Commercial health care spending growth is estimated to grow to its highest level in 13 years, according to PwC’s newest research into annual medical cost trend. PwC’s Health Research Institute (HRI) is projecting an 8% year-on-year medical cost trend in 2025 for the Group market and 7.5% for the Individual market. This near-record trend is driven by inflationary pressure, prescription drug spending and behavioral health utilization. HRI is also restating the 2023 and 2024 medical cost trends as higher than previously reported based on the input of health plans we surveyed and their trend experience. This unfavorable trend reflects higher than expected utilization of glucagon-like peptide-1 (GLP-1) drugs as well as higher acuity (higher levels of care) inpatient and outpatient utilization. Inpatient and outpatient utilization were driven by demand from care deferred since the pandemic, which was met by newly created capacity as sites of care shifted to outpatient, professional and ambulatory care settings.
PwC is projecting an 8% year-on-year medical cost trend in 2025 for the Group market and 7.5% for the Individual market, driven by inflationary pressure, prescription drug spending and behavioral health utilization.
The same inflationary pressure the healthcare industry has felt since 2022 is expected to persist into 2025, as providers look for margin growth and work to recoup rising operating expenses through health plan contracts. The costs of GLP-1 drugs are on a rising trajectory that impacts overall medical costs. Innovation in prescription drugs for chronic conditions and increasing use of behavioral health services are reaching a tipping point that will likely drive further cost inflation. Meanwhile, cost deflators are not enough to offset cost inflators. The growing adoption of biosimilar medications may provide some relief, while many health plans are looking inward to find opportunities across business operations to generate additional cost savings. Today’s medical cost trend is an urgent call to action for healthcare organizations to rethink their strategies to manage the total cost of care more effectively – a challenge that is inextricably linked to the broader challenge of affordability, defined by the Affordable Care Act as the percentage of a member’s household income used for healthcare expenses.
Source: PwC analysis
Note: 2023 and 2024 trends were restated to be higher than previously reported. This unfavorable development reflects higher than expected utilization of GLP-1 drugs for both diabetes and weight management as well as higher acuity inpatient and outpatient utilization.
As we predicted in our Next in health services 2024 report, the sector is in a state of sustained economic compression. For healthcare organizations already in a fragile financial position, these factors are relentless. This reality requires a new response. Organizations should reshape strategies; reengineer financial, workforce and business models and capitalize on each transformational opportunity — from investments in innovation and technology to deals — to overcome the inflationary chokehold and forge a path to a drastically different cost and business model. Health plans we surveyed are also keeping their eye on several trends to watch, including Centers for Medicare and Medicaid (CMS) price transparency, the implementation of generative AI (GenAI), Medicaid redetermination, the No Surprises Act and the impact of the Inflation Reduction Act of 2022.
Each year, HRI surveys and interviews actuaries at US health plans to generate an estimate of medical cost trend for the coming year. The medical cost trend is defined as the projected percentage increase in the cost to treat patients from one year to the next, assuming benefits remain the same. While medical cost trend can be defined in several ways, HRI’s research estimates the projected increase in per capita costs of medical services and prescription medications that affect Group and Individual insurance plans. Insurance companies use the projection to calculate health plan premiums for the coming year. For example, a 5% trend means that a plan that costs $10,000 per member this year would cost $10,500 next year. The medical cost trend, or growth rate, is influenced primarily by changes in the price of medical products and services and prescription medications, known as unit cost inflation, and changes in the number or intensity of services used or changes in per capita utilization.
Healthcare inflation materialized with the continuous increase in the year-over-year healthcare expenditure index. Within health expenditures, the hospital and related services index saw a significant uptick in the most recent two quarters, hitting 6.3% growth in the fourth quarter of 2023 relative to the fourth quarter of 2022. Generally, health expenditure inflation continues to lag behind hospital wage inflation.
