medical cost trend: behind the numbers 2017 - pwcfigure 4: pwc’s hri projects a 2017 medical cost...

Medical Cost Trend:Behind the Numbers 2017

June 2016

Table of contents

The heart of the matter 2

Putting trends in perspective 3Growth in employer health cost is at historic lows 3Decline in utilization trend puts more focus on price trend 4Not all components have the same impact on health benefit costs 5

Medical cost trend in 2017 6

Factors affecting 2017 medical cost trend 7Inflator #1: Convenience has a cost 7Inflator #2: Increased access for behavioral health 8Deflator #1: High performance networks 9Deflator #2: PBMs get aggressive 10What this means for your business 13Feedback from ACA health insurance exchanges 14

2 Medical Cost Trend: Behind the Numbers 2017

The heart of the matter2017 will be a year of equilibrium for medical costs. The forces that increase health costs are being tempered by a demand for value in the New Health Economy. Compared with a period of double-digit trend growth in the last decade, flat growth may feel like a win to health industry leaders.

PwC’s Health Research Institute (HRI) projects the medical cost trend to be the same as the prior year – a 6.5% growth rate for 2017. After likely changes in benefit plan design, such as higher deductibles and co-pays, the net growth rate is expected to be one percentage point lower at 5.5%. For comparison, the net growth rate projection in 2016 was two percentage points lower due to more employer interest in cost sharing.

HRI’s analysis measures spending growth for the 155 million Americans covered by employer-sponsored health insurance. This analysis does not cover government-sponsored or nongroup insurance.

Forces inflating medical cost trend stem from increases in access to care, particularly primary and behavioral health services. Convenient care settings, such as retail clinics, provide consumer satisfaction at a low unit cost. Yet their success has led to greater utilization, and more spending.

At the same time, consumers will likely have greater access to behavioral health services thanks to renewed attention from regulators and employers. But expanded treatment options for mental health, though potentially reducing health costs in the long term, may inflate next year’s spending growth.

Yet these increases will be tempered by deflators, all pushes for value in the New Health Economy. Pharmacy benefit managers (PBMs) are employing new and more aggressive strategies in their contracts with drug makers for bulk discounts and pricing. These moves will help keep overall drug cost trends in check next year. We also expect that political and public pressure will tamp down the largest drug cost increases.

Insurers and employers also are deploying more aggressive network strategies. As the continuous shift to higher cost sharing starts to wane, we expect employers to explore new benefit strategies that change the focus from cost sharing to leveraging high-performing provider networks with higher quality and lower costs.

And though specialty drug costs outpace traditional drug spending trends, the costs of these new cures are not growing as fast as in previous years when the cost of new Hepatitis C drugs caught the market off-guard. Drug spending is still a relatively small portion of overall health spending and, as such, concerns of ever-increasing cost growth from new cures may trigger false alarms. 2017 will likely see slower specialty drug cost growth relative to last year.

HRI’s Medical Cost Trend: Behind the Numbers 2017 projection of a flat growth rate raises critical issues. There are signs that the decade’s slowing medical cost growth rate could tick back up as new healthcare access points increase utilization. At the same time, employers are turning to a largely untested benefit strategy of relying on narrow provider networks to bring prices down.

As a result, 2017 will be a tough balancing act for the health industry. Healthcare organizations must simultaneously increase access to consumer friendly services while decreasing unit cost. Employers, worried that this current trend is at an inflection point that could turn back up, will demand more value from the health industry. When medical growth outpaces general inflation, a flat trend is not good enough.


Putting trends in perspectiveA historical perspective offers a wider lens to better understand the 2017 medical cost trend. This long-term view shows us that employer healthcare costs have fluctuated over the years in cycles, how price and utilization interplay in the cost equation, and which parts of the health system are the largest and fastest-growing components of cost.

Growth rates in employer health cost are at historic lows

Since 1960, the federal government has tracked historical cost information for private health insurance in its National Health Expenditures database.1 During those 56 years, this measure has risen and fallen in cycles. During these cycles, premium trends

Source: PwC Health Research Institute analysis based on CMS National Health Expenditure Private Health Data

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Figure 1: Recent trends in health insurance costs are at historical lows

tend to peak after several years of double-digit increases, fall for several years, hit a trough and then rebound back to double digits (see Figure 1).

While each cycle tends to run about 10 years, the trending pattern varies from one cycle to the next.2 For example, since the Great Recession ended in 2009, the trend in premium costs has risen and fallen without consistent movement toward another

Source: PwC Health Research Institute analysis based on CMS National Health Expenditure Private Health data3

peak. Compared with the past six decades, healthcare costs appear to be in a prolonged period of relatively low growth: The average trend from 1984 to 1994 was 10.0%; from 1994 to 2004, 7.9%, and from 2004 to 2014 (a time that includes the Great Recession and reflects fewer people enrolled in employer plans), just 4.2%.


