Trending in 2019: Medical Costs Likely to Keep Climbing

By Katy Mena-Berkley
Friday, December 7, 2018

The U.S. healthcare system has long offered some of the most sophisticated and effective care available, But success comes with rising costs. Those increases do not appear to be over.

Costs in the employer-based market will continue to climb during 2019, although the rise is not expected to be as steep as in previous years, according to the PwC Health Research Institute’s (HRI) annual report, “Medical Cost Trend: Behind the Numbers 2019.” The employer-based market covers roughly half of non-elderly Americans.

“When you look at our medical cost trend over time, the projections, back in 2017, the double-digit increase year over year was almost 12 percentage points,” says Benjamin Isgur, Leader of PwC HRI, which analyzes various sectors of health care. “We are projecting for 2019 something that is half of that, over 6 percentage points over the year before, which sounds like we have made a lot of great progress. ... The problem is, healthcare inflation still outpaces general inflation, so it’s going at two to three times the inflation factor in terms of the rest of the economy.”

Several factors are expected to inflate medical costs during 2019, among them:

  • More access points for care. Additional service venues increase utilization in the short term.
  • Continuing mergers. Greater negotiating power and market share resulting from health system consolidation often boost prices.
  • Physician employment. Care from a physician employed by a hospital or healthcare system is typically more expensive than that provided by an independent physician.

“Increased targeting power and prices associated with big consolidation with healthcare providers — there is a lot of evidence showing that does increase prices,” says Ani Turner, Co-Director of Sustainable Health Spending Strategies with Altarum, a Michigan-based nonprofit health systems research and consulting organization.

Turner notes that population growth and aging add further challenges to the costly reality of American health care, as do high-priced services, such as MRIs, and unnecessary ER visits and inpatient stays.

“We need to be a lot more serious to make more dramatic changes to things that affect what we pay for the health care we receive,” Turner says.

However, other factors are expected to hold prices somewhat in check, according to the HRI report. They include:

  • A gentler flu season. The 2018–2019 flu season is expected to be less severe than the previous season, making the illness less of a driver of medical costs.
  • Guided care. New services from employers and health plans are directing patients toward less costly plans and care.
  • Quality- and cost-focused networks. Some employers are negotiating with providers to craft limited-provider networks that focus on quality and lower costs.
“I think until we have real, transformational change, you will likely continue to see trend rates that are unpalatable.”
— Barbara Gniewek, Principal in the Global Human Resource Services Practice and the National Practice Leader for Health and Welfare Consulting with PwC

The Kitchen Table Impact

With more families paying out of pocket for healthcare services not covered by high-deductible plans and more employers forced to choose between investing in employee raises and keeping their healthcare plans reasonably priced, individuals have less to set aside for college education, retirement or other needs. The public’s frustration is often focused on high pharmaceutical prices, industry observers say.

“I don’t think in recent years people have had a clear appreciation for how much of their compensation is going toward higher premiums and how much is then left over for wage increases,” Turner says. “That’s one reason why you hear so much attention being paid to prescription drug increases: It affects people’s household budgets on a weekly basis.”

However, drug prices are only one component of higher healthcare costs. Lack of attention to more important drivers may make the likelihood of addressing the total tab for medical care more remote.

“Think about the way the price of gasoline affects us as opposed to energy at large. You don’t hear people going crazy about electricity, but they see that gas price every time they go home or to work. That’s how people look at drug prices, even though it’s only a small part of the overall hit,” says Paul Hughes-Cromwick, Co-Director of Sustainable Health Spending Strategies with Altarum. “This issue is a critical one because it’s a key aspect to income and wealth distribution in the U.S. We often hear how people halfway up the income distribution haven’t seen real gains in 30 to 40 years. A big hunk of that is that the gains they would have seen have been eaten up by this voracious healthcare beast.”

In response, some employers, such as Amazon, Berkshire Hathaway and Chase, are formulating their own models for delivering care. Reduced costs, administrative expenses and improper utilization of care are key components of their focus.

“Employers are trying to make a change. There is not an appetite for the status quo,” says Barbara Gniewek, Principal in the Global Human Resource Services Practice and the National Practice Leader for Health and Welfare Consulting with PwC. “The idea of employers coming together because they don’t see ... incentives in the industry: That’s a big part of where the change will come from.”

Looking Ahead

Those and other efforts may prove critical as employees and families choose, in some cases, not to seek care because it is out of reach financially.

“This is a big change for doctors, that they now have to be able to have conversations with their patients not just about different treatment protocols and what the side effects may be but about the cost of those services,” Isgur says. “We are seeing that in medical schools, as they educate and train the doctors of tomorrow to have conversations around value and options for different services.”