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Medical Cost TrendBehind the Numbers 2017

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HFMA

PwC28 July 2016

Table of contents

3Medical Cost Trend

Topic

The 101 – medical cost trend and our research

Putting trends in perspective

Factors affecting the 2017 spending growth rate - Inflators

Factors affecting the 2017 spending growth rate - Deflators

What this means for your business

PwC28 July 2016

About our report

5Medical Cost Trend

• Conducted interviews with 12 health plan executiveswhose companies cover more than 100 million people

• Conducted interviews with internal PwC subject matterspecialists covering payer, provider, pharma, andemployer sectors

• Included results from PwC’s 2016 Health and Well-beingTouchstone Survey of more than 1,100 employers from36 industries, HRI consumer survey of more than 1,000US adults, and an HRI survey of Health Plan Alliancemembers

• Analyzed government data, academic journal articles,industry trend reports and conference proceedings indetermining the 2017 growth rate

PwC28 July 2016

The 101: what is medical cost trend?

6Medical Cost Trend

DefinitionProjected percentage increase in the cost to treat patients, orhealthcare spending growth rate

ImportanceThe projection is used by insurance companies and employers tocalculate health plan premiums for the coming year

Influencers

Changes in the price of medical products and services, known as unitcost inflation

Changes in the number of services used, or per capita utilizationincreases

PwC28 July 2016

PwC’s HRI projects a 2017 medical cost trend of 6.5%—level with the 2016 projection

7Medical Cost Trend

11.9%

9.9%

9.2% 9.0% 9.0%

8.5%

7.5%

6.5% 6.8%

6.5%

6.5%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

HR

I’s

pro

jecte

dm

ed

ica

lco

sttr

en

d

6.5%

Source: PwC Health Research Institute medical cost trends 2007–2017

PwC28 July 2016

Recent trends in health insurance costs are at historicallows

8Medical Cost Trend

Growth in health expenditures for private employers from 1961-2015

Source: PwC Health Research Institute analysis based on CMS National Health Expenditures Private Health Insurance Component data

Linear trendFour-year movingaverage

Annual trend

0%

5%

10%

15%

20%

25%

1961 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

An

nu

alg

row

thin

pri

va

teh

ea

lth

insu

ran

ce

sp

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din

g

PwC28 July 2016

-4%

0%

4%

8%

12%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

An

nu

alg

row

thPrice, not utilization, is the historical force behindmedical cost trend

9Medical Cost Trend

Components of growth in healthcare costs from 2001-2015

Overall healthcare cost:Employer Health Benefit Costs

Price:PwC Benefit Price Index

Utilization:PwC Utilization Index

Source: PwC Health Research Institute analysis of Bureau of Labor Statistics data

PwC28 July 2016

Roughly half of employer health costs stem from hospital inpatientand outpatient services; the prescription drug share is small butincreasing

10Medical Cost Trend

Share of employer healthcare spending in 2007 and projected 2017

Source: Milliman Medical Index for 2007 and PwC Health Research Institute projections of 2017 medical spending based on the2016 Milliman Medical Index. http://us.milliman.com/insight/?pfld=2413

36%

30%

16%14%

4%

30% 30%

19%17%

4%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Physician Inpatient Outpatient Pharmacy Other

Sh

are

of

em

plo

yer

he

alth

be

ne

fits

Medical index – components of spending

2007 Share (Milliman) 2017 Share (PwC Projection)

-17%

0%

19%21%

0%

% Change since 2007

PwC28 July 2016

Feedback from ACA health insurance exchanges

11Medical Cost Trend

• The ACA exchanges attracted strong enrollment in theirfirst few years

• Premiums are similar to or lower than those forcomparable employer plans

Adoption of privateexchanges by

employers

• Lower cost of narrow networks is appealing toemployers

• Acceptance of narrow networks by exchange enrolleesmay encourage employers to introduce them

Adoption of narrownetworks by

exchange enrollees

• Medicaid expansion can help reduce employer costs byone-half to one-third in states where uninsured areenrolled in both Medicaid and the exchanges

Employer cross-subsidization may

decline in Medicaidexpansion states

PwC28 July 2016

Inflator #1: Convenience has a cost

13Medical Cost Trend

Use of retail clinics is increasing along with the number of places for treatment

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2011 2012 2013 2014 2015 2016

Pe

rce

nt

of

co

nsu

me

rsw

ho

use

reta

ilclin

ics

Nu

mb

er

of

reta

ilclin

ics

Source: PwC Health Research Institute Consumer Survey and Convenient Care Association data

24%

36%

40%

Projected

PwC28 July 2016

Inflator #2: The share of employer health spending onmental health services is increasing

