Medical Cost Trends for 2011, health care going up 9%, hey, that’s progress-employees beware

According to a recent report from PricewaterhouseCoopers’ Health Research Institute, The medical growth trend is expected to decrease from 9.5% in 2010 to 9% in 2011. Sounds like we are headed in the right direction, but it is more complicated.  Much of the decline is coming about because employers are simply shifting costs to workers in the form of higher out of pocket costs and fewer choices in health care plans.  Plans that manage care more closely are on the rise which means less flexibility for patients.  More emphasis on generic drugs means penalties for not using a generic.   In short, the promise of lower health care costs does not appear to extend to the average employee.  Workers costs are going up, driven in part by the changes caused by the PPACA.  

For a look at what a 9% trend in health care may mean for premiums, see Anatomy of a 30% Premium Increase

Here are some highlights from the report. 

This year’s Behind the numbers was especially challenging because of a high degree of uncertainty among health  plans and employers. Thanks to the worst recession in a quarter century, employers had less to spend on their workforces. Then came health reform with dozens of small-bore changes about how healthcare is financed, delivered, packaged and regulated. Some changes will drive the trend up, while others will push it down

Here’s what employers can expect to see in 2011:

• Growth in medical costs for 2011 is expected to be 9%, down 0.5% from 2010.

• Three primary deflators that will help hold down the medical trend.

–Employers are moving network benefits toward pre-managed care benefit design by increasing deductibles and replacing co-pays with coinsurance. By requiring workers to spend more out-of-pocket at the point of care, employers believe they’re reining in utilization of services and drugs. The number of employers using coinsurance for physician visits has nearly doubled and one-third use coinsurance for brand-name drugs, according to PwC’s survey of 700 employers. In addition, high-deductible plans were the most prevalent plan for 13% of employers surveyed in 2010, up from 6% in 2008.

–Generics continue to eat into brand-name drug market share. About $26 billion in drugs are expected to go off patent in 2011, including the world’s best-selling drug, Lipitor. Generics, which account for as much as 80% of all prescriptions in some plans, continue to erode the market share of brand name drugs, and remain a drag on medical cost trends.

–COBRA costs are expected to return to more normal levels in 2011. COBRA subsidies passed by Congress in 2009 created a 1% upswing in the medical trend. Laid-off workers who continued their healthcare coverage typically incurred medical costs of two to four times higher than those of other workers. In 2010, the combination of higher unemployment and new government subsidies to pay for COBRA coverage led to a significant increase in COBRA coverage. A combination of declining unemployment and expiration of the COBRA subsidies is expected to lead to reduced enrollment in COBRA in 2011.

• The biggest inflators of the medical trend will be in provider costs, which make up 81% of the medical benefit.

–Cost-shifting from Medicare is expected to increase as hospitals see their rates cut 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 renegotiate terms and shift more costs to commercial payers during their negotiations.

–Provider consolidation is increasing, which is expected to increase their bargaining power. The number of physicians involved in mergers or acquisitions in 2009 was 2,910, nearly twice that of 2008. In addition, 2010 has seen record activity as well. Payment changes, embedded in the federal health reform law, also encourage models that align financial incentives among providers.

–Spurred by stimulus funding that begins in 2011 and Medicare penalties that begin in 2015, hospitals will invest billions of dollars into 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.

An in-depth discussion PricewaterhouseCoopers’ Health Research Institute