Projection of Flat Medical Cost Growth Rate for 2017 Puts Industry at an Inflection Point, According to PwC's Health Research Institute

NEW YORK, June 21, 2016 /PRNewswire/ -- PwC's Health Research Institute (HRI) anticipates 2017 will be a year of equilibrium for healthcare spending. Based on its annual report "Medical Cost Trend: Behind the Numbers 2017," HRI projects a 6.5% growth rate for next year, the same projection as 2016. While this forecast may feel like a win in the short-term compared with the double-digit growth of the past decade, it still outpaces general economic inflation. As a result, 2017 will be a tough balancing act for the health industry. Healthcare organizations must simultaneously increase access to consumer friendly services while decreasing unit cost. Employers, worried that this current trend is at an inflection point that could turn back up, will demand more value from the health industry.

"Forces that typically drive healthcare costs higher are being tempered by demand for value in the New Health Economy," said Kelly Barnes, US Health Industries and Global Health Industries Consulting Leader, PwC. "Consumers are pushing back against high cost sharing, forcing employers to look for new and creative ways to control spend."

There are five things healthcare industry executives need to know about the top factors expected to impact medical cost trends in the coming year:

1. Convenience comes at a price. Making care more convenient for consumers has led to higher utilization. Eighty-eight percent of consumers said that they are likely to seek treatment at retail clinics. With options on every corner, the threshold for seeking care is lower, drawing in people who may have forgone care in the past. While this may reduce costs down the road through improved overall health and wellness, the increased utilization of convenient care will be a main medical cost inflator for the foreseeable future.

2. Pent-up demand for behavioral health increasing near-term spend. Mental health – once on healthcare's back burner – now has the regulatory push and mainstream recognition to be a crucial part of employer's health benefits. Between 2005 and 2013, the share of employer health spending related to mental health rose from 5.2% to 6.2%. Expanded access will inflate next year's healthcare spending growth. However, it may help manage costs in the long-term, as behavioral health is linked to many other health issues.

3. We're going to see more aggressive network strategies. As employees push back against high cost sharing, employers are seeking other ways to control spend, such as high performance networks. These networks have more limited provider choices and may feature outcomes based payments – which could reduce costs by as much as 35% compared with broader, more inclusive networks. Forty-three percent of employers are considering implementing high performance networks in 2016, up from 37% the prior year.

4. Pharmacy benefit managers (PBMs) get aggressive. With increased appetite from employers to narrow their formularies to one treatment option, PBMs are using competition between products to more aggressively negotiate drug costs. This is putting a downward pressure on the growth rate of total healthcare spending. Reflecting the demand for value, the future of PBM contracting points toward paying for results and cures, not fee-for-service, around drug costs. 

5. Specialty drugs are loosening their grip on growth. While individual drug costs can be high enough to spark media attention, as a whole prescription drugs are expected to make up a relatively small portion of total health spending – 17% - in 2017. Compare this with hospital spending, which drives roughly half of all healthcare costs (30% inpatient services and 19% outpatient services). And though specialty drug costs outpace traditional drug spending trends, the cost of these new cures will not be a key driver of spend in 2017. Unlike in previous years when the cost of new Hepatitis C drugs caught the market off-guard, no specialty blockbusters are expected in 2017.

"It's too soon to declare victory or defeat when it comes to containing medical costs," said Barbara Gniewek, principal at PwC. "Stakeholders need to be ever-vigilant and keep a close eye on pricing, delivery and access changes that might impact utilization."

Like its predecessors, this year's Behind the Numbers report draws upon findings from PwC's 2016 Health and Well-Being Touchstone survey, one of the most thorough studies available on benefit plans offered by U.S.-based employers. Key findings include:

• The average number of medical plans offered decreased from 4.1 plans last year to 3.6 plans this year, with employers most frequently offering 3 plans (27%) versus 2 plans (24%) last year. However, the number of plans is still up significantly from 2.9 two years ago.
• High deductible plan prevalence is continuing to increase. While Preferred Provider Organization (PPO) plans are the highest-enrolled plan 47% of the time, this figure has decreased from 57% in 2012.
• Employers continue to consider private exchanges – 19% of employers are considering moving their active employees to a private exchange, and 3% have already done so.

For its research, HRI interviewed industry executives, health policy experts and health plan actuaries whose companies cover more than 100 million employer sponsored members. HRI also analyzed results from PwC's 2016 Health and Well-being Touchstone survey of more than 1,100 employers across 37 industries, and a national consumer survey of more than 1,000 US adults. Projections are based on HRI's analysis of medical costs in the employer insurance market, which covers approximately 155 million Americans. The report does not cover government-sponsored or non-group insurance.

Learn more about "Medical Cost Trend: Behind the Numbers 2017" during a Twitter Chat to be held on June 29, 2-3pm ET, by following #BTN2017. Featuring Ben Isgur (@bisgur) of PwC's Health Research Institute and Barbara Gniewek (@BarbaraGniewek), Principal at PwC, and led by Politico reporter Paul Demko (@PaulDemko), the chat will engage those interested in discussing what the biggest medical cost inflators will be over the next 5 years. Learn more about the 2016 Health and Well-Being Touchstone Survey on June 21 from 1-2pm ET. Click here to register.

For the full report and graphics illustrating the key findings, visit: https://www.pwc.com/us/en/health-industries/health-research-institute/behind-the-numbers.html.

About PwC's Health Research Institute (HRI)
PwC's Health Research Institute (www.pwc.com/hri) provides new intelligence, perspectives, and analysis on trends affecting all health-related industries. The Health Research Institute helps executive decision makers navigate change through primary research and collaborative exchange. Its views are shaped by a network of professionals with executive and day-to-day experience in the health industry. HRI research is independent and not sponsored by businesses, government, or other institutions.

About PwC's Health Industries Group
PwC's Health Industries Group (www.pwc.com/us/healthindustries) is a leading advisor to public and private organizations across the health industries, including healthcare providers, pharmaceuticals, health and life sciences, payers, employers, academic institutions and non-health organizations with significant presence in the health market. Follow PwC Health Industries at @PwCHealth.

About PwC US
At PwC US, our purpose is to build trust in society and solve important problems. We're a network of firms in 157 countries with more than 208,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at www.pwc.com/US.

© 2016 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.

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