Medical Cost Growth to Level Off in 2009

Spencer's Benefits Report
7/1/08

After five years of slowing annual health care cost growth, trend will level off at 9.6% in 2009 (compared with 9.9% in 2008), in large part due to improved medical management of costly medical conditions and higher rates of generic drug use, according to a recently-released report from PricewaterhouseCoopers’ Health Research Institute (HRI). Conversely, factors that will spur medical cost growth are increased hospital construction and increased cost shifting from the uninsured, Medicare, and Medicaid to the private sector.

The study is based on analysis of historical and prospective cost trends and influences, of reports for publicly traded health plans, and on a survey of more than 500 employers and “provider-based” health plans covering more than 11 million lives.

The HRI defines “medical cost trend” as “the projected increase in the costs of medical services assumed in setting premiums for health insurance plans.” Medical cost trend, in turn, is affected by, among other factors, increases in the number of services used which may reflect demographic changes, new technologies, and advertising. Furthermore, medical cost trend does not necessarily anticipate premium increases as employer changes to benefits and plan design may affect premium.

In the future, more employers will rely on wellness, prevention, and disease management to help reduce cost-shifting to employees. And thirty-eight percent (38%) of employers surveyed said they expected to increase employee cost-sharing through plan design rather than premium increases.

The HRI anticipates cost shifting, primarily from hospitals to private payers in 2009, will represent nearly 36% of spending as Medicare implements new cost-containment programs such as pay-for-performance and denies payment for medical costs related to certain preventable hospital errors.

According to the HRI analysis, medical costs represent 87% of the average health insurance premium. Administrative costs account for 13%, a share which has been relatively stable over the past 40 years. As a share of medical costs, physician services account for 33%; inpatient hospital for 20%; and outpatient hospital for 15%, with the rate of growth higher in outpatient services as more services and procedures are provided in outpatient settings. Prescription drug costs represent 14% of premiums. The growth in drug spending has slowed largely due to the much greater use of generic drugs and because there have been fewer new drugs in the market, although the use of expensive biotechnology drugs has increased.