Med cost 2011

8/7/2019 Med cost 2011

1/24

PricewaterhouseCoopersHealth Research Institute

Medical cost trends for 2011

Behind the numbers

8/7/2019 Med cost 2011

2/24

8/7/2019 Med cost 2011

3/24

Table of contents

June 2010

The heart o the matter 2

Medical costs will be buffeted by reactions inside andoutside the nearly $3-trillion health industry in 2011.

An in-depth discussion 4

The medical growth trend is expected to decrease from9.5% in 2010 to 9% in 2011. The small decrease hidesa more complicated set of forces.

How the medical cost trend is determined 6Deators will be cost-sharing, generics and COBRA 11Inators will be cost-shifting, IT and consolidation 14

What this means or your business 18

While this report looks at changes from 2010 to 2011,its important for business leaders to look at long-termchanges from health reform and other sources.

8/7/2019 Med cost 2011

4/24

The heart of the matter

Medical costs will bebuffeted by reactions

inside and outside thenearly $3-trillion healthindustry in 2011.

8/7/2019 Med cost 2011

5/24

3

The past 18 months have been extraordinary for employers and medical costs. The worstrecession in a quarter-century was followed by the most extensive changes in federal healthfunding and regulation in 45 years. The full consequences of both continue to play out, butmedical costs will be buffeted by reactions inside and outside the nearly $3-trillion healthindustry in 2011.

To aid employers in designing their health benets, PricewaterhouseCoopers (PwC) Health

Research Institute (HRI) provides annual estimates of how much private medical costswill grow over the next year, and what the leading drivers of the trend are expected to be.This report looks at the projected increase in costs of medical services assumed in settingpremiums for health insurance plans. Insurance companies use medical cost trends toestimate what the same plan would cost in the next year.

In estimating the medical cost trend growth for 2011, HRI interviewed health planexecutives, surveyed employers and hospital-based health plans, and reviewed analystreports. All numbers are national estimates. Cost trends may vary from market to market,depending on the level of provider and health plan competition and the regional economy. Inaddition, these numbers will vary with benet plan design. HRI conducted a survey of morethan 700 employers from 30 industries. In addition, the research included interviews withhealth plan actuaries and other executives whose companies have a combined 47 million in

covered lives.

The heart of the matter PricewaterhouseCoopers Health Research Institute

8/7/2019 Med cost 2011

6/24

8/7/2019 Med cost 2011

7/24

5An in-depth discussion PricewaterhouseCoopers Health Research Institute

This years Behind the numbers was especially challenging because of a high degree ofuncertainty among health plans and employers. Thanks to the worst recession in a quartercentury, employers had less to spend on their workforces. Then came health reform withdozens of small-bore changes about how healthcare is nanced, delivered, packaged andregulated. Some changes will drive the trend up, while others will push it down.

Heres what employers can expect to see in 2011:

Growth in medical costs for 2011 is expected to be 9%, down 0.5% from 2010.

Three primary deators that will help hold down the medical trend.

- Employers are moving network benefts toward pre-managed care beneft design byincreasing deductibles and replacing co-pays with coinsurance. By requiring workersto spend more out-of-pocket at the point of care, employers believe theyre reining inutilization of services and drugs. The number of employers using coinsurance for physiciavisits has nearly doubled and one-third use coinsurance for brand-name drugs, accordingto PwCs survey of 700 employers. In addition, high-deductible plans were the mostprevalent plan for 13% of employers surveyed in 2010, up from 6% in 2008.

- Generics continue to eat into brand-name drug market share. About $26 billionin drugs are expected to go off patent in 2011, including the worlds best-selling drug,Lipitor. Generics, which account for as much as 80% of all prescriptions in someplans, continue to erode the market share of brand name drugs, and remain a dragon medical cost trends.

