4 Key Inflators That Are Fueling Medical Cost Trends, Pricing

July 07, 2023 - What drivers influence the medical cost trend, and what steps can payers take to address these factors?

The medical cost trend is the percentage that experts anticipate treatment costs will grow year-over-year, the PwC Health Research Institute’s (HRI) medical cost trend report for 2024 explains.

There are a variety of ways to calculate medical cost trends. PwC uses per capita costs of prescriptions and healthcare services to make its estimate. In 2024, PwC evaluated both the individual and group health insurance markets.

In 2024, the medical cost trend is expected to increase by 7.0 percent in the individual and group health insurance marketplaces, according to PwC. This means health insurers could expect to spend 7.0 percent more on healthcare costs.

A couple of critical factors are driving this increase.

“The higher medical cost trend in 2024 reflects health plans’ modeling for inflationary unit cost impacts from their contracted healthcare providers, as well as persistent double-digit pharmacy trends driven by specialty drugs and the increasing use of the GLP-1 agonists for Type 2 Diabetes or weight loss,” the report summarized.

In 2024, overall inflation, consolidation, pharmaceutical costs, and other factors will drive medical cost trend inflation, while biosimilars and site-of-care changes will exert deflationary force.

Overall inflation raises healthcare spending

It should come as no surprise that when prices in the country go up, healthcare prices mirror that trend. However, the mirror tends to have a delay. For example, when household expenditures dropped drastically in the final quarter of 2018, health expenditures did not decrease significantly until a couple of quarters later.

Household expenditures rocketed up to 6.0 percent in the fourth quarter of 2022, and healthcare expenditures began to catch up in the first quarter of 2023. Health insurers are seeing higher unit costs in 2023 and 2024. As a result, the medical cost trend will increase.

Workforce shortages lead to higher reimbursement rates

Overall inflation and workforce shortages significantly influence providers’ negotiation decisions which, in turn, drives the overall healthcare spending trend. The coronavirus pandemic drove down healthcare employment. Hospitals increased spending on temporary staff to fill the gaps and heightened wages.

Healthcare employment was expected to increase. Using data from the Bureau of Labor Statistics Employment Cost Index, PwC projected that overall healthcare employment would have grown steadily, with ambulatory staffing showing the most significant increase.

Instead, the advent of the coronavirus pandemic began a steep downward trajectory that has seen a slow recovery for most healthcare fields. Overall healthcare employment remains below 2019 levels.

Nursing and residential care facility staffing took the biggest hit, declining well into 2022. In March 2020, national employment levels in these healthcare sectors totaled 3.3 million, according to separate research. Two years later, the nation had 2.9 million workers in these sectors.

To compensate for these higher costs, providers demand higher reimbursement rates from payers. This contributes to higher spending. Separate research has indicated that provider market share, quality of care, administrative services spending, and cost-shifting can also influence how payers reimburse providers.

These trends are likely to continue, PwC projected.

Consolidation reduces competitive pricing

When healthcare providers and payers consolidate, they can significantly injure regional healthcare competition. When competition decreases, prices may increase.

One way to visualize the consolidation rate is by tracking the number of physicians who work for hospitals or corporations. At the beginning of January 2019, more than six out of ten physicians worked in such institutions (62.2 percent), according to PwC. But three years later, more than seven out of ten providers would be employed in these workplaces (73.9 percent).

Private equity has also greatly influenced healthcare dealmaking. In 2017, there were 405 private equity deals, according to a Pitchbook report from 2022. By 2021, private equity firms accounted for 1,004 deals, and 2022 was estimated to exceed 2021 levels.

AHIP has called on Congress to crack down on health system consolidation and drawn attention to how diminished hospital competition can boost prices for consumers. However, providers are just as adamant about the effects of payer consolidation and market domination.

Rising pharmaceutical costs impact the healthcare sector

The cost of new prescription medications rose dramatically between 2019 and 2022. From 2008 through 2018, the median price of new drugs remained well below $50,000. But between 2020 and 2021, 47 percent more drugs were priced at $150,000 or more per year.

New drugs are not the only area of the pharmaceutical industry that has seen significant price tag hikes.

The number of existing drugs that experienced a price increase reached 3,840 in 2022, compared to 2,545 only three years before. The dollar value of these price increases rose as well, from a little over a 100 percent average dollar price change in 2016 to a more than 150 percent price change in 2022.

What is behind these trends? First, drug shortages are driving costs higher, primarily due to increases in the price of generics. Second, new cell and gene therapies have increased, and the high development costs are being passed on to insurers.

While these trends are not expected to decline, payers can take and should take steps to mitigate the effects, PwC researchers shared.

First, at reimbursement negotiations with providers, payers can lean into value-based care models to reduce costs. They can also adopt targeted care management strategies that improve personalization, adherence, disease management, and disease prevention.

Additionally, they can use technology to inform where they expend their resources and to decrease administrative burdens. The researchers identified artificial intelligence technologies and in-house data analytics as two critical forms of technology that can help combat rising spending, tools that some payers have used with medical record data, hyper-targeting, and risk adjustment.

Second, payers should take into account the pharmaceutical pipeline so that they accurately estimate cost trends and formulary management. Some payers have also explored new payment models for advanced therapies.

Third, payers have been and should continue to explore the potential of biosimilar coverage. Biosimilars are considered a deflator, but they are hard to implement. Payers should connect with pharmacy benefit managers to assess which biosimilars to cover and leverage utilization management tools and innovative cost-sharing. They should also take into account increased utilization.

Finally, given the deflationary impact that site of care can have, payers should include the effect of shifting the site of care in their trend modeling. Employer-sponsored health plans can use plan design and telemedicine to drive plan members toward primary care and behavioral healthcare at lower-cost care sites.

The researchers also noted that employers are unlikely to increase employee cost-sharing. Employers will lean toward narrow and high-performing networks, centers of excellence, low-cost provider networks, and patient navigation tools.

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