Double Digit Increases Anticipated in 2007

WASHINGTON, Nov. 13, 2006 –Employers who do not make changes to their benefit packages are being told by carriers to expect double-digit increases in healthcare costs, according to PricewaterhouseCoopers, which today released the first reported projections of medical cost trends for 2007. The projections are used by insurance carriers and employers to set health insurance premiums levels and design benefit packages in 2007. Employers are expected to adjust their health benefit design to avoid double-digit increases in premiums.

According to PwC, insurance carriers anticipate medical costs to rise across all plan designs, including health maintenance organizations (HMOs), preferred provider organizations (PPOs) and consumer directed health plans.  But the rate of increase will be slowest among consumer-directed health plans, in which members have higher deductibles and pay more of the direct costs of their care upfront.  In 2007, PPO costs are expected to rise 11.9 percent, HMOs by 11.8 percent and consumer-driven health plans by 10.7 percent.  

A detailed analysis of medical cost trends can be found in a new report by the PricewaterhouseCoopers Health Research Institute, titled "Behind the Numbers: Medical Costs Trends for 2007.”  The report marks the first time that PricewaterhouseCoopers has provided an estimate of year-ahead medical costs trends, and is based on a survey of health insurance carriers, proprietary research and extensive analysis of publicly available reports and government data.  A full copy of the report is available at http://pwc.com/2007healthcosttrends.

"Medical costs continue to grow faster than wages, and this trend is an important driver of insurance company premiums,” said Jack Rodgers, managing director of the Health Policy Economics Group at PricewaterhouseCoopers.

"The fact that medical costs are expected to increase by double digits, however, does not mean that health insurance premiums will increase at the same rate," Rodgers said.  "Employers have the ability to influence premiums through strategic and creative benefit plan design.  This is a reason that the growth rate of premiums has actually declined each year since 2003 even though medical costs assumed by insurers have accelerated,” he added.

The report notes that American workers have been shielded from the rising cost of healthcare for decades, and that the burden of rising medical costs has been borne largely by employers and the government.  According to PwC, Americans spent six percent of their personal budgets on medical costs in 1960, the same percentage of consumer spending as in 2004.  Both the government and U.S. employers are now looking to share more of the responsibility, if not the actual costs, with their employees in an attempt to curb rising spending levels.

Using medical cost trend projections, employers can customize health benefit packages, offering incentives and increasing the level of cost sharing in the form of co-payments, deductibles and premiums.  Consumer directed health plans offer employers greater flexibility to make adjustments than traditional plans such as HMOs and PPOs. 

"Increases in health spending are a source of contentious debate and finger-pointing,” commented Barry Barnett, partner and healthcare analyst in the global human resource solutions practice at PricewaterhouseCoopers.  "In reality, spending increases because of a myriad of overlapping societal, economic and behavioral issues.  Health plans and employers must consider all of these factors in setting premiums levels and look closely at what is driving up health spending and how to mitigate it.”

The report includes an analysis and discussion of the inflators and deflators of health spending.  PricewaterhouseCoopers identified the following as inflators of health spending:

•New treatments and technologies, including the increased use of new prescription drugs and diagnostics.  While these contribute to early diagnosis and treatment, and in many cases are worth the increased cost, their availability obligates some physicians to order more tests as defense against potential litigation.

•Increased demand for services by workers shielded from true costs who may overuse or inappropriately use the services •An aging population and declining health status due to such rising problems as obesity.

•Cost-shifting, whereby private insurance must fill the gap for patients unable to pay for services.

The PwC report also identified the expected deflators of health spending, including:

•Cost sharing – When workers absorb more of the cost of their care they respond by using fewer or less expensive services and drugs.

•Price transparency – When consumers see prices, they may reduce costs by shopping around for better values.

•Digital backbone – electronic records and auto-adjudication can lower administrative costs and duplicative testing which can amount to as much as one-third of health spending.

•Health and wellness programs – employers are starting to see a return on investment in health promotion activities such as smoking cessation programs that address costly health conditions.

"It is too early to say definitively that consumer-directed plans will lower overall health spending, but given their more flexible frameworks, they seem a promising way for employers to keep premium costs down,” added Barnett.  "Overall, the cost trend for 2007 is going to be affected by economies among providers and those who are covered. Workers, most significantly, will assume a greater share of the cost burden, thereby increasing their discernment in selection of services and in their overall wellness. Especially in the area of consumer-directed health plans, we see a significant potential for lowering medical costs.”

Currently only three million Americans – compared to 240 million in other private coverage plans – are in consumer-directed health plans.  Noting that consumer-driven health are expected to have the lowest spending increase, the report concludes that greater acceptance of consumer-directed health plans, especially those that incorporate patient education and information tools, could have a strong impact on future medical costs. 

About the PricewaterhouseCoopers Health Research Institute PricewaterhouseCoopers Health Research Institute provides new intelligence, perspective and analysis on trends affecting all health-related industries, including healthcare providers, pharmaceuticals, health and life sciences and payers. The Institute is part of PricewaterhouseCoopers' larger initiative for the health-related industries that brings together expertise and allows collaboration across all sectors in the health continuum.

About PricewaterhouseCoopers LLP

PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders.  More than 130,000 people in 148 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice.

"PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.

Contacts:  

Todd Hall              

PricewaterhouseCoopers     

(617) 530-4185         

todd.w.hall@us.pwc.com

Constance Hubbell Clapp    

The Hubbell Group, Inc.

(781) 878-8882

Hubbell@hubbellgroup.com