14Medical Cost Trend

Mental health spending as a share of total employer health spending from 2005-2013

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

2005 2006 2007 2008 2009 2010 2011 2012 2013

Me

nta

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ea

lth

sp

en

din

ga

sa

sh

are

of

tota

lem

plo

yer

he

alth

sp

en

din

g

Source: PwC Health Research Institute analysis based on Medical Expenditure Panel Survey data

Annual Increase

Linear Trend

PwC28 July 2016

Inflator #2: The new focus on mental health parity willlikely increase utilization in 2017

15Medical Cost Trend

2008Mental Health Parity Act amendedto require full parity. Insurancecompanies must treat mental healthconditions on an equal basis withphysical conditions when healthpolicies cover both

March 2016CMS finalizes mental health andsubstance use disorder parity rulefor Medicaid and Children’s HealthInsurance Program

October 31, 2016The interagency task force willbe responsible for delivering areport to the President

2010The Patient Protection andAffordable Care Act was signedwhich required all health insuranceplans to include coverage for thetreatment of mental health andsubstance use disorders

March 2016President Obama announces a newtask force on mental health parity–aimed at ensuring that people withmental illnesses and substanceabuse problems don’t facediscrimination in the healthcare system

Source: PwC Health Research Institute analysis, Kaiser Family Foundation, Kaiser Health News and Health Affairs

2005 2010 2015 Mar. 2016 Sep. 2016June 2016 Dec. 2016

Timeline of mental health parity legislation

PwC28 July 2016

Deflator # 1: Interest in high performance networks hasincreased substantially

17Medical Cost Trend

As more employees push back against high cost sharing due to their inability to paytheir deductibles, employers are exploring other ways to control costs

Alreadyimplemented aperformance basednetwork

Considering theimplementation of aperformance basednetwork

Source: PwC Health Research Institute analysis of PwC’s Health and Well-being Touchstone survey for 2014, 2015 and 2016

3%

6%

9%

34%

37%

43%

'14

'15

'16

'14

'15

'16

Percent of employers

PwC28 July 2016

Deflator # 2: PBMs win price concessions

18Medical Cost Trend

The approval of a second specialty medication within a treatment class can givePBMs leverage to extract sizable rebates

Specialty drug M,a direct competitor,gains FDA approval

$57,000Discount = 5%Specialty drug Z, afirst-in-classbreakthrough therapy,has a list price of$60,000 for a courseof treatment$57,000

$36,000Discount = 40%PBMs act to limitformulariesto one treatment,lowering the netcost of drug Z

Source: PwC Health Research Institute

PwC28 July 2016

Specialty drugs are loosening their grip on growth

19Medical Cost Trend

The impact of Hepatitis C therapy on medical cost trend declines after 2016 as thenumber of patients treated declines

0.71%

0.10%0.15%

-0.23%

-0.10% -0.08% -0.06% -0.04%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

2014 2015 2016 2017 2018 2019 2020 2021

Nu

mb

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of

pa

tie

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tre

ate

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Ch

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ine

mp

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rm

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eto

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era

py

Annual change in medical cost trend

Source: PwC Health Research Institute estimate based on National Health and Nutrition Examination Survey and 2012 Truven Health Analytics claimsdata from employers

Change in medical costs

Annual number ofpatients treated

Impact of Hepatitis C therapy on employer medical costs

PwC28 July 2016

The impact of a new specialty drug entering the marketcan vary greatly depending on price and volume of sales

20Medical Cost Trend

6.5% 6.5% 6.5%

0.7%0.0% 0.2%

0%

1%

2%

3%

4%

5%

6%

7%

8%

High Cost, High Volume Low Cost, High Volume High Cost, Low Volume

An

nu

al%

ch

an

ge

inth

em

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ica

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nd

Increase from new therapy use Base medical cost trend

Source: PwC Health Research Institute estimate

PwC28 July 2016

Healthcare organizations are looking for new ways toreduce costs as consumerism and value forge ahead

22Medical Cost Trend

1) Realign cost sharing on ambulatory services

2) Consider a high performance network arrangement

3) Evaluate PBM arrangements

1) Considering partnerships with insurers

2) Providing convenience that consumers are demanding

3) Collaborating with PBMs

1) Leveraging alternative therapies

2) Creating a framework for high performance networks

3) Reviewing PBM relationships

1) Developing an effective pricing strategy

2) Discussing new products with insurers and PBMs early

3) Considering the impression made by pricing decisions

Employers

Healthcare providers

Health insurers

Pharma and life sciences

Thank you!

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To download the full report, please visit: www.pwc.com/us/medicalcosttrends

Benjamin IsgurLeader, PwC Health Research Institute214 754 5091benjamin.isgur@pwc.com@bisgur