May 20th, 2011

Pent-up demand for health services and consolidation among doctors and hospitals are among the factors exerting upward pressure on costs.

U.S. employers can expect to see health-care costs rise by 8.5% in 2012, up a tick from this year’s 8% climb, according to a new report from PricewaterhouseCoopers. The firm says that by changing the design of health-benefit plans, such as increasing what employees contribute, employers could keep actual cost hikes to 7% this year.

PwC had projected a 9% increase in employer medical costs for both this year and last, when the actual increase was 7.5%. The slow economic recovery, unemployment, and reduced disposable income caused Americans to seek fewer health-care services, which led to lower-than-expected costs.

The end of subsidized COBRA coverage in 2010 is offsetting otherwise rebounding plan-utilization rates so far in 2011. But employers and health plans expect pent-up demand to put upward pressure on costs in 2012, says the PwC report, which is based on surveys of 1,700 employers from 32 industries.

Increasing consolidation among hospitals and physicians is also expected to play a role in inflating medical costs in 2012. The trend is expected to accelerate as health reform provides incentives for them to align under so-called accountable care organizations. Such consolidation is seen as a way to increase efficiency and reduce costs in the long term, but health plans is concerned it will reduce competition among providers.

Still another factor is postrecession stress that is building up in workers. Health plans and employers interviewed by PwC say they are beginning to see more claims for stress-induced illnesses, which are highly correlated to unhealthy behavior and adverse health conditions such as heart disease.

At the same time, other factors will have a deflating effect on costs. One is increased cost sharing with employees. High-deductible plans were the fastest-growing type of plan design in 2011. Higher deductibility also makes it less attractive to use out-of-network doctors and hospitals. And sales of lower-cost generic versions of drugs scheduled to go off-patent in 2012 are expected to reach $28.1 billion, the highest in history.

PwC says health-care reform will have minimal effect on medical cost trends in 2012. Provisions of the Patient Protection and Affordable Care Act that take place prior to 2012 are small changes for which employers have already fully accounted. Medicaid expansions, health-insurance exchanges, subsidies to buy private insurance, mandates for employers to offer insurance, and mandates for individuals to buy insurance all are slated to take place in 2014 or later.

Health care in the future will be very different from what it is today, and uncertainty about the changes complicates health-care benefits strategies, notes Michael Thompson, principal of human resource services for PwC. “The most proactive employers are planning for potential future scenarios and making incremental changes now,” he says.