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Health-Care Inflation Rate to Slow Significantly

Dan Mangan
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Already sluggish health-care inflation is expected to slow down even more in 2014 as consumers, employers and the federal government continue looking to cut medical costs, a new report said Tuesday.

And the rate of health-care inflation-as distinct from total medical spending-could drop further in future years as the Affordable Care Act rolls out and employers and consumers pay greater attention to costs, suggests the report by the professional services firm PwC.

In 2014, the health-care inflation rate is projected to slow to 6.5 percent, according to the "Medical Cost Trend: Behind the Numbers" report by PwC's Health Research Institute. That's 1 percent less than the 7.5 percent inflation rate for 2013 that HRI projected last year.

After accounting for changes in health insurance benefit designs that drive down costs, the net growth rate of inflation next year is projected to be just 4.5 percent, according to HRI. The report based those projections on analysis of the large-employer market that covers around 150 million Americans.

The deceleration in health-care inflation breaks a historical pattern of increases in that inflation rate after a recession ends, and stems from "structural changes that are altering how and where care is being provided," the Health Research Institute report said.

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"For an industry that until recently has consistently seen double-digit growth, the ongoing slow-down poses immediate financial challenges," the report noted.

"Total spending will rise with the cost of caring for the newly insured" as mandated by the new Affordable Care Act, the report said.

"But the rate of growth, which is based on unit cost, should remain at some of the lowest levels since the government began measuring national health expenditures in 1960."

Ceci Connolly, a PwC managing director and a leader of the Health Research Institute, added that, "From an employer perspective, slower rate of growth on health-care costs is good news."

Connolly said HRI's projection of lower health-care inflation confirms a trend first identified last year.

"A year ago, when we issued this report for the seventh time, we described what we thought was a 'new normal' in the health-care ecosystem. There was a slowdown in the rate of [inflation] growth," Connolly said.

"Round about 2008, 2009, it was the recession that was slowing down health-care spending, and we've seen that movie before," Connolly said. "There's a recession, then health-care spending slows down. The economy comes back, health spending pops, right back up again. That has not happened this time."

"The recession officially ended in 2009. And over and over again, our health care clients are saying to us, 'Things have changed: consumer are thinking differently, doctors are doing their jobs differently, health-care is being delivered in lower-cost settings."

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HRI's report identified four "deflators" holding down health-care costs.

Among them is the increasing tendency among US companies to offer workers insurance plans with higher co-pays and deductibles.

"High-deductible plans have been rising steadily and will continue to do so," said Connolly. "We see behavior changing as a result of being enrolled in high-deductible plans."

"Cost-conscious shopping is happening increasingly as individuals are now paying more of their costs. It's their own money. When you're spending your own money, you make some different choices."

The other three deflators are: less expensive non-traditional care sites such as retail health clinics; the adoption of "high-performance" health-care networks by businesses seeking to control coverage costs; and a decline in hospital readmissions spurred by penalties under the ACA that penalize hospitals in the event of patient readmissions for certain conditions.

HRI said the use of retail clinics tripled in the past five years. Those clinics offer savings up to two-thirds of the cost of a visit to a doctor's office or hospital.

Connolly said the poor economy in recent years might have initially encouraged people to try a retail clinic for the first time, "because you didn't much money."

"But why are they continuing to go in larger and larger numbers? Yes, it's more affordable, but it's also more convenient, people like the experience."

"The health-care sector is way behind when it comes to customer services and the customers experience . . . the consumers are demanding change," Connolly said.

The institute said 33 percent of the businesses it surveyed in another study indicated they planned to partner directly with high-performance health networks, which offer high-quality care at lower prices.

One example is cardiac care offered by the Cleveland Clinic, which is being used by Lowe's (LOW), Boeing (BA) and Wal-Mart (WMT), the report noted.

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HRI said that while the "use of high-performance networks is still in its infancy . . . early data suggest the savings range from 10-25 percent off the total cost."

The HRI report also said it expects "hospitals will act aggressively in 2014 to ensure patients don't require a return trip" to the hospital after discharge, given the penalties for readmission that are set to increase under the ACA.

Connolly said that health-care cost savings in future years could be significantly driven by reduction of the 25 to 30 percent of waste that is estimated in the health system as a result of duplication and inefficiency.

"There are phenomenal opportunities for additional improvements, efficiencies and savings," she said. "But that transformation is going to take a long time."

The HRI report noted that the decline in the rate of health-care inflation was offset by two inflationary factors..

The first was a rise in the cost of specialty drugs, which the report said would push spending for drugs higher for the first time in several years. The report noted that while the use of less-expensive generic drugs "will remain high, there will be fewer new ones entering the market."

In contrast, by next year specialty drugs will account for up to 60 percent of new FDA approvals, "and seven of the top 10 best-selling therapies," the report said.

HRI also said that the ongoing consolidation seen in hospitals' continued acquisition of physician practices could drive up health-care prices by up to 20 percent in some markets.

The HRI's report's projection of an overall lower inflation rate is in line with the federal government's National Health Expenditure data, which tracks the inflation rate for all US health-care spending, not just spending related to large employers' plans.

In 1990, the annual growth in total US health spending was 11 percent, according to NHE data. That inflation rate was down to 7.6 percent in 2007, and 4.7 percent in 2008.

The rate fell to 3.9 percent for both 2009 and 2010.

-By CNBC's Dan Mangan. Follow him on Twitter @danpostman

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