A lower cost trend in health care reflects unit costs, not total spending. In other words, when people seek care, the cost of that care will increase less next year than in past years.
Despite all of the bluster, worry and teeth gnashing over the Patient Protection and Affordable Care Act (PPACA), otherwise known as health care reform or Obamacare if you prefer, the law seems to be making a positive and lasting impact on health care spending.
As survey after survey shows a lower-than-average cost trend, it becomes more apparent that something is really happening out there. The latest survey by PricewaterhouseCoopers (PwC) provides among the first projections for 2014—the year in which most of the key provisions of the PPACA take hold.
Yet, despite concerns that the health coverage mandate, Medicaid expansion and other key provisions of the PPACA due to go into effect on January 1, 2014, will push health care costs even higher, the PwC’s Health Research Institute projections show the opposite to be true. In fact, the report expects health care spending to increase 6.5% next year, which is less than the cost increase projected for 2013 and the lowest cost trend in 50 years. It gets even better. After factoring in the adjustments employers are likely to make to benefit designs, including higher deductibles, PwC projects a net growth rate of 4.5% for 2014.
There are some caveats here, however. First, this lower cost trend reflects unit costs, not total spending. In other words, when people seek care, the cost of that care will increase less next year than in past years. If more people seek care as expected as more previously uninsured individuals have greater access to the health care system, overall health care spending may increase. Yet, despite the influx of newly insured individuals into the system, the study report notes that “none of these changes will likely directly affect the medical cost trend. Total spending will rise with the cost of caring for the newly insured, but the rate of growth, which is based on unit cost, should remain at some of the lowest levels since the government began measuring national health expenditures in 1960.”
Second, a lower cost trend does not necessarily translate into lower premiums for employers with fully insured health plans. In fact, fully insured employers may still see premium increases next year, even significant increases that are well above this cost trend as the health system, including insurers, determine how to quantify the risk and uncertainty caused by the addition of newly insured individuals in the system. Self-insured employers are more likely to see the impact from the lower cost trend much sooner than employers with fully insured health plans. However, over time, this uncertainty should wane as insurers gain greater insight into the risks of this new marketplace, and fully insured employers could see an impact on premiums.
The study identifies four factors contributing to this lower cost trend. If employers take action to encourage the growth of these trends, they could be reducing their own costs over the long term.
1. Health care is moving away from the high-cost hospital setting and toward retail clinics and mobile health that can provide care that is up to two-thirds less expensive.
2. Large employers contracting directly with health systems and “centers of excellence” for specific procedures for the promise of lower costs and better outcomes. Even when these arrangements require travel to the health care facility, these employers still expect to achieve savings.
3. Hospital readmissions, which tend to be quite costly and detrimental to overall outcomes, continue to decline. Reducing these events has been a key goal under the PPACA.
4. Employers are more and more likely to offer high deductible health plans—44% are considering making these plans the only option for employees. Whether by choice or not, employees are more and more likely to purchase those plans. As a result, employees are becoming more discerning health care consumers.
At the same time, employers should be aware of two forces pushing in the opposite direction. First, the introduction of a new array of expensive, but potentially groundbreaking, pharmaceuticals could push costs up considerably if employers do not manage the use of these new drugs. Second, as the health care industry is under pressure to reinvent itself and remove waste, expect to see greater consolidation among providers. This, in turn, could increase prices in some markets that have fewer provider choices as a result.