PwC’s Health Research Institute just released “Medical Cost Trends: Behind the Numbers 2024” with the 7% year-over-year forecast. That’s higher than its projected medical cost trend in 2022 and 2023 (5.5% and 6.0%, respectively). Partly, the higher number is a result of recent events in the overall economy and in workforce trends in health care, which could cease to be big drivers down the road. A couple of “inflator” factors have longer term implications. But the two major “deflators” represent cost suppressors that will definitely have an effect on costs going forward.
To arrive at the 7%, the Institute queried health plans on multiple factors, which it then parsed into “cost inflators” and “cost deflators.” The information is served up with great detail, including implications for health plans, providers, payers, and employers. In the right hands, it could help employer plan sponsors take action now to deflect some of the “inflators” predicted to boost medical spending next year.
A few of the inflators are familiar to us and need no detailed description. Inflation has been high, but it’s coming down. The health system’s scramble for employees is well-documented, its outcome still uncertain. The ongoing cost to health consumers of industry consolidation likewise is no secret–although the report suggests a backlash from unhappy physicians may be in the offing. The report sees them exiting the large entities created via mergers and buyouts, fleeing to the emerging value-based opportunities that let them actually practice medicine.
New pharma products
But, the report suggests, the pharmaceuticals industry will continue to find ways to sell more drugs at higher prices to health plans and groups. This is an area where plan administrators will have their hands full attempting to reign in spending, as more plan members will demand these new drugs that fight diseases like diabetes and cancer. The upside: the new drugs may reduce the cost of care for chronic and cancer patients, which would be a huge plus over time.
PwC’s U.S. Health Services Sector Lead, Thom Bales, one of the authors of the report, said the new, costlier drugs hitting the market will likely have different short- and long-term plan impacts. Those that address obesity and diabetes offer promising outcomes for overweight plan members and those with diabetes. So, despite their high purchase prices, they could deliver savings in the form of healthier individuals over time. Glucagon-like peptide drugs are an example of new-to-the-market products that promise to fight obesity.
“The new pharmaceutical pipeline is anticipated to be a strong headwind to any medical cost trend improvement. The median annual price for new drugs being approved by the U.S. Food and Drug Administration’s (FDA) Center for Drug Evaluation and Research (CDER) increased from $180,000 in 2021 to $222,000 in 2022, implying double-digit annual growth in price,” the report states. “Pharmaceutical manufacturer pricing is expected to be in the high single or double digits from 2023-2024. New drugs typically exist in the market for 15 years on average without competition from generic drugs, along with general increases in drug prices over time. Multiple insurers report that the trend used for pricing 2023 plans was lower than actual experience, driven by higher-than-expected pharmacy trends for both brand and specialty drugs.”
Compounding the higher cost of many new designer drugs: drug shortages and supply chain issues. A report to Congress found a 16.6% increase in the price of drugs in shortage, driven mostly by an increase in the price of generics (14.6%).
Health plans are hoping that biosimilars–non-generic drugs that are similar to, but cheaper than, costlier brand-name drugs–can be substituted in their formulas to hold down costs. But the Institute says such relief may still be some years away.
“The idea that biosimilars offer lower-cost alternatives to biologics is simple, but the actual implementation can be complex. For health plans, the first step is likely to be working closely with pharmacy benefit managers to understand which biologic/biosimilar(s) is the most cost-efficient — sometimes staying with the existing biologics might be as cost-efficient as switching to biosimilars through competition-driven larger rebates,” the report cautions. “While biosimilars have grown and carved out a space on the medical benefit side, particularly within physician-administered drugs in oncology, biosimilar market maturity within the pharmacy benefits space is just beginning.”
Commenting on the pharmaceutical component of overall costs, Bales said the new designer drugs aren’t the only ones contributing to higher costs. The prices of many generics have also increased of late. But the newly released products bring high price tags because of the billions spent on their development.
“These new drugs coming to market – they are very expensive – over $200,000 for the average new designer drug, with the most expensive ones costing up to $3 million,” said Bales. “It’s staggering. But the cost of development is high too, and that’s built into the price.”
He said the health plans surveyed only referenced the newly approved obesity compounds for non-diabetic use. “More will be approved in the upcoming year. We would expect next year for those to have more of an impact on cost going forward.”
The rapid consolidation within health care continues to put financial pressure on health plans and, subsequently, on employer-sponsored plan costs. When physician groups become part of a larger entity, they are forced to increase revenue to pay part of the system’s overhead and improve bottom line results. With fewer standalone provider options available to health plans, particularly outside major metropolitan areas, cost control becomes ever more difficult.
“Recent physician practice acquisition activities, including actions by hospitals, private equity firms and insurers amplify the inflationary pressure during contract renewals. Studies find that such acquisitions accelerated during the COVID-19 pandemic, and over the three-year period starting from 2019, the percentage of physicians employed by hospitals or corporate entities increased by 62% to 74%. … The ongoing consolidation of physician groups is expected to compound the inflationary pressure on medical cost in the near term,” the report states.
Relief may come over time as “many consolidated physician groups aim to enter value-based care and thus lower total cost of care.” Until that happens on a large scale, plan member care choices will remain limited.
Even within these large closed systems, an emerging trend – a shift in the site of care – exists that may deliver cost savings.
“The pandemic revolutionized the dynamics of the U.S. health care system by rapidly shifting the site of care from more expensive inpatient hospitals to less expensive outpatient. While this trend started before the pandemic with cataracts and cosmetic surgery in the 2000s, it accelerated toward the end of the pandemic when employment in ambulatory care settings recovered the fastest. As a result, lower-cost freestanding and non-acute sites were able to absorb a large portion of the demand for these health care services that were previously only available through inpatient settings.”
Virtual, off-site care as offsets
The report believes this shift represents a “new phase” in health care delivery. “Plans are factoring in higher utilization of less expensive in-person settings and virtual care going forward when pricing their 2023 plans and beyond. Non-acute sites have lower costs for plans, which in turn is expected to decrease the share of revenue received by inpatient hospitals. With lower-cost in-person settings and virtual delivery setting the path going forward, the overall cost of care is expected to decline, helping plans offset the trend inflators.”
This is very good news for employer plans. Meantime, the uptake in virtual care– also driven by the pandemic– should both offer lower overall cost of care and improve employee health.
“Through plan design changes and adding new third-party telemedicine vendors, employers will likely continue to encourage the use of telemedicine. Virtual visits for behavioral health have exploded in recent years, allowing for increased flexibility in addressing the pressing need for mental health treatment, especially to address significantly increased anxiety and depression issues among adolescent patients. Virtual primary care visits are expected to increase in the coming years as well.”
Bales said both health plans and plan sponsors are taking steps to integrate innovative solutions into their plans to achieve better care at lower cost. But it will take time for many of them to do so, and they will likely need guidance from experienced benefits consultants.
“Health plans are investing heavily in care management and AI. Some are above the line and some below the line. Those with more resources can invest more in population health care management. We saw that in our survey,” he said. “Do plan sponsors understand these strategies? There remains a gap in terms of employer understanding. There are opportunities out there for health plans and employers, and that’s where benefits consultants come in. Only the very large employers can set up a health care analytics team in the HR department.”