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OVERALL HEALTHCARE COST:Employer Health Benefit Costs

PRICE:PwC Benefit Price Index

UTILIZATION:PwC Utilization Index

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Figure 2: Price, not utilization, is the historical force behind medical cost trend

Components of growth in healthcare costs 2001-2015

Decline in utilization trend puts more focus on price trend

Healthcare cost can be broken down to the two simplest components—the unit price of services and the volume and intensity of use of those services, known as utilization. Understanding trends in these components is key to understanding changes in overall spending: Are costs rising or falling? Are consumers using more or fewer services and products?

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

The overall healthcare trend, as measured by employers benefit cost, can be broken into price based on the Consumer Price Index (CPI) for the various components of health benefit costs and a residual, which includes utilization and other non-price changes (see Figure 2).4

In the early 2000s, price and utilization were both major contributors to healthcare trend growth. Since then, the utilization trend has declined while price trend grew. Future reductions in medical cost trend growth will require a continued focus on prices but also delivery and access changes that might impact utilization.


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Figure 3: Roughly half of employer health costs stem from hospital inpatient and outpatient services; the prescription drug share is small but increasing

Not all components have the same impact on health benefit costs

Healthcare costs also can be broken into components such as hospital inpatient and outpatient services, physician services and prescription drug spending. Not all components contribute equally to employer costs (see Figure 3). Roughly half of all medical costs come from hospital spending: 30% from hospital inpatient and 19% from hospital outpatient. Physicians account for about another 30% and prescription drugs, 17%.5

It is important to understand the weight of these components to put health spending in context. Prescription drug spending is a prime example since individual drug costs can be high enough to garner national media attention but, as a whole, are a relatively small portion of total health spending: a 10% jump in the growth in prescription drug spending would increase the overall medical cost trend by about 1.7%, for instance.6

Source: Milliman Medical Index for 2007 and PwC Health Research Institute projections of 2017 medical spending based on the 2016 Milliman Medical Index. http://us.milliman.com/insight/?pfld=2413


Medical cost trend in 2017

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Figure 4: PwC’s HRI projects a 2017 medical cost trend of 6.5%—level with the 2016 projection

HRI’s projected medical cost trend 2007–2017

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

PwC’s Health Research Institute projects 2017’s medical cost trend to be 6.5%—level with the trend for 2016 (see Figure 4). Insurance companies use medical cost trend to help set premiums by estimating what the same health plan this year will cost the following year.

Benefit design changes typically hold down spending growth by reducing utilization of services through cost sharing. The net growth rate in 2017, after accounting for benefit design changes such as higher deductibles and narrow provider networks, is expected to be 5.5%.

For this research, HRI interviewed industry executives, health policy experts and health plan actuaries whose companies cover more than 100 million employer-sponsored members. HRI also analyzed results from PwC’s 2016 Health and Well-being Touchstone survey of more than 1,100 employers from 37 industries, and PwC’s national consumer survey of more than 1,000 US adults.

This projection is based on HRI’s analysis of medical costs in the employer insurance market, which covers about 155 million active employees.7

What is Medical Cost Trend?

Medical cost trend is the projected percentage increase in the cost to treat patients from one year to the next. While it can be defined in several ways, this report estimates the projected increase in per capita costs of medical services that affect commercial insurers and large, self-insured businesses. Insurance companies use the projection to calculate health plan premiums for the coming year. For example, a 10% trend means that a plan that costs $10,000 per employee this year would cost $11,000 next year. The cost trend, or growth rate, is influenced primarily by:

• Changes in the price of medical products and services, known as unit cost inflation

• Changes in the number or intensity of services used, or changes in per capita utilization


Factors affecting 2017 medical cost trendConvenience of care and more behavioral health parity will put upward pressure on the healthcare spending growth rate in 2017.

The proliferation of convenient ways to get care—such as retail clinics and urgent care centers—has led to higher utilization. And that is impacting medical cost trend. There will be more than 3,000 retail health clinics in the US by 2017.8 Forty percent of consumers will seek care from a retail clinic in 2016; 88% said they are likely to seek treatment at those sites in the future9 (See Figure 5).

In addition to retail clinics, there are 9,300 walk-in, stand-alone urgent care centers in the US, and 50–100 new clinics open every year.10 According to Robin Gelburd, president at FAIR Health, Inc. a not-for-profit organization that tracks health costs, “Looking at the demographic shift of

site of service, we are seeing younger people use urgent care centers while older individuals use ambulatory care centers and retail clinics.”

Retail clinics aim to be the consumer-friendly alternative to the traditional doctor’s office and a much cheaper site of care than a hospital emergency room. According to Brian Marcotte, president and CEO at the National Business Group on Health, “as we expect employees to be more engaged consumers, they will demand more consumer-like experiences such as convenience, after-hours care and easy access that is cost effective.” In addition, 74% of clinicians believe that retail clinics have had a positive result on access to care.11

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Inflator #1: Convenience has a cost

Figure 5: Use of retail clinics is increasing along with the number of places for treatment

Source: PwC Health Research Institute Consumer Survey and Convenient Care Association data13

Recent research shows that, even though retail clinic prices are lower than many other sites of care, the ubiquitous locations and convenient access is increasing utilization and incrementally inflating medical cost trend. A recent Health Affairs study found that the easier access to retail clinics increased medical costs for low-acuity conditions by 21% annually.12

Clinics could be drawing people who may have forgone care in the past, or they could be leading some to seek care in more than one place. Even if higher use of these alternative sites reduce overall spending in the future, the savings may not reduce the short-term cost of more visits. Health insurance benefit design and the right mix of cost sharing may resolve this in future years.


