PWC Report on Employer Health Costs

PWC issued a report intended to guide employers on what to expect in medical cost trends over the next year, and to some extent, beyond.   (PWC Report) PWC interviewed over 700 employers and a number of health plan actuaries and executives to arrive at its forecast.  Overall, medical costs are expected to increase about 9% in 2011, which is slightly down from 9.5% in 2010.  Both years, however, are affected by the increase in COBRA enrollees caused by the recession.  The 2010 increase likely would have been smaller and the 2011 one higher.  The biggest concern is that cost increases had been decelerating in the last few years, although always remaining well above general inflation and GDP growth, and now may be reaccelerating.

Although medical costs are expected to rise 9%, most employers will mitigate the effect by continued cost shift to employees.  High deductible plans continue to spread and coinsurance is rapidly replacing copayments and is being applied to a wider range of benefits.  Provider unit price increases are responsible for most of the medical cost growth.  Those price increases are caused in part by cost-shifting due to inadequate government program reimbursement, provider consolidation and provider expenses for more IT.  Drug costs continue to be a bright spot, as wider use of generics constrains spending in that category.

There seems to be a strong consensus that health spending is continuing to grow at a very rapid pace, and this at a time when the general economy continues to struggle.  The new law is playing a role in these increases, partly through mandating expanded coverage and partly through uncertainty about its ultimate effects, which causes providers and health plans to protect themselves by raising prices and premiums.  It is unclear that the reforms called for by the new act will ultimately do much to limit further price increases, much less roll back the ones occurring now.