Employer Medical Costs Expected to Rise 8.5% in 2012

But health plan changes could hold the increase to 7%, according to PricewaterhouseCoopers

By Stephen Miller, CEBS May 20, 2011

U.S. employers can expect to see health care costs rise by 8.5 percent in 2012, compared with an increase of 8 percent in 2011, according to an annual survey of medical cost trends by PricewaterhouseCoopers' (PwC) Health Research Institute. However, mitigating changes in health benefit plan designs, including increased cost-sharing with employees, could keep employers’ cost increases to an average of 7 percent in 2012.

The slow economic recovery, unemployment and a reduction in disposable income caused Americans to seek fewer health care services, which led to lower-than-expected growth in employers’ medical cost trends in 2010 and 2011. Based on interviews with health plans, PwC had projected a 9 percent increase in employer medical costs for both years. However, low health care utilization led to adjusted estimates in the medical cost trend to 7.5 percent for 2010 and 8 percent for 2011 before benefit plan changes.

In addition, the end of federally subsidized COBRA coverage in 2010 is offsetting otherwise rebounding utilization growth rates in 2011, but employers and health plans expect pent-up demand to put upward pressure on the medical cost trend continuing into 2012.

PwC's 2011 survey was completed in the first quarter of 2011. Survey participants included 1,700 U.S.-based companies from 32 industries. Companies ranged from employers with fewer than 500 employees to companies with more than 20,000 employees. In addition, PwC interviewed hospital executives, health plan actuaries and other executives whose companies provide health insurance for more than 80 million people.

Driving Costs Higher

In its May 2011 survey report, Behind the Numbers: Medical Cost Trends for 2012 (registration required), PwC identified three factors likely to inflate the medical cost trend in 2012:

Consolidation among hospitals and physicians.Hospitals and physicians are aligning through mergers, acquisitions and other arrangements. This trend is expected to accelerate as health reform drives hospitals and physicians to align and form so-called "accountable care organizations" (ACOs) as specified under the Patient Protection and Affordable Care Act. Provider consolidation is seen as a way to increase efficiency and reduce costs in the long term; however, health plans are concerned that it will reduce competition among providers and drive up payment rates.

Increasing cost-shifting from Medicare and Medicaid.In 2012, Medicare and Medicaid payment rates are expected to decline relative to private payment rates. The increase in Medicare inpatient hospital rates is expected to be 3.3 percentage points below the expected growth in their costs. Hospitals and health plans agree that much of the difference shifts to private payers.

Post-recession stress builds up on workers.Money, work and the economy—found by the American Psychological Association to be the top three causes of stress among the American workforce between 2007 and 2010—are taking a toll. Health plans and employers interviewed by PwC say they are beginning to see more claims for stress-induced illnesses, which are highly correlated to unhealthy behavior and adverse health conditions such as heart disease.

Holding Costs Down

At the same time, a number of factors will have the effect of deflating medical costs for health plans and employers in 2012, according to PwC. These factors include:

Increased cost-sharing. Employers are increasingly shifting the burden of rising medical costs to employees through higher cost-sharing. High-deductible health plans were the fastest growing plan designs in 2011. According to PwC’s survey, 17 percent of employers said plans with deductibles of $1,000 or more were their most common benefit design, up 4 percentage points from 2010.

Blockbuster brand-name drugs go off patent.In 2012, the cumulative sales of drugs going off patent will be the largest in history, representing approximately $28.1 billion in U.S. pharmaceutical sales, according to a PwC estimate. Increased use of generics, spurred by financial incentives to tier pricing, will moderate health spending growth.

Tiering on out-of-network providers. Employers are increasing deductibles, making it far less attractive for workers to use the services of physicians and hospitals that are out of the plan’s network. The survey found that 44 percent of employers in 2011 (vs. 29 percent in 2010) said that their out-of-network deductible had crossed the $1,000 threshold. In some markets, payers are becoming more selective about which providers are in the network, choosing to exclude high-cost and premier hospital systems.

Impact of Health Care Reform

In 2010, U.S. employers made benefit plan design changes that reduced the medical cost trend from PwC’s adjusted projection of 7.5 percent to 6 percent. But benefit changes in 2011 were able to reduce the trend by only 0.5 percent, from the projected 8 percent to 7.5 percent, because of mandates imposed by the health reform law, according to PwC.

“Health reform is pressuring employers, providers, insurers and pharmaceutical manufacturers to be more cost-conscious and accountable for costs, quality and performance, and they will need to work together to provide better, coordinated care, greater transparency in pricing and more patient-friendly practices,” said Michael Galper, U.S. health care payer leader, at PwC.

As part of the 2011 survey, PwC asked employers about changes they are making in their benefits plans, particularly in light of health care reform. The survey found:

84 percent of employers said they are likely to make changes in plan design to offset expected costs associated with the health reform law.

86 percent said they are likely to re-evaluate their overall benefits strategy.

One-half are considering significantly changing or eliminating company subsidies for dependent medical coverage.

89 percent likely will increase their health and wellness efforts.

“Employers continue to be concerned about the sustainability of health care cost increases, especially in the long term, and they are reacting by making changes now,” said Michael Thompson, principal, HR services, at PwC. “Health care in the future will be very different than we know it today, and uncertainty about these changes complicates health care benefits strategies. However, the most proactive employers are planning for potential future scenarios and making incremental changes now toward a longer-term view of transformational change in the way health care is delivered and paid for and a more collaborative and integrated model aligned around health and wellness.”

Milliman: Health Care Costs Doubled in Fewer than Nine Years

The 2011 Milliman Medical index, released by consulting and actuarial firm Milliman in May 2011, shows that the health care cost for a typical U.S. family of four covered by a preferred provider organization (PPO) in 2011 was $19,393, an increase of 7.3 percent over 2010. Even though the rate of increase was the lowest in recent years, the increase in total dollars—$1,319 in 2011—was the highest in the history of the study. (Milliman and PricewaterhouseCoopers use different methodologies to calculate health care costs.)

Of the $1,319 total cost increase, employers bore $641 while employees shouldered the rest—$403 in payroll contributions and $275 in additional cost sharing.

"In 2002, American families had health care costs of $9,235, and those costs have now doubled in fewer than nine years," said Lorraine Mayne, Milliman principal and consulting actuary. "As costs continue to grow—and even as the cost trend decelerates—the total cost of care for American families constitutes a larger and larger portion of the household budget."

In four of the last five years, employees paid a larger share of the cost increase than their employers, noted Scott Weltz, consulting actuary at Milliman. "That said," he added, "in absolute dollars, both employers and employees have shouldered approximately the same amount of additional costs since 2006, with employers absorbing $3,023 and employees absorbing $2,988."

Stephen Miller, CEBS, is an online editor/manager for SHRM.​

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