- COBRA costs are expected to return to more normal levels in 2011. COBRA subsidiepassed by Congress in 2009 created a 1% upswing in the medical trend. Laid-off workerswho continued their healthcare coverage typically incurred medical costs of two to fourtimes higher than those of other workers. In 2010, the combination of higher unemploymeand new government subsidies to pay for COBRA coverage led to a signicant increase iCOBRA coverage. A combination of declining unemployment and expiration of the COBRsubsidies is expected to lead to reduced enrollment in COBRA in 2011.

The biggest inators of the medical trend will be in provider costs, which make up 81% ofthe medical benet.

- Cost-shiting rom Medicare is expected to increase as hospitals see their rates cutor the frst time ater seven years o increases that nearly matched or exceeded

ination increases. Some hospitals that benetted from higher payments in 2008 and2009 may be able to manage this type of cut by tapping their reserves. Yet, more are likelto renegotiate terms and shift more costs to commercial payers during their negotiations.

- Provider consolidation is increasing, which is expected to increase their bargainingpower. The number of physicians involved in mergers or acquisitions in 2009 was 2,910,

nearly twice that of 2008. In addition, 2010 has seen record activity as well. Paymentchanges, embedded in the federal health reform law, also encourage models that alignnancial incentives among providers.

- Spurred by stimulus unding that begins in 2011 and Medicare penalties that beginin 2015, hospitals will invest billions o dollars into certifed electronic health record

(EHR) systems. While many hospital systems were planning to implement EHRs in thenear future, the governments new regulations dramatically condensed their timelines toinvest in technology, IT staff, training and process redesign. Healthcare CIOs surveyed byPwC said they will make their largest investments to meet the new EHR regulationsin 2011.

8/7/2019 Med cost 2011

8/24

6 Behind the numbers: Medical cost trends for 2011

This report looks at the projected increasein costs of medical services assumed insetting premiums for health insurance

plans. Insurance companies use medicalcost trends to estimate what the same planwould cost in the next year. For example, a10% trend indicates that a medical plan thatcosts $10,000 per employee this year wouldcost $11,000 the next year. Medical costtrend is inuenced primarily by:

Unit cost ination, or changes in theintensity, and changes in the unit price ofmedical products and services

Utilization increases, or changes in

the volume of services used, whichmay be affected by demographicchanges, advertising, and the use ofnew technology

Aspects of regulatory, marketplace changeswill impact the 2011 medical trend

How the medical cost trend is determined

Pushing trend down

- Drug costs- More coinsurance

- COBRA returns to normal levels

Pushing trend up

- More cost shifting from Medicare

- Provider consolidation

- Investment in health IT

8/7/2019 Med cost 2011

9/24

7

Figure 1: 2010 Private health insurance benefts by medical spending category

Slowest annual growth, 2009-2010:

Physician, 5%

Drugs, 6%

Other, 4%

Outpatient

17%

Inpatient

31%

Physician

33%

Drugs

15%

Fastest annual growth, 2009-2010:

Inpatient, 10%

Outpatient, 12%

Other

4%

Source: PwC Analysis of Milliman Medical Index 2009 and 2010

According to the Milliman Medical Index,the biggest portion of the private healthinsurance benet is spent on physician

services, at 33%. At 31%, the next biggestportion is inpatient hospital servicesfollowed by 17% on outpatient servicesand 15% on prescription drugs. (SeeFigure 1.) Compared to the growth in totalspending, physician services have had thelowest rate of increase and trended slightlydownward in recent years. Consistent withpast years, spending on outpatient servicesis growing the fastest, spurred by more

specialty procedures that are moving outof the hospital operating rooms and intoambulatory settings. (See Figure 1) Nearly

40% of hospital revenues are generatedfrom outpatient services, according tothe American Hospital Association. Inaddition, outpatient spending includessome drugs. Just over half of specialtymedication is accounted for on themedical side of the benet through drugsadministered in outpatient clinics, accordingto Express Scripts.