“Many behavioral health insurance systems—with their complicated rules and claims processes—seem deliberately designed to discourage use by both patients and service providers,” said Ken Dolan-Del Vecchio, a vice president in Prudential Financial’s health and wellness organization. “The results are predictable. Clinicians decline network participation and plan participants receive limited treatment or no treatment at all. We all deserve a more effective system of care.”

But that is changing. A raft of new efforts aimed at enforcing the Mental Health Parity and Addiction Equity Act of 2008 are under way to make it easier to get care (see Figure 7). As these changes go into effect, they will unlock pent-up demand, inflating medical cost trend in the short term, but should also help reduce costs in the long term.

In years past, behavioral health has been a back burner issue but now it is key to health status and health spending. The mental health share of employer health benefit costs is increasing. Behavioral healthcare now has the regulatory push and mainstream recognition to be a bigger part of employer’s health benefits—and with expanded access comes new costs (see Figure 6).

For employers, behavioral health is often closely connected to their employees’ overall health. Sixty-eight percent of people with mental illness have chronic health conditions such as diabetes and heart disease.14 But employees have long had a hard time gaining access to mental health care and getting it paid for.

A National Alliance of Mental Illness study in 2014 found that nearly one-third of consumers or their family had been denied mental health care on the basis of medical necessity, which was twice the denial rate for general medical care.15

Inflator #2: Increased access for behavioral health

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Figure 6: The share of employer health spending on mental health services is increasing

Source: PwC Health Research Institute analysis based on Medical Expenditure Panel Survey data16

Timeline of mental health parity legislation

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2008Mental Health Parity Act amended to require full parity. Insurance companies must treat mental health conditions on an equal basis with physical conditions when health policies cover both

2010The Patient Protection and Affordable Care Act was signed which required all health insurance plans to include coverage for the treatment of mental health and substance use disorders

March 2016CMS finalizes mental health and substance use disorder parity rule for Medicaid and Children’s Health Insurance Program

March 2016President Obama announces a new task force on mental health parity—aimed at ensuring that people with mental illnesses and substance abuse problems don’t face discrimination in the health care system

October 31, 2016The interagency task force will be responsible for delivering a report to the President

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Figure 7: The new focus on mental health parity will likely increase utilization in 2017

Source: Source: PwC Health Research Institute analysis, Kaiser Family Foundation, Kaiser Health News and Health Affairs17

Mental health spending as a share of total employer health spending


Employers may have squeezed all they can from increased cost sharing, such as offering high deductible plans. In the last three years, the percentage of employers offering high deductible plans has increased by one half. Sixty-three percent of employers offer a high deductible plan with a health savings account and 25% offer a high deductible plan as the only health insurance option to their employees.18

But as more employees push back against high cost sharing due to their inability to pay their deductibles, employers are exploring other ways to control costs, such as high performance networks that have more limited provider choices and may feature outcomes-based payments.

Forty-three percent of employers are considering implementing this type of network in 2016, up from 37% the prior year (see Figure 8). High performance networks can reduce

But provider networks are regulated by state insurance and health laws to ensure networks aren’t too restrictive. To be successful, networks need to be designed and implemented based on cost, quality and consumer preferences.21 “Having a rich plan doesn’t mean that employers are going to pay the premium for that plan,” said Timothy P. Sullivan, vice president of healthcare affordability at HAP, a Detroit-area health insurer. “This is why we offer a range of benefit plans and funding arrangements. Employees need to be educated about the benefits of a high-performing network.”

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Figure 8: Interest in high performance networks has increased substantially

costs by as much as 35%, compared with broader, more inclusive provider networks.19 The balance is lower cost for narrower provider networks with fewer choices of doctors and hospitals. “There is a cost for having the increased access,” said Greg Malone, senior actuarial director at Cigna.

Employers are also looking to the lessons learned from the Affordable Care Act’s (ACA) public exchanges, where half of the plans offered to consumers are considered narrow networks.20 “The value I see from narrow networks is the ability to negotiate a better rate with providers and monitor the quality of care,” said Mary Grealy, president of the Washington, D.C.-based Healthcare Leadership Council, a coalition of healthcare chief executives. “If consumers are shopping primarily on premium cost, narrow networks are a magnet, especially for those that are on the exchanges.”

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

Deflator #1: High performance networks

Other emerging trends may cause the scale to equalize. Employers shifting to more high performing networks and aggressive PBM strategies will put downward pressure on the growth rate.


