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Employer Medical Costs Expected to Increase by 8.5 Percent in 2012, According to PwC

Source: PwC

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Posted on 18 May 2011

U.S. employers can expect to see healthcare costs rise by 8.5 percent in 2012, compared with an increase of 8 percent in 2011, according to the annual Behind the Numbers report on medical cost trends, published by PwC’s Health Research Institute. 

Mitigating changes, however, in health benefit plan designs, including increased cost-sharing with employees, could keep employers’ costs increases to an average of 7 percent next year. Meanwhile, American workers are beginning to show signs of post-recession stress and the effects of delayed care taking a toll on their health.

The slow economic recovery, unemployment and reduction in disposable income have caused Americans to seek fewer healthcare 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 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. The end of subsidized COBRA coverage in 2010 is offsetting otherwise rebounding utilization growth rates so far in 2011, but employers and health plans expect pent-up demand to put upward pressure on the medical cost trend to continue into 2012.

Behind the Numbers includes findings from PwC’s 2011 Touchstone Health and Well-being Employer Survey of approximately 1,700 U.S. employers from 32 industries, as well as interviews with hospital executives, health plan actuaries and other executives whose companies provide health insurance for more than 80 million covered lives.

Medical cost trend is the projected increase in the cost of medical services assumed in setting premiums for health insurance plans.  To help employers design their health benefits, PwC’s Health Research Institute provides annual estimates of how private medical costs will grow over the next year and what the leading drivers of the trend are expected to be.

In this year’s report, PwC identifies three factors that are 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 incentivizes hospitals and physicians to align and form Accountable Care Organizations (ACOs).  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.

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 are:

    •    Increased cost sharing.   Employers are increasingly shifting the burden of rising medical costs to employees through higher cost sharing. High deductible plans were the fastest growing plan designs in 2011, according to PwC’s Touchstone survey.  Seventeen percent of employers surveyed said high deductible plans 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 US pharmaceutical sales according to PwC estimates.  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. Forty-four percent of employers in 2011 compared to 29 percent of employers 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 higher-cost and premier hospital systems.

According to PwC, the health reform law will have minimal effect on the medical cost trend in 2012.  Provisions of the Patient Protection and Affordable Care Act that took place prior to 2012 were small changes for which employers already have fully accounted. The Medicaid expansions, health insurance exchanges, subsidies to buy private insurance, mandates for employers to offer insurance and mandates for individuals to buy insurance take place in 2014 or later, although PwC notes that health reform could contribute to more cost shifting by further discounting Medicare rates for inpatient care.

“Healthcare organizations are in state of flux over pending health reform provisions, an uncertain economic outlook and financial pressures, and the way they react will have significant implications for their own long-term health in this rapidly changing market,” said Michael Galper, U.S. healthcare payer leader, 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.”

Response from U.S. Employers and Health Plans

The medical cost trend is influenced primarily by unit cost inflation and changes in the volume of healthcare services used.  PwC’s projected medical trend does not reflect changes in benefit plans, which typically reduce the trend by 1.5 to 2 percentage points.  Employers and health plans made benefit plan design changes in 2010 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.

As part of the 2011 Touchstone Health and Well-being Employer Survey, PwC asked employers about changes they are making in their benefit plans, particularly in light of health reform. The survey found:

    •    Eighty-four percent of employers said they are likely to make changes in plan design to offset anticipated costs associated with the health reform law.
    •    Eighty-six percent of employers said they are likely to re-evaluate their overall benefits strategy
    •    One-half (50 percent) of employers are considering significantly changing or eliminating company subsidies for dependent medical coverage.
    •    Eighty-nine percent of employers will likely increase their health and wellness efforts.

“Employers continue to be concerned about the sustainability of healthcare cost increases especially in the long-term, and they are reacting by making changes now,” said Michael Thompson, principal, human resource services, PwC.  “Healthcare in the future will be very different than we know it today, and uncertainty about these changes complicates healthcare 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 healthcare is delivered and paid for and a more collaborative and integrated model aligned around health and wellness.”

PwC’s Behind the Numbers report and highlights of the 2011 Touchstone Employer Survey, including recommendations for employers, health plans, providers and pharmaceutical companies, are available at  Full findings from the 2011 Touchstone Employer Survey can be downloaded from


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