While hospital performance has improved through year-to-date 2024 relative to industry low margins in 2022, providers continue to face operational difficulties and rising expenses. With greater regulation related to government fee schedules for Medicare and Medicaid, providers are looking to Commercial health plan contracts to recoup growing operating expenses.
Additionally, half of health plans we surveyed this year noted hospital, private equity and other physician consolidation as among the top three cost inflators, reflecting the lasting impact of consolidation on contract negotiation as existing contracts come up for renewal. Data on the impact on health care costs of heightened deals activity is still emerging. To better evaluate the effect of consolidation on medical cost trend, health plans should consider future deal trends at a more detailed level, by segment as well as local markets, specific to the plan.
Source: Bureau of Economic Analysis Personal Consumption Expenditure, Bureau of Labor Statistics Consumer Price Index, PwC analysis
Health plans and payviders: Health plans will likely encounter greater unit cost increase pressure from providers, which can play out for several years. Health plans should continue to rethink strategies that deliver greater affordability, as affordability is key to winning in the Individual and Group markets. Value-based care, targeted care management, versatile in-house data analytics and the power of artificial intelligence technology can help plans aggressively counteract the forces of inflation.
Providers: Ongoing cost pressures require providers to solve for systemic workforce shortages that continue to strain operations and to be creative in leveraging new technology to automate processes and implement efficiencies (e.g., billing, scheduling, electronic record management.) In the long term, the likelihood of constrained reimbursement from CMS can require more orchestrated efforts to optimize margin.
Employers: Employers are expected to maintain current employee cost sharing to try to retain key talent. To control costs, employers are leveraging plan design (steering members to lower-cost providers, navigation solutions, virtual health) and network strategies (narrow, high-performing, tiered networks.)
Source: Bureau of Economic Analysis Personal Consumption Expenditure, Bureau of Labor Statistics Consumer Price Index, PwC analysis
Pharmaceutical companies have successfully invested in innovation or therapies for many chronic conditions. While these innovations have delivered improved health and quality of life for many consumers, they create sustained inflationary pressure on medical cost trend in coming years. Biopharmaceutical innovation is yielding new treatments for obesity, cell and gene therapies for rare diseases, and neurological conditions such as Alzheimer’s disease, Parkinson’s Disease, and schizophrenia. These drugs, together with their expected high unit cost and/or high utilization rate, are likely to drive up medical costs.
GLP-1 agonists are a type of medication that mimics the effects of the hormone glucagon-like peptide-1, which helps to regulate blood sugar levels and promote weight loss. They first became a major cost inflator last year given a spike in utilization combined with high unit cost. A year of experience since our last report substantiated the inflationary impact, and health plans continue to regard GLP-1 as a key inflator for the coming years.
In the near term, utilization of GLP-1 agonists is anticipated to continue to grow in both the Individual and Group markets, driven by expansion of approved indications (studies are being conducted in Parkinson’s disease, sleep apnea, addiction), and growing patient interest and acceptance. The ultimate market penetration of GLP-1 agonists remains unknown. The long-term savings generated by these drugs requires more time to be analyzed. However, the benefits of managing weight – one of the key effects of GLP-1 agonists – include lowering the risks of type 2 diabetes, heart disease and stroke, all of which carry significant medical and economic costs.
New central nervous system (CNS) drugs are likely to drive significant increases in healthcare costs in coming years. CNS drugs are used to treat brain disorders, including Alzheimer's disease, Parkinson’s disease, Multiple Sclerosis (MS), bipolar and schizophrenia. Historically, CNS drugs have had failure rates in clinical trials. Recent advancements have introduced a wave of innovative drugs. While these advancements hold promise for improving patient outcomes, they may bring cost challenges as well.
Health plans and payviders: Most health plans offer coverage of GLP-1 agonists for type 2 diabetes. Currently, GLP-1s are not considered “essential health benefits” and are not required to be covered by plan sponsors for weight management. Health plans should consider their broader weight management benefit strategies, expected costs based on their member demographics, potential cost savings, and effects on member/employee satisfaction and well-being. Health plans also should closely monitor regulatory changes that might require coverage for GLP-1 agonists for members meeting certain criteria.