An in-depth discussion PricewaterhouseCoopers Health Research Institute

8/7/2019 Med cost 2011

10/24


Prior to 2009, the growth of employer-sponsored health insurance premiumsand costs decelerated for ve years,

according to the Kaiser Family Foundation.Figure 2 compares trends from the KaiserFamily Foundations estimate of employerpremiums, the cost of private healthinsurance (PHI) per capita, and the employercost index for insurance. This illustrates

the deceleration from 2003 to 2008 andthe distinct peaks and troughs (shaded inFigure 2) in healthcare cost growth over

time. However, this deceleration came to anend in 2009 as demonstrated in the chartbelow. Premiums in the next year or two willshow whether the US is in a new period ofacceleration in premiums or just a pause inthe deceleration that began around 2003.

Figure 2: Growth in premiums, spending per capita and employer cost index

0%

1988

Kaiser Family Foundation estimate of employer premiums

5%

10%

15%

20%

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Centers for Medicare and Medicaid Services cost of private health insurance per capita

Bureau of Labor Statistics employer cost index for insurance

Sources: Kaiser Employer Health Benets Annual Surveys for 2009, 2008 and 2007 (note: 1991, 1992, 1994, 1995, 1997,

and 1998 are estimates); Center for Medicare and Medicaid Services; Bureau of Labor Statistics.

8/7/2019 Med cost 2011

11/24

9

Unpredictable factors that affectedthe trend in 2009 and 2010, willimpact 2011

A recession coupled with highunemployment threw the US economy intoa spin, although medical costs were lessaffected than other goods and services. Still,benet costs in employer plans increasedbecause of expansions in the number ofhigher-than-average-cost employees whoenrolled in COBRA during the recession.Enrollment in COBRA typically rises duringrecessions as workers are laid off, but thistendency was magnied by the AmericanRecovery and Reinvestment Act (ARRA),

which established a temporary federalsubsidy to pay part of the cost of continuedhealth insurance for workers laid off betweenSept. 1, 2008 and Dec. 31, 2009. Asexpected, more workers enrolled in COBRAonce subsidies became available.

The medical growth trend is expected todecrease from 9.5% in 2010 to 9% in 2011(See Figure 3.) The small decrease hides a

more complicated set of forces. The impactof the recession on the age of the workforce and the higher COBRA enrollmentpushed the trend up in 2010 beyond whatPwC predicted last year. In 2010, we saidthe trend would be 9.0%, but our researchshows that it is coming in closer to 9.5%because of COBRA. In 2011, we expectthat medical trend will be pulled down asthe number of COBRA enrollees falls, andmore young workers are hired. If it were notfor these confounding effects, our estimateof the trend would be lower in 2010 and

higher in 2011.


Figure 3: Estimates or the medical cost trend rom 2008 to 2011

2008 2009 2010 2011

Medical cost trend 9.9% 9.2% 9.5%(2009 estimate9.0%)

9.0%

Source: PricewaterhouseCoopers

8/7/2019 Med cost 2011

12/24


The new health reform law1 passed inMarch 2010 expands health insurancecoverage through expansions in Medicaid,

tax subsidies and credits, and penalties onemployers that do not provide insuranceto their workforce and individuals who donot purchase insurance. The health reformlegislation also makes dozens of small-borechanges in the healthcare system designedto reduce costs and improve efciency.

In many cases, these changes would affectemployers healthcare costs, but will notaffect what is considered the medical trend.For example, in 2011, they cannot havewaiting periods longer than 90 days for

employees to start receiving benets. In thiscase, total costs to employers would risebut this might actually lower medical trend ifthe newly insured workers were younger andhealthier than the average covered workers.Adding more adult children to family planswould also tend to increase the costs ofa family plan. Other changes, however,would clearly increase both total costs toemployers as well as trend. For example, theban on denying coverage to children withpre-existing conditions would bring in more

expensive children on plans and raise theannual costs of a family plan.