Pharmacy benefit managers are aggressively negotiating drug costs, in part, because their employer clients have more of an appetite for narrow formularies, and, in part due to public and political pressures to hold down drug prices. When there is competition, PBMs can win bigger rebates that act as a counterweight to higher drug spending.

The impact of specialty drug spending on overall medical spending soared in 2014 primarily due to the sales of first-in-class treatments for Hepatitis C. But with the approval of a competing treatment in December 2014, PBMs moved aggressively to negotiate larger rebates.

As a result of the new competition in Hepatitis C drug treatments, PBMs at CVS/Caremark and Express Scripts narrowed their formularies to exclusively feature either Gilead Sciences’ drugs Harvoni and Sovaldi or AbbVie’s Viekira Pak. And with competition comes pricing discounts: Gilead’s expected rebates more than doubled across all payers for 2015.22

In the past, employers and their PBM vendors have not had much appetite for limited drug formularies, but now they are seeing their PBMs as a way to control costs. Many of the new prescription drugs that are coming on market are not arriving alone but at

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PBMs act to limit formularies to one treatment, lowering the net cost of drug Z

Specialty drug Z, a first-in-class breakthrough therapy, has a list price of $60,000 for a course of treatment

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Specialty drug M, a direct competitor, gains FDA approval

Figure 9: PBMs win price concessions

Source: PwC Health Research Institute

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

close to the same time as competitors’ drugs. The availability of a competitor product makes it easier to negotiate more attractive discounts if employers are willing to narrow their formularies to one treatment option (see Figure 9).

The future of PBM contracting points toward paying for results and cures, not the volume of drugs dispensed. The contracts and terms being negotiated may be more complex compared to simple volume discount models. Companies should develop strategic plans for sourcing and procuring drugs. The need for an alternative to the tiered formulary has also been created by coupons that

Deflator #2: PBMs get aggressive


companies issue to reduce out-of-pocket costs and thwart the incentives for patients to use the less costly, preferred drugs. John Sivori, president at Health Net Pharmaceutical Services explains, “Drug companies are not going away. How you partner with drug makers for the long term is how you improve your cost trend.”

Specialty drugs are loosening their grip on growth

Specialty drugs, a big contributor to spending growth in years past, are not expected to have the same impact in 2017. This is because there are no specialty blockbusters expected in 2017, and the impact of the Hepatitis C drugs has ebbed.23

This was not the case in 2014 when the introduction of new drug treatments for Hepatitis C had increased employer healthcare costs by nearly one percentage point (see Figure 10). Marcotte, at the National Business Group on Health, says “If Hepatitis C medications were $10 per pill over a 20-year period, no one would blink. But the costs were so concentrated in a short time, it created a fire storm over cost and value.”

But now, Hepatitis C therapies’ contribution to medical cost growth is shrinking partly because competition between drug brands led to significant discounts in 2015. Also, the high number of patients receiving treatment in 2014, 2015, and 2016 shrunk the remaining population still living with Hepatitis C.

Specialty drugs have been an inflator of spending for the past two years, but the trend has leveled and may have a smaller impact on medical cost trend growth in 2017.

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Figure 10: The impact of Hepatitis C therapy on medical cost trend declines after 2016 as the number of patients treated declines

Source: PwC Health Research Institute estimate based on National Health and Nutrition Examination Survey and 2012 Truven Health Analytics claims data from employers24


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Figure 11: The impact of a new specialty drug entering the market can vary greatly depending on price and volume of sales

Source: PwC Health Research Institute estimate26

“Specialty pharmacy cost is the headliner in 2016, but better management and pricing should moderate this trend in 2017,” said Mick Diede, chief actuary for Kaiser Foundation Health Plan.

Despite the extensive media coverage about high-priced specialty drugs, they do not always have a big impact on medical cost trend. It depends on the combination of price and volume—and it takes a lot of both to increase medical cost trend substantially (see Figure 11).

No drug with a similar impact to Hepatitis C is known to be in the approval pipeline for 2017. Last year,

some analysts pointed to the new PCSK9 anti-cholesterol drugs as the next Hepatitis C tsunami, but spending on the first entries in the class has been light to moderate.25

“Hepatitis C cost trend is declining, but everyone is still asking what the next blockbuster drug is – even though it may not be as prevalent as the new Hep C drugs, with only low frequency and high severity of treatments,” according to Greg Malone, senior actuarial director at Cigna. While the pipeline has 200+ biologics under development and testing, no one knows whether any one of them will become a budget buster.


EmployersWhile health benefit costs are growing at a rate that is low compared to historical trends, the growth in premiums is still outpacing the growth in wages. Health benefit costs will be unsustainable in the long run. Employers are looking for new ways to reduce costs as employees push back against further cost sharing.

Things to consider Realign cost sharing on ambulatory services. Given the rapid growth in convenient retail clinics and telemedicine, employers should consider reviewing cost sharing for these services. Since recent evidence suggests that these new points of entry are adding to benefit costs, plan enrollees could be asked to pay larger shares of costs for this added “convenience.”

