Medical Costs in 2018

It is not too early for health plans and employers to think about 2018 medical costs, as negotiations are already underway for 2018 premiums or self-funding targets.  The annual Behind the Numbers report from PriceWaterhouseCooper’s Health Research Institute gives that organization’s early projection for medical trend next year.  (HRI Report)   The headline number is trend growth of 6.5%, driven largely by unit price.  The author’s expect benefit design changes to reduce the underlying trend by about a point to 5.5%.  The 6.5% increase is modestly higher than 2017’s 6.0% and 2016’s 6.2%.  Some factors identified by HRI as contributing to the trend uptick are general inflation, reduced impact on utilization of shifting costs to employees, and fewer branded drugs coming off patents.  HRI thinks these may be offset to some extent by the high-profile battle over drug pricing and by a renewed focus on intensive care management for certain members.

While medical trend is generally stable, it has unfortunately stabilized at several percentage points above economic or personal income growth.  As we have been saying for years, and this report acknowledges, the health spending issue in the US relates to price, not utilization and health plans and companies are going to have to work harder on reducing unit cost if they want to see a lower trend, particularly since a continuation of stable utilization cannot be assumed.  The bad news is that hospital inpatient and outpatient spending, which accounts for almost half of total spending for these employment-based plans, are going to be hard to change given the absurd levels of horizontal and vertical consolidation we have seen among health systems and the willingness of these systems, despite many being nominally non-profit, to gouge their commercial health plan customers.  A structural remedy is needed or perhaps if the systems can’t start being a little more responsible, government should just dictate that health plans can pay them Medicare rates as a default.   And drugs, which are climbing toward 20% of costs, are similarly relatively immune to cost reductions, as manufacturers use their government-provided monopolies to charge extremely high prices and garner extremely high profits.  Since this only exists because of a government grant of patent rights, government is well within its rights to limit prices and profits on those drugs.  If we are really going to reduce trend, it is going to take drastic action.