While the biggest changes dont start until2014, the new health reform law requiresemployers to make changes in their benetdesigns, beginning with the next plan year.Some of those are:

Must cover dependents to age 26. Somehealth plans have already decided toallow dependents to remain on family

plans immediately rather than waiting forthe plan year that would be affected bythe legislation.

Can no longer have lifetime limits on

1 The law comprises two acts: the Health Care and Education

Affordability Reconciliation Act of 2010, PL 111-152), which amends

the Patient Protection and Affordable Care Act, PL 111-148,

PPACA.

Health reform delivers minor impacts in 2011,major impacts in 2014

coverage. Lifetime limits are provisionsthat limit the total dollars in benetsthat the insurance plan will pay out over

the lifetime of an enrollee in the plan.For example, a health plan might specifythat once $1 million in benets are paidout in claims, they no longer will pay forfurther medical treatment for that enrolleeLifetime limits can be reached a numberof ways. In the case of a catastrophicmedical condition, beneciaries mayreach the limit in one year. A patientsuffering from chronic disease, such ashemophilia, may reach the limit over veyears by having $200,000 in medicalexpenses each year. However, removing

lifetime limits, which many employershave already dropped, wont add muchto cost trend. PwCs analysis in 2009estimated that raising or removinglifetime limits would elevate monthlypremiums by 1%.2

Health plans are subject to minimummedical loss ratios (MLRs).

Then, in 2014, the most substantive changesbegin with funding for new coverage and

mandates on employers and individuals.Similarly, providers, pharmaceuticalcompanies, and health plans may beginto alter prices, products, and policies inanticipation of the 2014 changes. Healthplans, for example, may be careful not tointroduce new benet designs that willnot be allowed when 2014 rules becomeeffective. Prices may also be increased inanticipation of higher demand in 2014 andbeyond when more people have insurancecoverage. The opposite may also be trueif market participants are concerned about

the negative publicity from large priceor premium increases, especially in anenvironment where the healthcare system isoften politicized.

2 PricewaterhouseCoopers, The Impact of Lifetime Limits, National

Hemophilia Foundation, March 2009.

8/7/2019 Med cost 2011

13/24


Coinsurance is increasinglyreplacing co-pays; deductibles arehigh and rising

Employers are returning to pre-managedcare benet design by increasingdeductibles and replacing co-pays withcoinsurance. In 2011, for the rst time,most employers are expected to have adeductible of $400 or more. According toPwCs survey of 700 employers, in 2010,the most common plan among employerssurveyed by PwC had a deductible ofbetween $400 and $999. The trend indeductibles has been remarkably fast. In2008 and 2009, the most common plan

had no deductible. In addition, according tothe PwC survey, high-deductible plans arenow the primary plan for 13% of employerssurveyed in 2010, up from 6% in 2008.

With coinsurance as with high deductibles,workers are more aware of the full costof the drugs or the services theyre using,

and consequently can be more likely toshop around or delay or avoid services.Co-pays are nominal at payments formedical services or drugs. Coinsurance is apercentage of the cost; typical coinsuranceis between 10% and 20%. Prescriptiondrugs have been based on co-pays for thepast 20 years, but one-third of employersare now using coinsurance instead, upfrom 26% two years ago, according to thePwC survey. Figure 4 shows the use ofcoinsurance among employers plans.

The number of employers using coinsurancefor physician visits has nearly doubledand has increased for ER visits as well. Inaddition, more employers are using co-paysleaving very few plans with no cost sharing.

