Behind the Numbers report: Employers' medical costs to increase by 9% in 2011

The nation's employers can expect medical costs to increase by 9 percent in 2011, a decrease of 0.5 percent from the 2010 growth rate, according to the annual Behind the Numbers report published today by the PricewaterhouseCoopers LLP (PwC) Health Research Institute. For the first time, the majority of the American workforce is expected to have a health insurance deductible of $400 or more, as more employers return to "indemnity style" cost-sharing by raising out-of-pocket limits, replacing co-pays with co-insurance and adding high-deductible health plans.

The Behind the Numbers report includes findings of the PricewaterhouseCoopers' Health and Well-Being Touchstone Survey of more than 700 employers from 30 industries, as well as interviews with health plan actuaries and other executives whose companies provide health insurance for 47 million American workers and their families.

Improving wellness programs and increased cost-sharing lead the planned changes employers will make in the benefit plan designs they will offer for next year. According to PricewaterhouseCoopers' Touchstone research:

• Two-thirds (67 percent) of companies intend to expand or improve wellness programs inside the U.S.
• 42 percent intend to increase employee contributions for health insurance coverage.
• 41 percent intend to increase medical cost-sharing, including higher deductibles and co-pays, while only 26 percent intend to increase prescription drug cost-sharing.
• More employers are dropping health benefits for retirees. One-third of employers with over 5,000 workers subsidize pre-65 retiree medical coverage, down from 47 percent in 2009. Only 22 percent of employers with over 5,000 employees subsidize post-65 retiree medical coverage, down from 37 percent in 2009.

In 2011, the Behind the Numbers report outlines three primary deflators that will help employers hold down medical costs:

• Employers are moving toward pre-managed care benefit design by increasing deductibles and replacing co-pays with co-insurance. By requiring workers to spend more out-of-pocket at the point of care, employers believe they will rein in utilization of services and drugs. The number of employers using co-insurance for physician visits has nearly doubled, and one-third use co-insurance for brand-name drugs.
• Drug costs are tempered by generics. Insurers are benefitting from the growing use of generic drugs. Drugs representing about $26 billion in annual sales are expected to go off patent in 2011, including the world's best-selling drug, Lipitor. Generics account for as much as 80 percent of all prescriptions.
• COBRA costs are expected to return to more normal levels in 2011. COBRA subsidies passed by Congress in 2009 created a 1 percent increase in the medical cost trend, according to PricewaterhouseCoopers' analysis. A combination of declining unemployment and expiration of the COBRA subsidies is expected to lead to reduced enrollment in COBRA.

The biggest inflators of the medical trend in 2011 will be in hospital and physician costs, which make up 81 percent of premium costs.

• Hospitals shifting costs from Medicare to private payers and employers is seen as the Number One reason for higher medical costs trends. In 2011, Medicare, which is the single largest payer for hospitals, will reduce payment rates to hospitals for the first time after seven years of increases that nearly matched or exceeded inflation increases. Some hospitals that benefitted from higher payments in 2008 and 2009 may be able to manage this type of cut by tapping their reserves. Yet, more are likely to shift more costs to commercial payers during their negotiations.
• Provider consolidation is increasing, which is expected to increase their bargaining power. More physicians are getting out of private practice and joining forces with local hospitals or larger physician groups. The number of physicians involved in mergers or acquisitions in 2009 was 2,910, nearly twice that of 2008. There has been record consolidation activity in 2010, and PricewaterhouseCoopers expects the trend to accelerate in 2011. Payers expect to see more negotiating power and higher prices in the short term, though the benefits of consolidation should create efficiencies that moderate rate increases in the future.
• Spurred by stimulus funding that begins in 2011 and Medicare penalties that begin in 2015, hospitals will invest billions of dollars in certified electronic health record (EHR) systems. While many hospital systems were planning to implement EHRs in the near future, the government's new regulations dramatically condensed their timelines to invest in technology, IT staff, training and process redesign. Healthcare CIOs surveyed by PwC said they will make their largest investments to meet the new EHR regulations in 2011. In the long term, EHRs are expected to help control costs.

"For more than 50 years, U.S. employers have used health benefits as a critical part of their compensation package to recruit and retain workers," said Michael Thompson, principal, Human Resource Services, PricewaterhouseCoopers. "The value of these benefits is becoming an even more visible part of overall compensation as medical costs grow, and, by 2014, health insurance benefits will shift from being a voluntary benefit to an individual mandate, enforced by new tax levies. Companies are now working with their health plan providers for new post-recession, post-health reform strategies to sustain their programs and promote health and well-being as their next competitive advantage."

Each year, PricewaterhouseCoopers' Health Research Institute provides estimates on growth of private medical costs over the next year and what the leading drivers of the trend are expected to be. Insurance companies use medical cost trends to help set health plan premiums by estimating what the same health plan this year would cost in the next year. In turn, employers use the information to make adjustments in benefit plan design to help offset any cost increases.

"Health reform delivers only a minor impact on the underlying medical cost trends in 2011 and introduces hundreds of changes in the healthcare system designed to reduce costs and improve efficiencies in the long-term," said Kelly A. Barnes, U.S. health industries leader at PricewaterhouseCoopers. "These changes could bring significant new cost savings opportunities for employers and payers as well as new choices and transparency for workers buying insurance."