Healthcare costs on pace to rise 8% over the next year

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Commercial healthcare spending growth is estimated to grow to its highest level in 13 years, with PwC's Health Research Institute (HRI) predicting in a new report an 8% year-on-year medical cost trend in 2025 for the group market and 7.5% for the individual market.

This near-record trend is driven by inflationary pressure, prescription drug spending and behavioral health utilization, the report claimed.

Meanwhile, HRI said 2023 and 2024 medical cost trends will be higher than previously reported based on the input of surveyed health plans. This unfavorable trend, the report said, reflects higher-than-expected utilization of GLP-1 drugs, as well as higher-acuity inpatient and outpatient utilization.

Inpatient and outpatient utilization were driven by demand from care deferred since the pandemic, which was met by newly created capacity as sites of care shifted to outpatient, professional and ambulatory care settings.

Continued inflationary pressure is expected to persist into 2025 as providers look for margin growth and work to recoup rising operating expenses through health plan contracts, HRI found.

The costs of GLP-1 drugs are on a rising trajectory that impacts overall medical costs. Innovation in prescription drugs for chronic conditions and increasing use of behavioral health services are reaching a tipping point that will likely drive further cost inflation, authors said.

Meanwhile, cost deflators are not enough to offset cost inflators. The growing adoption of biosimilar medications may provide some relief, while many health plans are looking inward to find opportunities across business operations to generate additional cost savings.

WHAT'S THE IMPACT?

According to HRI, healthcare is in a state of "sustained economic compression." This requires a different response from industry stakeholders.

Organizations should reshape strategies; reengineer financial, workforce and business models; and capitalize on each transformational opportunity – from investments in innovation and technology to deals – to overcome the inflationary choke hold and forge a path to a drastically different cost and business model, the authors contended.

Healthcare inflation materialized with the continuous increase in the year-over-year healthcare expenditure index, according to the report. Within health expenditures, the hospital and related services index saw a significant uptick in the most recent two quarters, hitting 6.3% growth in the fourth quarter of 2023 relative to the fourth quarter of 2022. Generally, health expenditure inflation continues to lag behind hospital wage inflation.

While hospital performance has improved through year-to-date 2024 relative to industry low margins in 2022, providers continue to face operational difficulties and rising expenses. With greater regulation related to government fee schedules for Medicare and Medicaid, providers are looking to commercial health plan contracts to recoup growing operating expenses.

Also, half of the plans surveyed cited hospital, private equity and other physician consolidation as among the top three cost inflators, reflecting the lasting impact of consolidation on contract negotiation as existing contracts come up for renewal.

Data on the impact on healthcare costs of heightened deals activity is still emerging. To better evaluate the effect of consolidation on medical cost trend, HRI said health plans should consider future deal trends at a more detailed level, by segment, as well as local markets specific to the plan.

THE LARGER TREND

Over the next eight years, hospital spending is expected to grow at an average rate of 5.7% a year, according to 2023-2032 National Health Expenditure Projections released by the Centers for Medicare and Medicaid Services.

Hospital spending is expected to have grown 10.1% in 2023, which is substantially higher than 2022's 2.2%, according to a 2023-2032 projections report in Health Affairs.
 

Jeff Lagasse is editor of Healthcare Finance News.
Email: jlagasse@himss.org
Healthcare Finance News is a HIMSS Media publication.