PwC forecasts 8.5 percent increase in healthcare costs for employers in 2012

Employers can expect to see an 8.5 percent increase in healthcare costs in 2012, a slight increase from the 8 percent increase expected this year, according to a new report from PricewaterhouseCoopers' Health Research Institute.

PwC's "Behind the Numbers" report, however, noted the potential for changes in the structure of health plans, including shifting more costs to employees, which may keep employers' costs closer to 7 percent. At the same time, workers are beginning to show the effects of stress from the long recession and the effects of delayed care beginning to take a toll on health.

[See also: Actuarial survey says transparency would reduce healthcare costs; Continuing cost pressures among PwC's top six healthcare trends]

"The slow economic recovery, unemployment and reduction in disposable income have caused Americans to seek fewer healthcare services, which led to lower-than-expected growth in employers' medical cost trends in 2010 and 2011," PwC reported. "Based on interviews with health plans, PwC had projected a 9 percent increase in employer medical costs for both years. However, low utilization led to adjusted estimates in the medical cost trend to 7.5 percent for 2010 and 8 percent for 2011 before benefit plan changes. The end of subsidized COBRA coverage in 2010 is offsetting otherwise rebounding utilization growth rates so far in 2011, but employers and health plans expect pent-up demand to put upward pressure on the medical cost trend to continue into 2012."

Medical cost trend is used by health plans to help set premiums. PwC's Health Research Institute's annual cost trend estimates are intended to help employers understand how costs will increase and identify the major drivers of the increases.

For 2012, PwC has identified three drivers it believes will have a major impact on the medical cost trend:

• Consolidation among hospitals and physicians. The trend of hospital and physician group mergers and acquisitions is expected to accelerate as health reform provides significant incentives for hospitals and physicians to align and form accountable care organizations. Provider consolidation is seen as a way to increase efficiency and reduce costs in the long term. However, health plans are concerned that it will reduce competition among providers and drive up payment rates.
• Increased cost shifting from Medicare and Medicaid. In 2012, Medicare and Medicaid payment rates are expected to decline relative to private payment rates. The increase in Medicare inpatient hospital rates is expected to be 3.3 percentage points below the expected growth in their costs. Hospitals and health plans expect much of that difference will shift to private payers.
• Post recession stress builds up on workers. Money, work and the economy – found by the American Psychological Association to be the top three causes of stress among the American workforce between 2007 and 2010 – are taking a toll. Health plans and employers interviewed by PwC indicate they are beginning to see more claims for stress-induced illnesses, which are tied to unhealthy behavior and adverse health conditions such as heart disease.

Other factors are expected to help keep costs in check in 2012, including:

• Increased cost sharing. Employers are shifting the burden of rising medical costs to employees through higher cost sharing. High deductible plans were the fastest growing plan designs in 2011, with 17 percent of employers noting that high deductible plans were their most common benefit design, up 4 percentage points from 2010.
• Blockbuster brand-name drugs go off patent. In 2012, the cumulative sales of drugs going off patent will be the largest in history, representing approximately $28.1 billion in U.S. pharmaceutical sales according to PwC estimates. Increased use of generics, spurred by financial incentives to tier pricing, will moderate health spending growth.
• Tiering on out-of-network providers. Employers are increasing deductibles, making it far less attractive for workers to use the services of physicians and hospitals that are out of the plan's network. In some markets, payers are becoming more selective about which providers are in the network, choosing to exclude higher-cost and premier hospital systems.

Overall, PwC noted that it expects health reform to have little effect on the medical cost trend in 2012. While most of the larger changes from the Affordable Care Act will take place in 2014 or later, PwC noted that the potential for even greater cost shifting exists if there are further cuts in Medicare rates for inpatient care.

"Healthcare organizations are in state of flux over pending health reform provisions, an uncertain economic outlook and financial pressures and the way they react will have significant implications for their own long-term health in this rapidly changing market," said Michael Galper, U.S. healthcare payer leader for PwC. "Health reform is pressuring employers, providers, insurers and pharmaceutical manufacturers to be more cost-conscious and accountable for costs, quality and performance, and they will need to work together to provide better coordinated care, greater transparency in pricing and more patient-friendly practices."