As more CNS drugs are approved, health plans will likely face increasing pressure to cover these medications. Consequently, health plans should make critical decisions about formulary inclusion and whether to implement stringent utilization management techniques. This could significantly impact the margins for some health plans. At the same time, some plans may see costs come down as patient outcomes improve. Enhanced efficacy of these new CNS drugs could result in better disease management, fewer hospitalizations and reduced need for extensive medical interventions.
Pharmaceutical manufacturers: GLP-1s have launched a significant opportunity for manufacturers already in the market and they’ve driven a wave of Research and Development (R&D) investments and Mergers & Acquisitions (M&A) as other manufacturers look to enter the field. Manufacturers are likely to continue innovating their commercial model to differentiate, work around market access barriers, and provide better overall patient and prescriber experience. Manufacturers are expected to continue evolving their products and pipelines to include longer dosing cycles, more convenient doses in pill form, and superior clinical and health economics data.
Successful launch and commercialization of the upcoming CNS pipeline will likely take significant efforts across sales and marketing, pricing and market access, patient services, medical affairs and several other areas. Identifying patients for treatment, supporting those patients and their providers from initiation to adherence, demonstrating real world value over current standards of care and differentiating from competitors can be keys to success.
The utilization and cost of behavioral care have grown since the pandemic. At the same time, there’s an increasing demand for behavioral healthcare workers and not enough workers to meet the demand. Care reimbursement challenges imply future unit cost inflation as well.
Source: CareJourney, “Commercial Market Intelligence – Provider Procedure Cost Variation Analysis” Dataset from 2018 – Q3 2023; PwC analysis
*Dataset consists of 17 million lives as of 2022 for US Mid-Level Commercial and National Carriers
**Methodology: Dataset contains claims by HCPCS codes; BH specific codes were identified using a join of multiple BH HCPCS mappings found in our research with ihs.gov website one contributing most of the codes.
Health plans and payviders: Health plans will likely face the challenge of striking a balance between adequately covering behavioral health services and managing medical costs. The high demand for mental health and substance abuse treatments requires careful strategies, especially considering reimbursement issues with providers. Health plans may need to explore innovative solutions such as value-based payment models that incentivize quality outcomes and efficient resource utilization in behavioral health services. Additionally, they could invest in collaborative care models with providers that integrate physical and mental health services, promoting holistic and cost-effective care.
Providers: Providers should continue to address the complex needs of patients with behavioral health conditions while also managing the financial impact on their practices. This includes investing in specialized training and resources to effectively diagnose, treat and manage behavioral health conditions, and exploring creative approaches that move away from traditional therapy models. Providers may need to explore alternative payment models, such as bundled payments or capitated arrangements, to better manage the financial risks associated with behavioral health services. Collaborating with health plans and payviders to establish clear reimbursement policies and confirm adequate payment rates for behavioral health services is essential for sustaining quality care delivery.
Employers: Employers may need to make difficult decisions regarding benefit offerings and cost-sharing arrangements. They could consider implementing employee assistance programs (EAPs) or behavioral health initiatives to proactively support the mental well-being of their workforce, potentially reducing the need for more intensive and costly interventions. Employers could also explore value-based insurance design, where incentives are provided to encourage employees to seek appropriate behavioral health care, leading to improved outcomes and cost savings. Collaborating with health plans and providers to advocate for holistic and affordable behavioral health coverage options is essential for the overall well-being of employees and the financial sustainability of employers.
Source: CareJourney, “Commercial Market Intelligence – Provider Procedure Cost Variation Analysis” Dataset from 2018 – Q3 2023; PwC analysis
*Dataset consists of 17 million lives as of 2022 for US Mid-Level Commercial and National Carriers
**Methodology: Dataset contains claims by HCPCS codes; BH specific codes were identified using a join of multiple BH HCPCS mappings found in our research with ihs.gov website one contributing most of the codes.