Deators will be cost-sharing, generics and COBRA

Source: PricewaterhouseCoopers Touchstone survey; based on employers plans with the

highest enrollment

0% 20% 40%

2010

Percentage of employers using coinsurance

Specialty drugs

Brand name drugs

Generic drugs

Emergency room

Specialty care

Primary care

2008

32%

12%

18%

12%

23%

16%

23%

12%

19%

26%

33%23%

Figure 4: Percentage o employers surveyed that are using coinsurance or selected

services continues to rise

8/7/2019 Med cost 2011

14/24


Drug costs continue to betempered by generics

Drug costs, while rising, continue to be

a drag on the medical trend, and that isexpected to be the case in 2011 as well.Workers are using more and more generics,and almost 80% of them are members ofpharmacy benet managers, which havebecome efcient at redirecting patients frombrands and to generic alternatives. In 2008,generics accounted for more than 65% of allUS prescriptions and were reaching almost80% for some plans.

In 2011, payers will benet from severalpreceding years in which drugs lost patentprotection. In addition, some $26 billion ofdrug spending is expected to go off patentin 2011. This includes the worlds biggestselling drug, Lipitor, although its expiration isexpected in late 2011 and may cause moredownward pressure on the trend in 2012.Other drugs that lose patent protection in2011 are Plavix, which is used to inhibitblood clots; Actos, which treats diabetes;and Seroquel and Zyprexa , two drugs thattreat schizophrenia and bipolar disorder.Figure 5 shows that half of brand-name

drugs will lose patent protection between2010 and 2014.

Figure 5: Percent o 2009 sales o

branded drugs by the year they lose

patent protection

Remain under

patent protection

beyond 2014

50%

2010

9%

201112%

2012

11%

2013

9%

2014

9%

Lantus,

Abilify,

Celebrex,

Evista

Remicade,

Cymbalta,

Avonex,

Taxotere

Singulair,

Laxapro,

Procrit,

Enbrel

Lipitor,

Plavix,

Seroquel,

Zyprexa,

Actos

Seretide,

Aricept,

Effexor

Source: PricewaterhouseCoopers analysis2010

8/7/2019 Med cost 2011

15/24


COBRA costs are expected toreturn to normal levels

Increases in COBRA enrollment in 2009

and 2010 pushed up the medical trendin 2009 and 2010. Decreases in COBRAenrollments over the next two years will tendto pull the medical trend down. Traditionally,laid-off workers pay up to 102% of thepremiums for health insurance providedthrough their former employers. For thatreason, workers who enroll in COBRA planstend to be those with expensive, chronicconditions or conditions that preclude themfrom purchasing affordable coverage ontheir own. As a result, workers on COBRAtend to have higher medical costs, andtheir premiums do not cover all of theirmedical costs. As unemployment levels riseduring a recession, more of these high-costindividuals enroll under COBRA, pushingup the medical trend.

Medical trend was affected more thanwould have been the case in 2010 becauseCongress passed the ARRA, under whichthe federal government agreed to pay65% of the cost of COBRA with individualspaying the remaining. As a result, enrollment

in COBRA plans doubled during the pastyear, according to industry reports andinterviews with insurers. From March 2009to June 2009, monthly COBRA enrollmentrates for Americans eligible for the subsidyaveraged 38%, up from 19% betweenSeptember 2008 and February 2009. Theincrease in COBRA enrollment increasedthe average cost of employer plans in 2009and into 2010, the rst full plan year withCOBRA subsidies. A typical employer,

whose COBRA enrollees were 1% of totallives and 1.5% of total cost, would haveseen an increase in COBRA enrollment

to 2% and costs to 3%. Given the waythat the costs were spread across the twoyears, this might account for an increasein the trend of one percentage point abovewhat it would be otherwise, according toPricewaterhouseCoopers estimates.3

The end of the COBRA subsidies onMay 31, 2010, combined and the expectedeconomic recovery are expected to createa downswing in the medical trend between2010 and 2012. As employment levels returnto prerecession levels, fewer workers will be

eligible for COBRA coverage. Moreover, theend of the 65% federal subsidy, will makethe purchase of COBRA coverage moreexpensive and further reduce enrollmentrates. This reversal in COBRA should reducethe trend in 2011 by about 0.5% below whatit would be otherwise.4

3 It might be expected that because COBRA was affordable to a wider

range of individuals, enrollees would be healthier than in the absence

of subsidies. However, insurers reported the costs to be as high as

when subsidies werent offered.

