Surprise! Growth Rate of Employer Healthcare Costs Continues to Slowdown — Analysis by Margaret Dick Tocknell

It may be hard to believe but the growth in employer healthcare costs is at a 10-year low. PwC’s annual report  on medical cost trends— including physician, pharma, hospital, and outpatient costs—-projects that healthcare costs in 2017 will increase by 6.5%. That’s down from 11.9% in 2007 when cost increases began a steady decline interrupted only by a slight increase from 2014 (6.5%) to 2015 (6.8%).

The medical cost trend is important to employers and consumers because it influences the cost of health insurance premiums. And no, this decline doesn’t mean that insurance premiums will be lower anytime soon. That 6.5% is still a bit higher than the annual inflation rate so there’s still plenty of work to be done.

In this election year, both candidates have promised to reduce healthcare costs, but as the PwC report points out reducing those costs is complicated work, which has to account for not only the price paid for— but also the utilization of — medical products and services.

“Future reductions in medical cost trend growth will require a continued focus on prices but also delivery and access changes that might impact utilization,” says the report. The analysis, based on health industry interviews and surveys, measures medical spending growth for the 155 million people insured by employer-sponsored plans.

So what is pushing cost upward?

Convenience is a cost inflator. Just a few years ago the healthcare industry was excited by the arrival in big box stores of small retail clinics. With lower costs and convenient locations they can provide an alternative to costly ER (emergency room) visits. In 2011 there were fewer than 1,500 retail clinics nationwide and about 24% of consumers reported visiting one. It’s projected that by the end of 2016 there will be 3,000 retail health clinics and about 40% of consumers will have sought care at one.

So what’s the problem? Well, it’s sort of a damned if you do; damned if you don’t scenario. There’s evidence that the threshold for seeking care at a retail clinic is lower. A sniffle or a sprain may not justify a trip to the ER but a quick stop at a retail clinic is acceptable. So for now this convenience is contributing to increased costs.

But change is brewing and retail clinics may help reduce overall spending in the future. These clinics are already moving into chronic disease management, especially for diabetes and asthma, explains Rick Judy, a principal in PwC’s Health Research Institute, in an e-mail exchange. That’s a step physicians are welcoming with open arms with 75% of primary care docs saying they want retail pharmacists to assist with medication management.

Pent up demand is a cost inflator. For years mental health was something of a step-child to physical health in the health insurance industry with complicated rules for access and more frequent denials for mental health care than for general medical care. But according to the PwC report, employer recognition that mental health is closely related to physical health (68% of people with mental health issues have chronic health conditions such as diabetes and heart disease) and a new regulatory push to enforce mental health parity legislation is expected to change that.

In the short-term, pent-up demand for mental health services could inflate medical costs and push the medical cost trend upwards. Over the long term though mental health treatment could help reduce costs associated with physical health issues, according to the report.

Meanwhile, high performing networks and new pharmacy benefit management (PBM) strategies are putting downward pressure on healthcare costs, says the report.

The high performance network is a deflator. For years cost sharing was the go-to strategy for employers looking to reduce their healthcare expenses. So employees paid a larger share of healthcare premiums and often found themselves on the hook for higher and higher deductibles and copayments. But now it looks like cost sharing has plateaued and employers are looking for other ways to control costs.

A typical high performance network includes a local or regional community of providers with proven, high-quality care delivery, an efficient cost structure, and the willingness to be paid on outcomes, says Judy.

The narrow networks can reduce employer costs by as much as 35% compared with broader, more inclusive provider networks. Although only 9% of employers have implemented a performance-based network, there is strong interest with 43% of employers considering their adoption, according to the PwC report. One caveat: Employers may need to devote resources to educate their staff about the trade-offs between large all-inclusive networks and cost savings.

PBM is a deflator. Aggressive negotiations, increased competition and a move toward paying for results — not volume discounts—may create a perfect storm that will help hold down drug prices. PBMs are aggressively negotiating drug costs as employers signal their willingness to provide narrow formularies to their employees. Employers are more likely to get the best prices if they are willing to narrow their formularies to a single treatment option.

Meanwhile, increased competition and a lack of a new blockbuster specialty drug coming on market in 2017 will mean more rebates and pricing discounts.

“Many of the new prescription drugs coming on market…are arriving close to the same time as competitors’ drugs…[making] it easier to negotiate more attractive discounts,” says the report.

Judy notes that the FDA is beginning to approve biosimilar drugs, which are less expensive alternatives to the high-cost specialty drugs. “Our research found discounts as high as 40% once a follow-on drug is approved for market. Costs go down even further when the patents expire and generic versions compete with branded drugs.”

About the author: Margaret Dick Tocknell specializes in business-to-buiness healthcare reporting, white papers, and the analysis of trends affecting stakeholders in the delivery of healthcare services. She is based in Jacksonville, Fla.

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