PwC and Milliman Examination of Medical Cost Trends

by Clive Riddle, June 10, 2015

PwC projects a medical cost trend for 2016 of 6.5%, netting down to 4.5% after benefit design changes. Milliman tells us that the 2015 actual trend was 6.3%, up from 5.4% in 2014.

PwC’s Health Research Institute this week released their tenth annual Behind the Numbers report, which includes a “projection for the coming year’s medical cost trend based on analysis of medical costs in the large employer insurance market. In compiling data for 2016, HRI interviewed industry executives, health policy experts and health plan actuaries whose companies cover more than 100 million employer based members.

Milliman released their fifteenth annual Milliman Medical Index report two weeks ago, which is “an actuarial analysis of the projected total cost of healthcare for a hypothetical family of four covered by an employer-sponsored preferred provider organization (PPO) plan. Unlike many other healthcare cost reports, the MMI measures the total cost of healthcare benefits, not just the employer’s share of the costs, and not just premiums. The MMI only includes healthcare costs. It does not include health plan administrative expenses or profit loads.”

With respect to 2015, Milliman found “the cost of healthcare for a typical American family of four covered by an average employer-sponsored preferred provider organization (PPO) plan is $24,671”, up from $23,215 in 2014. The 2015 family costs works out to $2,055 on a monthly basis.

Milliman emphasizes the importance of the role the Rx costs play in the mix. They note “prescription drug costs spiked significantly, growing by 13.6% from 2014 to 2015. Growth over the previous five years averaged 6.8%. The 2015 spike resulted from the introduction of new specialty drugs as well as price increases in both brand and generic name drugs, increases in use of compound medicines, and other causes. Since the MMI’s inception in 2001, prescription drugs have increased by 9.4% on average, exceeding the 7.7% average trend for all other services. Prescription drug costs now comprise 15.9% of total healthcare spending for our family of four, up from 13.2% in 2001.”

Milliman also highlights the role of cost-sharing, citing that the “total employee cost (payroll deductions plus out-of-pocket expenses) increased by approximately 43% from 2010 to 2015, while employer costs increased by 32%. Of the $24,671 in total healthcare costs for this typical family, $10,473 is paid by the family, $6,408 through payroll deductions, and $4,065 in out-of-pocket expenses incurred at point of care.”

PwC also keys on these two issues for 2016 as well, with drugs as an inflator, and cost-sharing as a deflator of the medical trend.  PwC spotlighted two inflators of the 2016 medical trend: (1) New specialty drugs entering the market in 2015 and 2016 will continue to push health spending growth upward; and (2) Major cyber-security breaches are forcing health companies to step up investments to guard personal health data, adding to the overall cost of delivering care.

PwC notes three factors that serve to "deflate" the 2016 medical cost trend: (1) The Affordable Care Act’s looming “Cadillac tax” on high-priced plans which is accelerating cost-shifting from employers to employees to reduce costs; (2) Greater adoption of “virtual care” technology that can be more efficient and convenient than traditional medical care; and (3) New health advisers helping to steer consumers to more efficient healthcare.

PwC also comments on the longer range medical trend perspective, citing four key cost growth factors H observed over the past decade:

• The healthcare-spending trajectory has leveled off but is not declining;
• Cost sharing slows consumer use of health services;
• Curtailing inpatient care lowers costs; and
• The ACA has had minimal direct effect on employer health costs.