Cost Deflators in the New Health Economy

Bending the cost curve in healthcare spending went from slogan to reality as a sluggish economic recovery, new government policies, and structural changes in the industry reined in spending growth for five straight years. Whether the U.S. health system has truly derailed from its unsustainable growth trajectory can be gauged by what is happening in the employer-based market serving 150 million Americans.

The numbers released in today’s Medical Cost Trend: Behind the Numbers 2015 report from PwC’s Health Research Institute (HRI) project that healthcare spending growth will resume an upward trajectory in 2015. Six years post-Great Recession we are finally seeing more working Americans, more disposable income, and more newly insured individuals—all of which releases a pent-up demand for health services. Especially because health spending continues to outpace GDP, we should encourage new practices in the U.S. health industry that proved over the past few years to be “cost deflators.”

The rise in the expected healthcare growth rate in 2015 is modest compared to the double-digit annual increases seen throughout the late 1990s and early 2000s. PwC’s HRI projects a 6.8% growth rate for 2015, a slight uptick from the 6.5% projected last year.  Our analysis measures spending growth in the employer-based market. It does not focus on the individual market, which includes new plans sold on public exchanges. But actions and trends found in employer-sponsored plans will, over time, carry over to the individual market.

Single-digit growth in healthcare spending—even with the economic upswing and more insured Americans—demonstrates that cost deflators in the health sector have taken the steam out of run-away inflation. The challenge, no matter what happens in the political world, is to continue to control spending against the forceful tide of expensive new therapies, improved consumer confidence and an aging society that requires more medical care and services. Otherwise, individuals carrying more of the healthcare load will shoulder an ever-heavier burden.

Healthcare’s cost deflators are most evident in ways that the $2.8 trillion industry is becoming more efficient. Doctors and hospitals are adopting standardized processes that offer the prospect of better value for our health dollar. Many hospitals within large systems have streamlined; reducing redundancies lowers operating costs and should act as a counterbalance on spending growth next year. One tangible sign of shrinkage: health system employment has declined since 2011.

“At-risk” payment models that hold healthcare providers financially accountable for patient outcomes are also beginning to realize savings. Insurers and employers are increasingly using risk-based payments in physician and hospital contracts that include quality bonuses and penalties, shared savings programs that encourage physicians to cut costs, and patient-centered medical homes, which pay clinicians to manage and coordinate care. Accountable Care Organizations (ACOs) have also shown promise in reducing costs. In results released for Medicare ACO’s in early 2014, the government reported more than $380 million in savings[1].

Employers are tamping down spending growth by, among other things, shifting responsibility to consumers.  Eighty-five percent of employers in PwC’s 2014 Touchstone Survey have already implemented or are considering an increase in employee cost sharing through plan design changes over the next three years, and 18% now offer a high deductible health plan as the only insurance option for their employees.

The prevalence of new health plan designs is spawning a new class of healthcare shopper: price sensitive and willing to consider that less may be more. Research shows that families in high-deductible plans use fewer brand name drugs and visit doctors less frequently. But consumers need information in the new health economy.

Price and quality transparency has been proven to impact consumer and provider behavior. In 2011, CalPERS, a large California administrator of health and retirement benefits for state employees, demonstrated that consumers shop differently when given reliable information – and a financial incentive to choose wisely. When CalPERS set its reimbursement rate for hip and knee replacements at $30,000, its members switched to the lower-cost providers. In response, other providers dropped their prices to compete and CalPERS saved $5.5 million in the first two years[2].

Millions of newly insured Americans accessing care are causing an entirely expected spike in 2015. But the influx also marks a critical juncture in long-term direction: Can we build on recent improvements to finally bring medical inflation in line with the overall economy?

[1] U.S. Department of Health and Human Services, “Medicare’s delivery system reform initiatives achieve significant savings and quality improvements – off to a strong start.” (January 30, 2014) http://www.hhs.gov/news/press/2014pres/01/20140130a.html (accessed May 2014)

[2] PwC Health Research Institute, “Top Health Industry Issues of 2014.” http://www.pwc.com/us/tophealthissues  2014

Kelly Barnes is the leader of the U.S. Health Industries Practice at PwC.