Medical Cost Increases Projected for 2024

Looking ahead at medical cost trends, PwC’s Health Research Institute (HRI) gathered insights from health plan actuaries whose companies collectively cover nearly 100 million employer-sponsored large and small group members and 10 million Affordable Care Act (ACA) marketplace members. Participants were asked about their experience in 2022 and their insights into trend projections for 2023 through 2024, along with the factors underlying those trends, to come up with estimates and insights for 2024. A report detailing the findings highlights notable cost inflators,¹ including the ripple effects of inflation and growing drug costs. It also points to deflators, such as the arrival of biosimilars and a shift in care sites.

Inflation and its impact across the entire health care landscape are among the main factors driving spending. It is anticipated that hospitals and physicians will seek larger rate increases—and possibly more frequently—in contract negotiations. Staffing shortages and physician consolidation may wind up further amplifying this effect. The increased expense of drugs is viewed as another key inflator as plans face the growing price of existing drugs and the rising median price of new ones. The authors noted that along with the accelerated approvals of gene and cell therapies, pharmacy trends are not likely to slow down in the year ahead.

On the other hand, some developments are expected to lead to cost reductions. The prices of biosimilars tend to be significantly lower than the reference products at the time of launch. As they continue to market, these drugs can help drive substantial savings. In addition, plans have revealed a drop in inpatient utilization and a shift toward outpatient care, which can help keep costs in check. While these deflators may help dampen inflationary pressures to an extent, their impact is not expected to offset their impact fully. Considering all factors, HRI projected a 7% year-on-year cost trend for Individual and Group markets in 2024.

According to Patches Seely, MBA, RN, an EVP of clinical solutions at Carenet Health—a provider of 24/7 and on-demand patient engagement solutions—the report’s findings can be beneficial for managed care leaders and decision-makers looking to better understand their organization’s data around various factors like inpatient/outpatient volume, changes in formulary, or supply chain costs. Monitoring important cost-related factors can help organizations understand where they are and enable more accurate projections. “Sometimes getting your own data together can be a challenge, and reports like these can help,” added Seely.

Notable Inflators: Inflation and Rising Drug Prices

In the United States, inflation has reached rates we haven’t seen in decades, the PwC authors explained. Furthermore, employment in the health care sector took a nosedive during the COVID-19 pandemic, which meant hospitals incurred far higher labor costs. Although employment levels have recovered to an extent, they have yet to return to what was seen prior to COVID. If shortages continue, hospitals will need to seek higher reimbursement from payers. If employment stabilizes, the pent-up demand for care means heightened utilization is likely. Either way, health plans will be dealing with inflationary pressure in 2024.

Focusing on the workforce remains essential, Seely pointed out, and “investing in ways to match predicted need to workforce availability at the best price to the shift or schedule that’s needed is necessary.”

According to the report, heightened consolidation activities by hospitals, private equity firms, and physician groups will only amplify this inflationary pressure on medical costs in the short term, and the individual market is likely to be impacted to a greater extent than the group market. However, several tactics and tools may help health plans counteract these inflationary pressures and disrupt costs, such as targeted care management, value-based care, AI technologies, and in-house data analytics.

“Machine learning and generative AI will change the course of health care costs by lending advanced analytics to manage plan costs and identify potential emerging risks and high-risk patients,” explained Sean Crandell, MBA, SVP of Healthcare Economics at MultiPlan, a provider of tech and data-enabled end-to-end cost management, payment, and revenue integrity solutions.

Experts view the increasing cost of pharmaceuticals as another significant cost inflator. The PwC report pointed out that the median annual price for new medications approved by the FDA’s Center for Drug Evaluation and Research grew from $180,000 in 2021 to over $220,000 in 2022. There has also been dramatic growth in the approval of high-cost drugs. From 2008 to 2013, the proportion of approved medicines with a price tag of $150,000 or more per year was less than 10%, whereas that figure hit nearly 50% in 2020 through 2021.

