhealth economics analytics teams.As the only segment with promisinggrowth, biologics (and their off-patentequivalent, biosimilars), have becomean increasing share of yearly FDAapprovals and R&D pipelines. Drugmanufacturers are increasingly joiningforces with small biotech companiesand research institutions to create thesemore targeted medicines, but will beunder greater scrutiny to demonstratevalue as drug pricing shifts from volumeto clinical outcomes.Private and government payers arealso investing more in comparativeeffectiveness research, pushing drugmakers to justify new treatments withmeaningful differentiation over existingtreatment options. New drugs mustdemonstrate additional clinical and costbenefits in the new era. For example,a drug that can show a reduction inadditional doctor appointments, orreduce emergency room visits, will beviewed favorably.21 Behind the Numbers 2013
Helen Darling Mary R. GrealyAcknowledgments President and CEO President National Business Group on Health Healthcare Leadership Council Mark Duggan Professor of Business and Public Policy The Wharton School at the University of Pennsylvania What this means for your business 22
The “Behind the Numbers” report includes findings from PwC’s Health and Well-About this research Being Touchstone Survey of more than 1,400 employers from 30 industries, as well as interviews with health plan actuaries and other executives whose companies provide health insurance for 47 million American workers and their families. Each year, PwC’s Health Research Institute provides estimates on growth of private medical costs over the next year and expectations about the leading drivers of the trend. Insurance companies use medical cost trend to help set health plan premiums by estimating what the same health plan this year would cost in the next year. In turn, employers use the information to make adjustments in benefit plan design to help offset any cost increases. The report identifies and explains what it refers to as “inflators” and “deflators” to describe why and how medical cost trend is impacted. “Behind the Numbers 2013” is our seventh report in this series. PwC firms help organizations and individuals create the value they’re looking for.About PwC We’re a network of firms in 158 countries with close to 169,000 people who are committed to delivering quality in assurance, tax, and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com. PwC’s Health Research Institute provides new intelligence, perspectives, andHealth Research Institute analysis on trends affecting all health-related industries. The Health Research Institute helps executive decision makers navigate change through primary research and collaborative exchange. Our views are shaped by a network of professionals with executive and day-to-day experience in the health industry. HRI research is independent and not sponsored by business, government, or other institutions.
Kelly Barnes Tiffany BredesonHealth Research Institute Partner, Health Industries Leader Manager 214 754 5172 612 596 6417 firstname.lastname@example.org email@example.com David Chin, MD Jack Rodgers, PhD Principal (retired) Managing Director, Health Policy 617 530 4381 Economics firstname.lastname@example.org 202 414 1646 email@example.com Ceci Connolly Managing Director Kristen Soderberg 202 312 7910 Senior Associate, Health Policy firstname.lastname@example.org Economics 202 346 5143 Sandy Lutz email@example.com Managing Editor 214 754 5434 Britt Pinci firstname.lastname@example.org Research Analyst 617 530 4099 Benjamin Isgur email@example.com Director 214 754 5091 Slate Taylor firstname.lastname@example.org Research Analyst 678 419 1064 Serena Foong email@example.com Senior Manager 617 530 6209 Emily Korval firstname.lastname@example.org Research Analyst 646 471 6539 Christopher Khoury email@example.com Senior Manager 202 312 7954 firstname.lastname@example.org Reatha Clark Rick JudyHealth Research Institute Partner Principal 678 419 1014 310 617 5567Advisory Team email@example.com firstname.lastname@example.org Michael Thompson Principal 646 471 0720 email@example.com