Consider a high performance network arrangement. As an alternative to more cost sharing, employers may want to use a more limited network of providers that are contracted to deliver high-quality care at affordable prices. These arrangements will require robust employee education to explain the trade-offs between network sizes and costs.

Evaluate PBM arrangements. Employers should evaluate the abilities of PBMs to negotiate drug discounts and optimize utilization of the highest value drugs in each therapeutic class. In addition, they should consider combining management of prescription drugs and management of other medical services to avoid missing opportunities for savings. For example, adherence to prescription

drugs to treat chronic conditions, such as diabetes, may keep medical costs in check.

Healthcare providersTraditional healthcare providers are facing competition from a multitude of new sites of care and consumer demand for convenience. Many providers are pursuing consolidations or affiliations with other health systems to grow market share. Healthcare providers also are struggling to help consumers manage their high levels of cost sharing.

Things to consider Consider partnerships with insurers. What insurers want are “high performance” healthcare providers who deliver quality care efficiently and avoid unnecessary care. Focus on initiatives to reduce the unit cost of providing services while partnering with insurers to manage utilization to ultimately increase market share. It is important to align incentives with insurers so efficiencies result in shared savings.

Provide convenience. Patients are moving rapidly to more convenient sites of care. To keep costs in check, these visits should be substitutes for more expensive care and not extra, unnecessary appointments. To avoid fragmenting patient care, health systems should provide their own retail clinics and telemedicine outlets, or partner with existing ones to direct patients needing more intensive care to their hospitals and clinics.

Collaborate with PBMs. As healthcare providers take on more risk for patient outcomes and managing the cost of care, they should work with PBMs

What this means for your business

to identify higher-value treatments. PBMs can help providers with patient adherence to drug regimens that manage chronic disease and avoid more costly care that providers may be at risk for.

Health insurersInsurers are still reeling from the sudden jump of prescription drug costs in 2014. But now, under pressure from employers to reduce costs, they need to transform their business models and steer patients to high performance providers while providing appropriate transparency to the consumers.

Things to consider Leverage alternative therapies. High-priced specialty drugs have few generic alternatives. But less-costly biosimilar alternatives should be available in the next few years. Although biosimilar and generic specialty treatments may not offer savings as large as generics for traditional drugs, employers and insurers should explore building them into their plans.

Create a framework for high performance networks. Companies should consider the total cost of care, provider quality, and consumer preference when designing and implementing high performance networks that may contract with fewer providers.27 To control costs, health insurers should collaborate, explore joint ventures and offer risk-sharing arrangements with healthcare providers.

Review PBM relationships. PBMs and insurers can join forces to better understand the pipeline of upcoming drugs and create plans for managing


their cost and utilization. There are a number of levers they can engage jointly, from formulary design to drug distribution and administration to adherence programs to outcomes-based pricing. This is particularly critical for the specialty drugs in areas such as oncology where innovative, complex and expensive diagnostics and treatments are rapidly coming to the marketplace. HRI also anticipates that insurers will continue to evaluate, on an ongoing basis, which of the PBM functions they will continue to insource versus outsource.

Pharmaceutical and life sciencesThe need for innovative, cost effective medicines continues to rise as regulators, payers, healthcare providers and patients demand greater value for money. The need for more transparency and access to information has grown significantly due to high deductible plans and cost

sharing with patients. The reputation of the pharmaceutical industry has been weakened as a result of the high-profile pricing strategies of some manufacturers during the past few years.

Things to consider Develop a pricing strategy that takes into account competitors and price resistance. Manufacturers are being asked to provide large discounts but often are reacting to this by increasing list prices. This can cause public outrage. Companies need a strategy of introducing products with something different from a standard list price, such as outcome-based pricing. Higher prices can be justified when paying for high-value products.

Discuss new products with insurers and PBMs before they come on the market. Patients are more likely to have immediate access to new drugs if insurers have clearly stated policies

Feedback from ACA health insurance exchangesWhat can employers learn from the public exchanges?

The ACA has had a direct impact on employer benefit costs through numerous changes such as dependent coverage for adult children, minimum essential benefits, tax on commercial insurance, the upcoming Cadillac tax, and other regulations. But the overall impact on large employers has been relatively modest thus far.

An interesting question is whether there is a potentially larger impact from the ACA health insurance exchanges themselves even though large employers are not allowed to purchase these exchange plans for their workers. But other mechanisms may lead to feedback loops from the ACA exchanges, including:

when drugs arrive on the market. Health plans will put up less resistance to new products if they can budget for them. This process will go more smoothly when drug manufacturers have already made the case that new products are worth the price.

Consider the impression made by pricing decisions. Major pharmaceutical companies can damage their reputation from pricing decisions even if they can show stockholders big profit gains. Companies with high-priced products should consider what happens to patients who face high cost sharing for the new product. Price increases for existing products should be backed up with a case for why increases beyond normal inflation are justified.