“Payers are responding by more thoroughly assessing the cost/benefit of therapies in their coverage decisions, contracting with manufacturers to tie reimbursement to real-world evidence, exploring alternative financing arrangements (including stop-loss policies), and enacting prior authorization and other controls to manage drug utilization,” the authors noted.

Notable Deflators: Biosimilars and Evolving Sites of Care

The biosimilar market is accelerating, which means there is potential to help manage the rising cost of drugs. Biosimilar prices are, on average, over 50% less than the reference product’s price at the time of the biosimilar’s launch, according to the report, and the sales price of brand-name biologics often drop substantially following the arrival of the biosimilar. Although cost savings from biosimilars are projected to have a relatively modest effect on the overall medical cost trend, many health plans are keeping tabs on biosimilar developments, carrying out assessments, and hoping for more significant savings.

“The idea that biosimilars offer lower-cost alternatives to biologics is simple, but the actual implementation can be complex,” the authors noted, and one of the first steps for health plans may be to work with pharmacy benefit managers to understand which biologic or biosimilar provides the greatest cost efficiency. Health plans might also consider looking into “alternative cost-sharing design and utilization management tools” that can steer members toward cost-efficient options.

The report also looked backward to project 2024 cost trends, highlighting the influence of the past several years. The COVID-19 pandemic dramatically altered the US health care system by quickly shifting the care site from more expensive inpatient settings, like hospitals, to less expensive outpatient settings. The adoption of technology and the emergence of alternative care sites have led to changes in how and where Americans meet their care needs. Although some of these changes are temporary, others will be longer-lasting.

“Consumers continue to place more importance on a balanced combination of human and digital interactions,” said Ms Seely, who believes technology will play a significant role in 2024 by bringing care directly to patients and helping avoid more expensive avenues. She believes that the interest in and evolution of at-home and virtual care will ultimately reduce the total cost of care. “Leaning into other venues of care is a critical consideration for organizations to deflate rising costs.”

More Trends to Monitor in 2024 and Beyond

Beyond the main inflators and deflators detailed in the report, there were various other aspects that health plans highlighted. While they were not deemed a “significant trend bender,” these other factors can impact trend development and may be helpful to keep tabs on moving forward. “Many health plans continued to invest in total cost of care management initiatives such as value-based care that helped maintain year over year trend,” the authors pointed out. National health plans tend to fare better in this area, considering the advantages of scale, and as these plans keep growing, a deflator effect on cost trends is probable.

The net effect of pandemic policy changes related to COVID-19 will likely be neutral, the report explained, and the fallout of Medicaid redetermination will probably be felt only within the Individual market. While behavioral health utilization did grow during the pandemic and continues to see an uptick, health plans did not necessarily account for this in their forecasting. Similarly, efforts to address health equity and improve population health have yet to play a significant role in cost-of-care models. Although the impact of the Centers for Medicare and Medicaid Services (CMS) Price Transparency Rule on the 2024 trend is expected to be neutral, health plans may see a greater impact over time.

“Of the 4 key types of data analytics – descriptive, diagnostic, predictive, and prescriptive – only the first two are effectively used in managing health care costs and member health care delivery,” said Crandell. In 2024 and beyond, he anticipates that predictive and prescriptive analytics, which use AI to analyze many possible scenarios and suggest the ideal next step, will have a major impact on the managed health care space. “Tailoring managed care requires a proactive approach that focuses on prevention, early intervention, and the efficient allocation of resources to properly address the health needs of a population,” he added. “In this context, advanced analytics play a pivotal role in overcoming the ever-growing challenges of managing health care spending and cost containment.”

Reference

1. Medical cost trend: Behind the numbers 2024. PwC Health Research Institute. 2023. Accessed February 26, 2024. https://www.pwc.com/us/en/industries/health-industries/library/assets/pwc-behind-the-numbers-2024.pdf