It's no secret that healthcare costs in the United States are exceedingly high, and rising at 2x the rate of inflation. Healthcare costs represent a cost center over which the employer has seemingly no control.
The US spends the most of any country in the world on healthcare in terms of percent of GDP, sitting around 18% as of the most recent data available this year. But to address the issue of these skyrocketing costs, one needs to understand what is driving this increase. A recent study appearing in the Journal of the American Medical Association does a really nice job yet in outlining the factors behind the rising costs.
The researchers used data from the US Disease Expenditure Project, which utilizes 183 data sources and 2.9 billion patient records to quantify where each healthcare dollar is being spent in this country. Here's the bottom line. After accounting for inflation, healthcare expenditures increased by $933.5 billion between 1996 and 2013.
To put that into perspective, that's enough money to create 9 additional interstate highway systems. We could fully fund 3 NASAs every year. That's an new iPhoneX for every human on the planet. But to save money in the future, we have to know why we keep spending more. Here's the breakdown.
- Some of the increase in spending comes from the aging of the US population and population growth. Not much we can do about that.
- 50% of the increase was simply due to higher prices. This is distinct from healthcare utilization. In fact, healthcare utilization was decreased a bit over this time period. This is shown most dramatically in the data for inpatient care.
Let's take a moment to realize how weird this is, economically. Demand for healthcare decreased over time. Prices increased. That is not an efficient market.
Drivers of Cost Escalation in 2018 for Employers:
Pharma. With fewer branded, small molecule drugs coming off patent, employers will have fewer opportunities to encourage employees to buy cost-saving generics in 2018. Different chronic diseases have different patterns of price increases. One of the biggest increases is for diabetes care, driven largely by rising costs of pharmaceuticals.
High-Deductibles Lose Steam. After shifting healthcare costs to employees for years, employers are starting to ease off. Growth in high-deductible employer-based health plans is slowing, leaving less opportunity to stem increases in the use of healthcare services.
Rising General Inflation. An upswing in the US economy, now in its third-longest expansion in American history, is gaining strength, and higher general inflation rates will affect the labor-intensive health sector, driving up wages and - guess what - medical prices.
Health Plan Networks Are Challenged. With providers increasing their retail rates 1-2 x per year, a “percentage discount” from an ever increasing price has little value. Until prices are indexed to the Medicare Fee Schedule, unit prices will continue to rise faster than overall CPI.
Costs of Medical Advances. Employers must contend with cost increases that occur with medical advances, like the introduction of new medications used to treat complex conditions like cancer, multiple sclerosis and hepatitis C.
What Can Employers Do to Manage Costs?
In a competitive labor market, employers are looking for new cost containment strategies beyond shifting more costs to employees. They are pursuing new contract arrangements with providers, offering care coordination to their employees, and considering narrow networks to help them tackle healthcare prices.
Key Actions for Employers to Consider:
- Providing care coordination and care support for high-cost claimants. Given the complexity of the healthcare system, employees need a non-biased support infrastructure to allow them to make informed choices.
- Addressing quality by using incentives to direct employees to Centers of Excellence and other high-performance provider networks.
- Shifting away from traditional fee-for-service provider reimbursement toward new payment models that reflect the value of the services provided rather than just the quantity.
- Using data (from the claims administrator and care management firms) to understand workforce trends and health benefits actually used.
- Targeting work site health promotion programs to the right people.
- Evaluating the value of drug spending.
- Focusing more on narrow networks and direct provider arrangements to tackle price.
- Shifting away from the “insured” market to a “self-insured” structure to get greater access to data, have more significant control of decisions, and tailor a health benefit for the workforce.
Ultimately, to manage costs and reduce risk employers (or their health solution partners) will need access to real-time data, full cost transparency, Medicare-indexed pricing, and 24/7 care support for their employees who need medical care. Love to hear any other ideas out there.