1. Adoption of private exchanges by employers. The ACA exchanges attracted strong enrollment in their first few years despite the initial problems with websites. Moreover, premiums for health insurance plans are similar to or lower than those for comparable employer plans.28 Given the public exchange experience, some employers are considering whether private exchanges for employees would make sense. Thus far, few employers have chosen this avenue. Only 3% of employers have moved active employees to a private exchange and only 19% are currently considering this move—which is down from 28% last year.29 Large employers frequently offer insurance choices already and having an exchange that offers more of the same may not add much.

2. Adoption of narrow networks by exchange enrollees. The lower cost of narrow networks is appealing to employers, but they worry about whether employees will accept narrow network plans. The acceptance of narrow networks by exchange enrollees may encourage employers to introduce them, as a choice or in conjunction with premium incentives. Also, the cost of setting up a network plan for employers is not very high if the insurer has already built one for the state health insurance exchange.

3. Employer cross-subsidization may decline in Medicaid expansion states. Employers, who are ultimately paying for uninsured patients through their payments to providers, should expect their own healthcare costs to fall as the burden of indigent care is cut by half or two-thirds in states where the uninsured are being enrolled both by exchanges and an expanded Medicaid program.


Notes

13. Percentage of individuals who sought treatment, according to PwC Health Research Institute Consumer Surveys 2011 and 2015 with a 2016 projection. Number of Retail Clinics from Convenient Care Association as referenced in Staff Care, “Convenient Care: Growth and Staffing Trends in Urgent Care and Retail Medicine,” 2015, https://www.staffcare.com/uploadedFiles/convenient-care-growth-staffing-trends-urgent-careretail-medicine.pdf.

14. Substance Abuse and Mental Health Services Administration infographic, “Can We Live Longer? Integrated Healthcare’s Promise,” http://www.integration.samhsa.gov/Integration_Infographic_8_5x30_final.pdf.

15. National Alliance of Mental Illness report, “A Long Road Ahead: Achieving True Parity in Mental Health and Substance Use Care,” April 2015, https://www.nami.org/parityreport.

16. PwC Health Research Institute calculation based on Medical Expenditure Panel Survey (MEPS), 2005-2013. Mental health and total expenditures for those with full-year employer coverage and without Medicare.

17. Kaiser Family Foundation, “Timeline: History of Health Reform in the U.S.,” https://kaiserfamilyfoundation.files.wordpress.com/2011/03/5-02-13-history-of-health-reform.pdf. Jenny Gold, “President’s Task Force Aims To Help End Discrimination In Mental Health Coverage,” March 31, 2016, http://khn.org/news/presidents-task-force-aims-to-help-end-discrimination-in-mental-health-coverage/?utm_campaign=KHN%3A+Daily+Health+Policy+Report&utm_source=hs_email&utm_medium=email&utm_content=27901924&_hsenc=p2ANqtz-_JS804s68aVgpBSJEBdu_se4qWyv2pCljs_BNT7TKueHVM2fZ6YS64SJd6w-kFThBZ7c3Y6lWA-QXz8fiqNeDBghxiQg&_hsmi=27901924 “Enforcing Mental Health Parity. Five years after the Mental Health Parity and Addiction Equity Act took effect, access to equal benefits and qualified providers remains elusive for many insured Americans”, Health Affairs health policy brief, November 9, 2015 http://healthaffairs.org/healthpolicybriefs/brief_pdfs/healthpolicybrief_147.pdf.

18. PwC Health Research Institute analysis of PwC Health and Well-being Touchstone Survey for 2016.

19. Joyjit Saha Choudhury, Jayanth Godla, Jennifer Yaggy, John Andrewes, “High-performance health networks: A methodical approach creates a right to win,” Strategy&, July 15, 2015, http://www.strategyand.pwc.com/reports/high-performance-health-networks.

20. Bruce Japsen, “Half Of Obamacare Choices Are HMOs Or Narrow Network Plans,” Forbes, January 13, 2016, http://www.forbes.com/sites/brucejapsen/2016/01/13/half-of-obamacare-choices-are-hmos-or-narrow-network-plans/#2e657d141b78.

21. Joyjit Saha Choudhury, Jayanth Godla, Jennifer Yaggy, John Andrewes, “High-performance health networks: A methodical approach creates a right to win,” Strategy&, July 15, 2015. http://www.strategyand.pwc.com/reports/high-performance-health-networks.

22. Ed Silverman, “What the ‘Shocking’ Gilead Discounts on its Hepatitis C Drugs Will Mean,” Wall Street Journal blog, February 4, 2015, http://blogs.wsj.com/pharmalot/2015/02/04/what-the-shocking-gilead-discounts-on-its-hepatitis-c-drugs-will-mean/; Adam, J. Fein, “What Gilead’s Big Hepatitis C Discounts Mean for Biosimilar Pricing,” Drug Channels, February 5, 2015, http://www.drugchannels.net/2015/02/what-gileads-big-hepatitis-c-discounts.html.

23. PwC Health Research Institute analysis based on estimates reported by Express Scripts 2015 Drug Trend Report (March 2016), Truven Health Analytics and the National Health and Nutrition Examination Survey (NHANES)..

1. US Centers for Medicare and Medicaid Services, “Historical” web brochure, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical.html.

