The Loop

Healthcare Cost Trend

Filed under: Benefits

Healthcare spending has increased exponentially in the U.S. over the last half a century; we've developed ways to extend human life, and we're paying for it. In fact, between 1960 and 2013, the amount the average American spent on health increased from $147 a year to $9,255. Moreover, the cost of providing healthcare since 1960 has largely transferred from businesses, households, and other private sponsors (77 percent back then) to the government (43 percent today).

Along with population growth, medical advances leading to longer lives are the primary reasons why more seniors are Medicare beneficiaries today.

From 2003 through 2013, the growth in healthcare expenses slowed for a couple of reasons. The first was the proliferation of generic drugs that entered the market and the second was the lack of healthcare utilization brought on by the recession with so many people losing their jobs and coverage. Since then, spending has picked back up and is expanding at a rate much higher than overall inflation. While the consumer price index (CPI) has been trending at one percent over the past 12 months, healthcare costs are expected to grow 6.5 percent through next year, according to a new study from PwC's Health Research Institute.

At a time when healthcare cost increases are outpacing corporate profits and economic output, employers are not inclined to absorb a 6.5 percent annual increase and they continue to seek ways to reduce expenses and share them with workers. Many realign their plans and introduce new programs each year, incorporating strategies such as higher deductibles, higher co-pays, switching to high-performing providers, and narrowing drug options. PwC observed that these tactics can lower their average cost increase by about 4 percent.

Cost Drivers
The two primary factors that drive healthcare increases are service/drug prices and utilization. The healthcare reform law enabled 20 million more Americans to receive health insurance, which naturally increased utilization. The spread of retail clinics and urgent care centers also increased access for many people at a relatively low cost, ultimately generating more patient numbers and more spending. Healthcare insiders also note that recent reforms in insurance coverage have led to more people seeking mental healthcare. The good news is that many common mental health conditions are no longer considered taboo and are more treatable with today's medications.

Specialty Drugs
Speaking of medications, the class of drugs called specialty drugs, continues to grow both in new development and retail cost. In addition, because they are structurally more complex than traditional drugs, many require special handling. Therefore another factor that contributes to the cost of specialty drugs is the location where they are administered. Forty-seven percent of specialty drugs are administered in a hospital outpatient setting, which is the most costly, 42 percent are at a doctor's office, which is the next most expensive, and only nine percent are taken in the patient's home, which is the least expensive place to receive them.

As a result, specialty drugs tend to be much more expensive than traditional drugs. The three largest contributors to specialty drug costs are for those prescribed for:

• Inflammatory conditions (e.g., rheumatoid arthritis, inflammatory bowel disease) – 27%
• Oncology – 20%
• Multiple Sclerosis – 11%

Many drugs for treating cancer and other severe conditions now cost $10,000 a month or more. While only a small percentage of patients use them, they are expected to account for 30 percent of all healthcare claim costs in 2016.

On average, pharmaceutical costs account for 15-to-20 percent of employers' medical spending and are rising at two times the rate of overall health costs. In a recent study by Willis Towers Watson, about 1 in 3 companies reported that specialty drugs are the main factor in cost increases, with nine of 10 employers currently working on programs to manage their costs.

Cost Control Strategies
Employers continue to seek ways to manage healthcare costs. As for medications, some are transferring drug coverage to large pharmacy benefit firms to take advantage of greater volume buying power. Pharmacy benefit managers like Express Scripts and CVS Health continue to work on aggressive strategies to help keep drug prices under control.

To help manage the cost of specialty drugs, plan sponsors are exploring ways to facilitate administering them at patients' homes rather than at hospitals. Insurers and self-insured employers also are prioritizing high-performing networks within their plans. These are providers with proven track records for providing high quality care at a reasonable cost.

Higher Deductibles
While many employers offer a high deductible health plan (HDHP) as an option on their benefits menu, about one fourth now make it their only option. Another 39 percent report they are considering moving to an HDHP-only strategy within the next three years.

Defined Contributions
Similar to the transition to offer a 401(k) plan for retirement instead of a defined benefit pension, some employers have opted to provide a set amount of money to each worker to pay for the healthcare plan of their choice. If the plan selected costs more than the employer's contribution, the worker picks up the balance. While only 12 percent of employers have adopted this defined contribution approach to providing healthcare coverage, another 36 percent say they are considering the strategy in the near future.

Coverage Reductions
Employers continue to discourage or are even withdrawing coverage for workers' spouses who have access to a medical plan through their own workplaces. Willis Towers Watson anticipates that by 2018, 50 percent of large companies will levy an extra $100 a month – in addition to the worker's share of premiums – to cover a working spouse on the plan.

One encouraging trend that could significantly reduce healthcare delivery cost is increased utilization of telemedicine, the practice of using phone and video conferencing with patients to extend the hours and geographic reach of primary care clinicians. A recent study by the Healthcare Information Management Systems Society (HIMSS) found that nearly 90 percent of respondents used mobile devices to engage patients. While 70 percent of employers report they currently offer telehealth services in their health plans, 90 percent say they plan to offer them next year in states that allow it.

Acquisitions: Unite and Conquer
There are divergent opinions as to whether consolidation among healthcare insurers will ultimately lead to higher or lower costs. Today, more than 31 percent of every healthcare dollar goes to operations unrelated to actual healthcare delivery, including a complex system for billing individual insurers. Certainly merging insurers can take advantage of economies of scale and increased efficiencies.

However, some believe that fewer competitors in the marketplace will allow these behemoths to set higher prices, leading to increased spending by both employers and consumers. The mergers being sought this year by large insurance companies would result in America's healthcare insurance industry being dominated by three large insurers. If cost reductions do not play out as a result, the leap to a single-payer model would be much easier from that position. A single-payer system is the collection of insurance premiums and payout for services by a single entity, whether private or government sponsored. Proponents of a single-payer financing system claim that the savings on paperwork alone, estimated at more than $400 billion per year, would be enough to pay for all medically necessary services for the entire country.

To date, the Justice Department hearing for the Aetna and Humana proposed $37 billion merger is set for December, with a decision coming in mid-January. The hearing date for Anthem's proposed $53 billion acquisition of Cigna Corp was recently postponed and will likely be rescheduled for early 2017.

Trend Discrepancies
This year, several insurers have reported losses from the plans they offer on the Marketplace Exchanges, with many announcing plans to cut back participation or drop out of that market altogether. However, a recent report from the Department of Health and Human Services (HHS) found that per-enrollee medical costs in the exchange market remained flat in 2015, while costs in the broader insurance market (e.g., employer coverage and Medicare) grew by 3 to 6 percent. Moreover, states with the highest enrollment growth experienced an average 5 percent decline in per-enrollee medical costs.

Despite these findings, the large-employer market boasts modest cost increases compared to plans offered on the marketplace exchanges. This year, marketplace plans are seeking premium increases of 10 percent or more.

Regardless of the direction of costs, the number of people who enroll in marketplace exchange health plans continues to grow each year. This bodes well for strengthening those risk pools going forward. In addition, the HHS is taking steps to prevent some of the issues insurers have claimed increase their expenses, such as preventing abuses of short-term plans and Special Enrollment Periods. It is also embarking on an active outreach campaign to solicit young adults transitioning from their parents' plans to marketplace coverage.

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