4 However, if the economy does not improve and if Congress extends

the subsidies again, the medical trend would be expected to increase

an additional 0.5% in 2011.

8/7/2019 Med cost 2011

16/24


Inators will be cost-shifting, IT and consolidation

Providers will shift more costsfrom Medicare

Health reform has created anxiety and

uncertainty among health systems. Whilethis report focuses on the medical costtrend for 2011, hospital system executivesare worried about long-term factors andtheir effects on costs and payer mix. Bothpublic and private payers will be impactedby health reform, and the patient populationthat is expected to increase the mostMedicaidpays the least. The Medicaidpopulation is expected to grow by 40%between 2010 and 2019, but that expansionwont occur until 2014 and later.

Cost-shifting varies from community tocommunity depending on hospital systemsclout in the market. However, it is almostuniversally blamed as a source for highermedical costs regardless of geography. In aPwC survey of 11 system-based insurancecompanies from throughout the country,cost-shifting was identied as the numberone reason for the medical trend pushinghigher in 2011.

Frequently, Medicaid is a major source ofcost-shift because it covers far less thanthe costs incurred by hospitals. However,

in 2011 Medicaid enrollment is expectedto decrease, making it less of a problemfor hospitals than in 2010. Medicaidenrollment is expected to drop by 1 millionas the economy improves and another 1million because of the new health reformlaw, according to the CBO.5 The healthreform law adds high-risk pools and othermechanisms that may apply to someindividuals now covered by Medicaid.

A bigger problem for hospitals in 2011 isMedicare, which is the single largest payer

for hospitals. In 2011, Medicare paymentrates will dropa major turnaround afterseven years of payment increases thateither exceeded or nearly equaled inationincreases. (See Figure 6.) Medicare paymentincreases are tethered to a market basketindex, which is an ination proxy that CMSuses to determine Medicare paymentincreases for hospitals. It is calculatedthrough predicting the next years cost of

5 Congressional Budget Ofce and the staff of the Joint Committee

on Taxation.

-1%

Actual market basket*

0%

1%

2%

3%

4%

5%

6%

2004 2005 2006 2007 2008 2009 2010 2011

Payment increase

During these years, hospitals received inflation increases that nearly kept up with inflation increases

New coding system boosted payments to hospitals higher than inflation increases

Congress agrees to give hospitals full inflation increase

Medicare takes back the coding overpayments, plus health reform law cuts the market basket

Figure 6: Medicare inpatient rates compared with ination updates

* 20092011 market basket gures are forecasted

Source: Centers for Medicare and Medicaid Services (CMS)Market Basket Data; CMS 1406-F FFY 2010 Final Rule (pg. 379)

8/7/2019 Med cost 2011

17/24

15

supplies and labor for hospitals through amarket basket of prices. In 2009, actualMedicare payments to hospitals rose

far above the market basket predictionbecause the recession affected pricesof all goods and services and becausehospitals benetted from a coding change.In 2006, Medicare created severity-adjusteddiagnosis related groups (MS-DRGs) tomore accurately capture the acuity ofpatient cases. Although the new codingsystem was supposed to be revenue neutral,Medicare found that hospitals were usingthe more expensive codes, thus driving upspending. As a result, Medicare will reduceMedicare rates to hospitals by 2.9% in

2011, a reduction its calling a behavioralcoding adjustment. On top of that, the newhealth reform law automatically mandatesthat ination updates be shaved by 0.25%.That produces a drop in Medicare rates tohospitals of about 0.35%.

Some hospitals that benetted from higherpayments in 2008 and 2009 may be ableto manage this type of cut through theirreserves. Yet, others are likely to shift morecosts to commercial payers. All will have tofocus on cost reduction in the years ahead.

The federal government estimates thatMedicare will subtract 6.8% from paymentsin future years.