2. Smoothing the trends over the 55-year period, by a 4-year moving average, results in the red line curve with distinct cyclical patterns. Using the smoothed data, distinct peaks can be seen in the late 1970s, early 1990s, and early 2000s with a mini-peak around 1971–72. Similarly, distinct troughs can be discerned in 1968, 1987, and 1997, with a mini-trough in 1974.

3. PwC Health Research Institute calculations based on CMS Private Health Insurance component of National Health Expenditures, 1961-2014; PwC Health Research Institute estimate of private insurance payments in 2015 based on CMS estimate for 2015, adjusted for CMS changes in actuals in 2014 compared with forecasts for 2014.

4. Prices from the Bureau of Labor Statistics Consumer Price Index components and the Bureau of Labor Statistics Employer Cost Index for health benefit costs. The total trend in employer health benefit costs (as measured by the Bureau of Labor Statistics Employer Cost Index) can be broken into price and utilization components. The rest of the trend, which we labeled, “Utilization Trend” in the figure, includes both traditional utilization as well as changes in prices not captured by the price trend. This includes utilization, but also may include measurement errors in the CPI price component, declining numbers of workers with health benefits and less comprehensive health insurance.

5. PwC Health Research Institute estimates for 2017 are based on medical cost spending data obtained from the 2016 Milliman Medical Index (MMI) and the annual rate of increase in costs by component of medical care from 2015 to 2016. http://us.milliman.com/uploadedFiles/insight/Periodicals/mmi/2016-milliman-medical-index.pdf.

6. Specifically, a 10% growth times the share of costs from prescription drugs (0.17) equals 1.7%.

7. “Health Insurance Coverage for People Under Age 65 – Employment based coverage” https://www.cbo.gov/sites/default/files/114th-congress-2015-2016/reports/51385-HealthInsuranceBaseline_OneCol.pdf. See Table 1.

8. Number of Retail Clinics from Convenient Care Association as referenced in Staff Care, “Convenient Care: Growth and Staffing Trends in Urgent Care and Retail Medicine,” 2015, https://www.staffcare.com/uploadedFiles/convenient-care-growth-staffing-trends-urgent-care-retail-medicine.pdf.

9. PwC Health Research Institute Consumer Insights Survey 2015 questions: “How often did you seek healthcare treatment in a retail medical clinic?” and “How likely are you (or someone in your household) to seek treatment at the retail medical clinic in the future?” Response choices were: very likely, somewhat likely, not very likely, and not at all likely. Percentage represents the sum of very likely and somewhat likely.

10. American Academy of Urgent Care Medicine web article, “Future of Urgent Care,” http://aaucm.org/about/future/default.aspx.

11. PwC Health Research Institute Clinician Survey 2015 question: “In your opinion, are new, non-traditional care venues (e.g. retail clinics, concierge medicine services, on-demand telehealth services, etc.) having a positive or negative effect on access to care?”

12. Specifically, the spending for low-acuity conditions was increased by $14 per user relative to the $66 in spending for nonusers. See J. Scott Ashwood, Martin Gaynor, Claude M. Setodji, Rachel O. Reid, Ellerie Weber, and Ateev Mehrotra, “Retail Clinic Visits For Low-Acuity Conditions Increase Utilization And Spending,” Health Affairs (35): 3449-455, March 2016, http://content.healthaffairs.org/content/35/3/449.full.pdf.


24. PwC Health Research Institute forecast is based on estimates reported by Truven Health Analytics and the National Health and Nutrition Examination Survey (NHANES). Forecasts are based on a population of about 3.3 million patients who have Hepatitis C in the United States, an estimated 35,000 commercial insurance patients who received treatment per year under prior medication regimes and an estimated 16,000 new cases of Hep C contracted each year. The number of patients with commercial insurance treated with new Hep C therapies is assumed to increase to 74,250 in 2014, 91,630 in 2015, and peak at 121,176 in 2016. The costs of Hep C treatment with the new medications are adjusted to reflect discounts and the costs of treatment with older medications but not to reflect savings from lower non-drug medical costs.

25. Dan Mangan, Cholesterol drug cost worries linger even after spending report, August 6, 2015, http://www.cnbc.com/2015/08/06/cholesterol-drug-cost-worries-linger-even-after-spending-report.html.

26. The costs of treatments with all three new medications are adjusted to reflect the costs of treatments with older medications, but not to reflect savings from lower non-drug medical costs. The high cost, high volume drug was assumed to have the same commercially insured patient treated population as Sovaldi in its first year on the market of 2017 – 74,250 patients. The price was set at $100,000 in 2017, an incremental increase in price of $68,152 over an old, existing therapy. The low-cost, high-volume drug was priced at $3,600 per year and was estimated to treat 100,000 patients in 2017. With these stats, the drug would achieve over $1 billion in sales its first year on the market, making it a “blockbuster” drug. The $3,600 price tag was assumed to be an incremental increase in price of $2,453 over an old, existing treatment. The high-cost, low-volume drug was priced at $100,000, just like the “high cost, high volume drug”, but was estimated to treat 24,750 patients in its first year on the market. Also, like the high cost, high volume drug, it was assumed to be an incremental increase in price of $68,152 over an old, existing therapy.

