What your medical scheme will cost you in 2014

For 2014, PwC's Health Research Institute (HRI) projects a medical cost trend of 6.5%.

Defying historical patterns—and placing added tension on the health industry—medical inflation in 2014 will dip even lower than in 2013.

Aggressive and creative steps by employers, new venues and models for delivering care, and elements of the Affordable Care Act (ACA) are expected to exert continued downward pressure on the health sector.  

Kelly Barnes, partner and US health industries leader, identifies factors increasing healthcare spending next year including growth of specialty drugs and ongoing industry consolidation.

She also discusses HRI's projected spending growth rate for 2014.

Barnes describes key factors slowing healthcare spending growth, including increased use of retail health clinics, employers tapping "high performance" care networks, and reduced hospital readmissions.

Barnes identifies factors increasing healthcare spending next year including growth of specialty drugs and ongoing industry consolidation. 

Kelly Barnes, partner and US health industries leader, discusses HRI's projected spending growth rate for 2014.

In-depth discussion

Healthcare organisations, hurt by a squeeze on reimbursements and what might best be described as a recession “hangover,” have spent the past few years adapting to more modest growth rates. The industry will continue those efforts in 2014, including pushing care to locations and personnel that cost less.

The tepid economic recovery continues to impact the health sector. The slowdown—and even decline—in personal wealth has tamped down demand for healthcare. As we reported a year ago, the sluggish recovery has created a “new normal” in healthcare spending patterns.

Individual consumers, bearing more financial responsibility for their medical bills, are questioning and sometimes delaying procedures, imaging, and elective services. New delivery models, such as accountable care organizations (ACOs) are promising, but their prospects for significant savings remain largely unproven.

The ACA will also play a role in the slowdown in 2014, with hospitals working to hold down expensive readmissions (or face the law’s penalties) and employers being given greater power to influence employee behavior through increased or discounted premiums—up to 50% in some cases.

Each year, HRI issues its projection for the following year’s medical cost trend based on activity in the market that serves employer-based insurance. For its 2014 projection, HRI interviewed health plan actuaries, industry executives and health policy experts. HRI also analysed results from PwC’s 2013 Touchstone Survey of more than 1,000 employers from 35 industries.

In this year’s report, we identified four factors deflate medical cost trend in 2014:
  • Care continues to move outside costly settings such as hospitals to more affordable retail clinics and mobile health. Consumers value the convenience, and costs can be as little as one-third of the bill in a traditional healthcare site.
  • Major employers such as Walmart, Boeing, and Lowe’s now contract directly with big-name health systems for costly, complicated procedures such as heart surgery and spinal fusion. The employers are making the move to “high performance networks” far away from the home office in the belief that even with travel costs, these networks still deliver overall savings.
  • The federal government’s new readmission penalties take direct aim at waste in the health system, estimated to be as high as 30%. According to government data, hospital readmissions dropped by nearly 70,000 in 2012, and this trend is expected to accelerate through 2014 as hospitals focus on discharge planning, compliance and the continuum of care.
  • Seventeen percent of employers in PwC’s 2013 Touchstone survey today offer a high deductible health plan as the only option for employees. And more than 44% are considering offering it as the only option. When consumers pay more for their healthcare, they often make more cost-conscious choices.

Two factors inflate medical cost trend in 2014

  • Until recently, widespread adoption of generic medicines helped dampen overall medical inflation, but the rise of expensive complex biologics will nudge spending trends upward. Approvals of new biologics now outpace traditional therapies, and that pattern will continue in 2014 as research efforts target complex cases such as cancer.
  • Health industry consolidation has increased more than 50% since 2009—activity that is expected to continue through 2014. Higher prices are sure to follow in some markets. According to a recent report, hospital mergers can lead to price increases of up to 20.3% These price increases are especially acute in markets with one dominant system.

Employer engagement and individual consumers are a powerful and growing force in the health ecosystem. To succeed, healthcare organisations should fashion strategies around new demands for value.

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