Health Care Costs Still Eating into Employer Revenue

While increases in health care costs are slowing, they continue to outpace inflation by a wide margin, according to the 32nd National Healthcare Trend Survey from Xerox HR Services.

Since the most recent recession, the annual projected increase in health care costs has eased from 11.6% in 2010 to 8% in 2016. During the same period, the United States Bureau of Labor Statistics stated inflation rate in the U.S. has been 1.4%.                       

The rising expense of health care is causing employers to shift more costs to employees, resulting in some consumers weighing price into their decisions of where and when to seek health care, and even delaying treatment due to cost.

“While it’s promising to see a slowing of increases, health care cost increases are still eating into employer revenue and employee paychecks at four and five times the rate of inflation,” says Harvey Sobel, FSA, a principal and consulting actuary at Xerox HR Services and co-author of the survey. “Plan sponsors should remain vigilant, reviewing all facets of their medical plans, including benefit design, networks and vendors, to make sure they and their employees are getting the best value for the price.”

Xerox says there are several reasons why medical cost trends are still higher than inflation, including:

• Use of diagnostic tests and treatments;
• Limited reimbursement to providers from Medicare and Medicaid;
• Mandated coverage of certain benefits, such as expanded mental health benefits and prosthetic legislation;
• Increased administrative costs associated with new regulations; and
• Up-front costs associated with new medical technology and treatments.

In addition, the pace of prescription drug costs is not lessening; with the projected rate of increase rising from 6.7% in 2010 to a current 8.8%. Survey respondents cite three key reasons for rise: the continued impact of specialty drugs, where, as an example, treatment for multiple sclerosis can cost more than $50,000 a year; an increase in the number and use of pharmaceutical products that improve the quality of life and/or enhance lifestyles; and a dramatic increase in the number and expense of compounded pharmaceuticals.

“While specialty drugs continue to be a major component of prescription drug trend increases, there is a sizeable expense related to specialty medications billed under the medical benefit,” says Robert Ferraro, a principal in the national pharmacy practice of Xerox HR Services. “Plan sponsors have an opportunity to save money by making sure these non-oral medications are administered at the appropriate site of service.”

The 32nd National Healthcare Trend Survey looked at 143 health insurers and pharmacy benefit managers that cover a total of approximately 117 million people.