The market basket index used by Medicareto forecast whether hospitals shouldreceive an increase in payment rates eachyear relies on an industry-specic indexof input prices. The forecasted rate is anination update, and Congress uses it as abenchmark for implementing rate increases.Figure 6 shows what the market basketactually turned out to be for the years 2004through 2008. The year 2009 through 2011are forecasted.

Consolidation of physicians,hospitals increases theirnegotiating clout

Consolidation carries the benet ofeconomies of scale as well as increasedbargaining power with suppliers, payers, andlabor. Relatively small provider organizationsor networks are joining the ranks of nationalprovider conglomerates and demandingpremium rates for their services. Physicianand hospital consolidation are expected toincrease in 2010 and 2011.

About a half million physicians work in acottage industry that has been slow to

consolidate. While managed care andthe specter of health reform under theClinton administration prompted someto consolidate practices in the 1990s,the overwhelming majority of physicianscontinue to practice solo or in small groups.However, the new health reform law andother changes in government reimbursemenare changing the business and promptingmore physicians to sell their practices toeach other or to local hospitals.

One specialty particularly affected by this

trend is cardiology, which has experiencedthe deepest Medicare payment cuts.Because most private insurers base theirpayment rates on Medicare, the changesaffect physicians total earnings. CMSprojected an 8% cut in Medicare paymentrates for cardiovascular services in 2010,and a 13% decrease over the next fouryears. Some practices will see much deepercuts than others. A survey by the AmericanCollege of Cardiology found that 39% ofcardiology practices were considering sellingto a hospital system.


8/7/2019 Med cost 2011

18/24


In addition, other aspects of health reformare encouraging much closer alignment ofphysicians and hospitals. Bundled payments

and accountable-care organizations, both ofwhich include incentives to share paymentamong doctors and hospitals, createshared risk and shared savings on Medicarepayments for groups that can coordinateinpatient, outpatient and physician services.Figure 7 shows the ramp-up in physiciansinvolved in mergers between 2007 andearly 2010. Payers expect to see morenegotiating power and higher prices fromlarger physician groups who are working intandem with hospital systems. Eventually,consolidation is expected to produce

increases in efciencies for providers thatmay be passed along to payers in lower ormoderated rates.

Hospitals invest billions into ITsystems and professionals

The last few years have been booming

construction years for hospitals andoutpatient facilities. However, constructiongrowth has ebbed as providers are rampingup capital investments in IT.

As part of the stimulus act passed in 2009,the federal government will spend $36 billionbetween 2011 and 2015 on incentives forhospitals and physicians to purchase healthIT. To get the incentives, hospitals mustinvest in interoperable electronic healthrecord (EHR) systems. They also have todemonstrate meaningful use, a set ofcriteria aimed at enabling signicant andmeasurable improvements in populationhealth through the effective use of clinicalinformation systems. According to the

Source: Irving Levin Associates

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10

Number of Physicians

Figure 7: Physicians involved in mergers and acquisitions (cumulative) 20072010

8/7/2019 Med cost 2011

19/24

17

Department of Health and Human Services(HHS), the ultimate vision is one in which allpatients are fully engaged in their healthcare,

and providers have real-time access to allmedical information and tools to help ensurethe quality and safety of the care providedwhile also affording improved access andelimination of health care disparities.

Two-thirds of healthcare IT leaders said theywould increase their IT staff in a 2010 surveyby the Health Information and ManagementSystems Society. The top reason cited forincreasing IT budgets was the new federalrules around meaningful use of EHRs.

The mandates in the HITECH Act, passedin 2009, lit a re under health systemsbecause of the potential bonuses andfuture penalties for not complying withthe new regulations. Nearly 70% of CIOssurveyed this year by PwC and the College

of Healthcare Information ManagementExecutives said that the new regulationsaccelerated health IT efforts that they were

going to invest in anyway. When asked whentheir systems would incur most of the costfor implementing EHRs and other mandates,34% said in 2010 and 47% said 2011.(See Figure 8.)

