The trend of medical cost increases has leveled off, but it still outpaces inflation.
So what is driving health care costs? And where are employers spending their health care dollars?
Benjamin Isgur of the PwC Health Research Institute addressed these issues Dec. 13 at The Alliance Learning Circle in Madison, Wis.
Medical Cost Trend = Utilization x Cost
PwC is projecting an increase of 6.5 percent in medical cost trend for 2017. Last year’s projected rate was also 6.5 percent. That means the trend of cost increases is remaining stable, while continuing to outpace the rate of inflation.
Medical cost trend can be influenced by changes in the price of medical products and services and changes in the number of services used. Employers’ work to control costs by addressing utilization has been effective.
“Utilization as a contributor to trend has been very close to zero for the past nine years and in fact has moved into negative territory,” said Isgur.
High-deductible health plans (HDHPs) have been a factor in impacting utilization, as consumer surveys show. That could potentially have a negative impact in some situations, as some consumers may delay getting care or choose to delay or forego taking prescription medications.
Cost Drivers of Medical Cost Trend
Isgur cited four main cost drivers of health care costs. In order of importance, they are the cost of:
- Inpatient procedures.
- Outpatient procedures.
- Prescription drugs.
“Physician costs account for approximately one-third of all health care costs,” Isgur said. “And roughly half of employer health care costs stem from hospital inpatient and outpatient services.”
Most of health care spending is focused around physician fees and inpatient hospital procedures.
Prescription drug costs are small in comparison to the other three drivers. However, prescription drug costs are growing at an alarming rate.
“So, when are we going to address the issue about the price of medical care?” said Isgur.
Employers may find the answers they need in Isgur’s list of cost inflators and deflators.
Cost Inflator #1: Convenience Has a Cost
PwC has reported that the use of retail clinics is increasing along with the number of locations available for treatment. “In 2016, we project that 40 percent of consumers have used a retail care clinic,” Isgur said.
Increased numbers of retail care clinics have reduced the barrier to seeing a doctor quickly. In fact, consumers in some markets may have too much access. Usage was found to be especially high in urban and suburban areas.
Isgur gave the example of a person with minor cold symptoms. This person might go to a retail care clinic today, if one is nearby. In the past, this same person might have waited a day to see if their symptoms persisted or made a doctor’s appointment.
Cost Inflator #2: The Share of Employer Health Spending on Mental Health Services is Increasing
The new focus on mental health parity will likely increase utilization in 2017. Health plans are required to treat mental health conditions on an equal basis with physical conditions when health policies cover both.
This could include new mental health clinics popping up at new locations. However, Isgur said, telemedicine has been found to be an effective format for “talk therapy.” PwC forecasts that employers and providers will leverage telemedicine to increase access to mental health services in both urban and rural populations.
Deflator #1: Interest in High Performance Networks Has Increased Substantially
Employees are pushing back against high cost sharing due to their inability to pay high deductibles. Therefore, employers are exploring other ways to control costs, including high-performance networks.
High-performance networks can be structured in a variety of ways. They can be based on quality standards and bundled pricing – like The Alliance’s QualityPath program. Or they can be a narrow-network health maintenance organization (HMO). There are a variety of options for employers to choose from.
PwC’s 2016 survey showed that 9 percent of employers have already implemented a performance-based network. But 43 percent of employers in the survey wanted to implement one. This is an area where high growth and change is expected.
“We need to have an open dialogue with providers,” said Isgur.
Deflator #2: PBMs Win Price Concessions
Specialty drugs are loosening their grip on high price growth. When a treatment class has more than one specialty medication available, pharmacy benefit managers (PBMs) are able to obtain competitive pricing.
However, the impact of a newly-released specialty drug can vary greatly, Isgur said. Price and sales are major components of measuring the impact of a new drug.
Ways for Employers to Reduce Costs
Isgur concluded his presentation to employers by recommending three areas that they should consider when analyzing and evaluating their health care benefits.
- Realign cost-sharing for ambulatory services.
- Consider accessing a high-performance network. When introducing these networks, he advised offering it as a choice, rather than the only option for employees.
- Evaluate your PBM arrangements. Make sure you are getting value for your prescription dollars.
Reducing health care costs through consumerism and value will be important in 2017 and beyond.
- Speaking up to erase the stigma of mental illness and addiction is important. Read more in Darla’s blog article.
- Watch Mike Roche’s Dec. 2016 Presentation: Highlights of the 2016 Alliance Annual Benefits Survey.
- Learn more about PBMs in: “Rising Drug Costs Lead to PBM Scrutiny,” by Josh Bindl, CEO of National CooperativeRx.
Previously, Lisa worked at a founding member of The Alliance for 17 years as a marketing specialist. Lisa received her master’s degree from the University of Wisconsin-Whitewater in Communications with an emphasis in Corporate Communications.
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