27. Joyjit Saha Choudhury, Jayanth Godla, Jennifer Yaggy, and John Andrewes, “High-performance health networks: A methodical approach creates a right to win,” Strategy&, July 15, 2015. http://www.strategyand.pwc.com/reports/high-performance-health-networks.

28. PwC Health Research Institute found that health exchange plans had 2014 premiums that were somewhat lower than similar employer plans. See PwC, Health insurance premiums: comparing ACA exchange rates to the employer-based market, 2014. http://www.pwc.com/us/en/health-industries/health-research-institute/hri-aca-exchange-insights-report-2016.html.

29. PwC Health Research Institute analysis of PwC Health and Well-being Touchstone survey for 2015 and 2016.


Acknowledgments

John BertkoChief ActuaryCovered California

William CashionChief ActuaryHighmark Group

Douglas (Dee) Clamp, Jr.Staff Vice President and Actuary IIIAnthem

Mick DiedeSenior Vice President and Chief ActuaryKaiser Foundation Health Plan

Paul Fronstin Director Employee Benefit Research Institute

Robin GelburdPresidentFAIR Health

Mary Grealy President Healthcare Leadership Council

Kevin Grozio Vice President Underwriting & Actuarial ServicesFallon Health

Paul Hughes-CromwickHealth Economist and Senior Analyst, Center for Sustainable Health Spending Altarum Institute

Sean Keehan Economist in the Office of the Actuary Centers for Medicare and Medicaid Services

David Lansky President Pacific Business Group on Health

Doug LynchVice President and Chief ActuaryFlorida Blue

Sarah Macderment Chief ActuaryGeisinger Health Plans

Greg MaloneSenior Actuarial DirectorCigna

Brian Marcotte PresidentNational Business Group on Health

John Poisal Deputy Director Centers for Medicare and Medicaid Services

Russell D. Robbins MD MBAChief Medical OfficerFAIR Health

Charles Roehrig, PhDVice President, Health Care Economics; Director, Center for Sustainable Health Spending Altarum Institute

Bill SarniakSenior Markets Actuary and Vice PresidentHighmark Group

John SivoriPresidentHealthNet Pharmaceutical Services

John StensonVice PresidentAetna

Timothy SullivanVice President, Healthcare AffordabilityHAP

Cori UccelloActuary and Senior Health Fellow American Academy of Actuaries

Ken Dolan-Del Vecchio Vice PresidentPrudential Financial’s Health and Wellness Organization

Amy Yao Senior Vice President and Chief ActuaryBlue Shield of CA


About this researchEach year, PwC’s Health Research Institute (HRI) projects the growth of private medical costs in the coming year and identifies the leading drivers of the trend. Insurance companies use medical cost trend to help set premiums by estimating what the same health plan this year will cost next year. In turn, employers use the information to make adjustments in benefit plan design to help offset cost increases. The report identifies and explains what it refers to as “inflators” and “deflators” to describe why and how the healthcare spending growth rate is affected.

This forward-looking report is based on the best available information through May 2016. HRI conducted interviews in February, March and April 2016 with 12 health plan executives (whose companies cover more than 100 million people) about their estimates for 2017 and the factors driving those trends. Findings from PwC’s 2016 Health and Well-Being Touchstone survey of more than 1,100 employers from 37 industries and PwC’s national consumer survey of more than 1,000 US adults are also included. Additionally, HRI analyzed the findings of a survey of more than 10 health plans belonging to the Health Plan Alliance. HRI also examined government data sources, journal articles and conference proceedings in determining the 2017 growth rate.

Behind the Numbers 2017 is our eleventh report in this series.

About Health Research Institute

PwC’s Health Research Institute (HRI) provides new intelligence, perspectives, and analysis on trends affecting all health related industries. HRI 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 businesses, government, or other institutions.

About PwCAt PwC, our purpose is to build trust in society and solve important problems. We’re a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory, and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com.


Other ContributorsCarly Carmody, Jeff Gitlin, Ari Gottlieb, Barbara Gniewek, Sandra Hunt, Frank Lemmon, James McNeil, Michael K. Roberts, Warren Skea, Michael Thompson, Paul Veronneau, Mark Williams, Allan Zimmerman

PwC Health Research Institute

Sarah Haflett Senior Manager [email protected] 267 330 1654

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Jack Rodgers, PhD Managing Director, Health Policy Economics [email protected] 202 414 1646 Kristen Bernie Manager, Health Policy Economics [email protected] 202 346 5134

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© 2016 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please seewww.pwc.com/structure for further details.This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. 172489-2016.

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To have a deeper conversation about how this subject may affect your business, please contact:

Kelly BarnesUS Health Industries and Global Health Industries Consulting [email protected] 754 5172

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medical cost trend: behind the numbers 2017 - pwcfigure 4: pwc’s hri projects a 2017 medical cost...

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