U.S. employers can expect medical costs to increase by 9% in 2011, a decrease of 0.5% from the 2010 growth rate, according a report from PriceWaterhoseCoopers LLP (PwC) Health Research Institute.
For the first time, the majority of the American workforce is expected to have a health insurance deductible of $400 or more, as more employers return to "indemnity style" cost-sharing by raising out-of-pocket limits, replacing co-pays with co-insurance and adding high-deductible health plans.
Improving wellness programs and increased cost-sharing lead the planned changes employers will make in the benefit plan designs they will offer for next year. According to research:
- Two-thirds (67%) of companies intend to expand or improve wellness programs inside the U.S.
- 42% intend to increase employee contributions for health insurance coverage.
- 41% intend to increase medical cost-sharing, including higher deductibles and co-pays, while only 26% intend to increase prescription drug cost-sharing.
- More employers are dropping health benefits for retirees. One-third of employers with over 5,000 workers subsidize pre-65 retiree medical coverage, down from 47% in 2009. Only 22% of employers with over 5,000 employees subsidize post-65 retiree medical coverage, down from 37% in 2009.
In 2011, the report outlines three primary deflators that will help employers hold down medical costs:
- Employers are moving toward pre-managed care benefit design by increasing deductibles and replacing co-pays with co-insurance. By requiring workers to spend more out-of-pocket at the point of care, employers believe they will rein in utilization of services and drugs. The number of employers using co-insurance for physician visits has nearly doubled, and one-third use co-insurance for brand-name drugs.
- Drug costs are tempered by generics. Insurers are benefitting from the growing use of generic drugs. Drugs representing about $26 billion in annual sales are expected to go off patent in 2011, including the world's best-selling drug, Lipitor. Generics account for as much as 80% of all prescriptions.
- COBRA costs are expected to return to more normal levels in 2011. COBRA subsidies passed by Congress in 2009 created a 1% increase in the medical cost trend. A combination of declining unemployment and expiration of the COBRA subsidies is expected to lead to reduced enrollment in COBRA.
The biggest inflators of the medical trend in 2011 will be in hospital and physician costs, which make up 81% of premium costs.
- Hospitals shifting costs from Medicare to private payers and employers is seen as the Number One reason for higher medical costs trends. In 2011, Medicare, which is the single largest payer for hospitals, will reduce payment rates to hospitals for the first time after seven years of increases that nearly matched or exceeded inflation increases. Some hospitals that benefitted from higher payments in 2008 and 2009 may be able to manage this type of cut by tapping their reserves. Yet, more are likely to shift more costs to commercial payers during their negotiations.
- Provider consolidation is increasing, which is expected to increase their bargaining power. More physicians are getting out of private practice and joining forces with local hospitals or larger physician groups. The number of physicians involved in mergers or acquisitions in 2009 was 2,910, nearly twice that of 2008. There has been record consolidation activity in 2010, and PricewaterhouseCoopers expects the trend to accelerate in 2011. Payers expect to see more negotiating power and higher prices in the short term, though the benefits of consolidation should create efficiencies that moderate rate increases in the future.
- Spurred by stimulus funding that begins in 2011 and Medicare penalties that begin in 2015, hospitals will invest billions of dollars in certified electronic health record (EHR) systems. While many hospital systems were planning to implement EHRs in the near future, the government's new regulations dramatically condensed their timelines to invest in technology, IT staff, training and process redesign. Healthcare CIOs surveyed by PwC said they will make their largest investments to meet the new EHR regulations in 2011. In the long term, EHRs are expected to help control costs.
"Health reform delivers only a minor impact on the underlying medical cost trends in 2011 and introduces hundreds of changes in the healthcare system designed to reduce costs and improve efficiencies in the long-term," said Kelly A. Barnes, U.S. health industries leader at PricewaterhouseCoopers. These changes could bring significant new cost savings opportunities for employers and payers as well as new choices and transparency for workers buying insurance.
PricewaterhouseCoopers Behind the Numbers report and survey highlights are available at www.pwc.com/us/medicalcosts2011. The full findings of the PricewaterhouseCoopers 2010 Health and Well-being Touchstone survey are available at www.pwc.com/us/touchstone2010. For more on the details on the implications of health reform, go to http://www.pwc.com/healthreform.