In the long term, EHRs are expected tosave costs; one estimate is that physicianpractices with EHRs experience a 10%drop in revenues because of less serviceduplication. In the face of health reform,continued squeeze on reimbursements andthe increased need for capital related to

such things as IT modernization, a new andsignicant wave of provider consolidationsis underway.


Source: PwCCollege of Healthcare Information Management Executives Survey results

0%

10%

20%

30%

40%

50%

2010 2011 2012 2013 or after

CMS incentive payments begin in 2011 and continue through 2015

Figure 8: When will your health system incur most o the costs or implementing EMRs

and other mandates in the HITECH Act?

8/7/2019 Med cost 2011

20/24

What this means for your business

While this report looksat changes from 2010 to

2011, its important forbusiness leaders to lookat long-term changesfrom health reform andother sources.

8/7/2019 Med cost 2011

21/24

19What this means for your business PricewaterhouseCoopers Health Research Institute

Employers use health benets as a competitive advantage to recruit and retain workers.The value and context of this competitive advantage has been changing. As medical costscontinue to grow faster than general ination, the value of these benets has become alarger part of the overall compensation package.

Now, the new health reform law fundamentally alters the health insurance market, impactingvirtually all aspects of employer-sponsored insurance, from eligibility and plan design to

underwriting rules, tax deductions and funding. Once a voluntary benet, health insurancewill become an entitlement to workers in 2014, enforced by an employer mandate. Stateexchanges will also create a whole new market for insurance products beginning in 2014 forsmall employers and potentially available to large employers starting in 2017. Employers willbe subject to an excise tax on high premium plans beginning in 2018. CEOs must combineall of these changes and new options to customize a new post-recession, post-health reformstrategy as their next competitive advantage. (See Figure 9.)

The changes in health reform will play out over 10 years. While this report looks at changesfrom 2010 to 2011, its important for business leaders to look at long-term changes fromhealth reform and other sources.

Reduction in cost shiting rom the uninsured. Employers have been adjusting to a

system in which more people are uninsured each year. This will change in 2014 whenMedicaid opens up to everyone below 133% of the federal poverty level (FPL) and taxsubsidies are available to others with incomes below 400% FPL.

Changes in payment system or providers. One of the overarching implications ofhealth reform is a move away from siloed payment towards more coordinated care.However, this will bring disruption to the system, which could drive up costs in the shortterm, but eventually may drive them down. As currently congured, health reform maybring new choices and transparency to workers buying insurance. The effect on costsis uncertain.

New markets or health insurance. State exchanges will begin offering health insuranceto individuals and small employers in 2014. They may also open up to large employers in2017. Employers will, of course, perform price comparisons between their current plansand the plans in the insurance exchanges. The exchanges will offer only commercialinsurance, which will be subject to state premium taxes. However, employers may ndcost savings opportunities in the exchanges.

Excise tax on high premium plans, beginning in 2018. Beginning in 2018, employer-sponsored plans that have premiums above specied levels will face a 40 % tax on theexcess premiums. Employers will have to change plan designs before 2018 in order tomake the transition smoother. To do this, employers will need to increase cost sharing,reduce benets, move to more tightly managed care, or come up with other approachesto trim benet costs in order to avoid the excise tax.

For more on the details on implications of health reform, go to www.pwc.com/healthreform.

Figure 9: Health benefts as a competitive advantage during a decade o

health reorm

Optimize

Calculate the immediateimpact from various aspectsof the new health reform law.

Grow

Re-evaluate your overallapproach to rewards andhow health benets gureinto that context.

Lead

Review the new equilibriumsin the market from changesin tax policy.

8/7/2019 Med cost 2011

22/24


PricewaterhouseCoopers Health

Research Institute

Kelly Barnes

Partner, Health Industries [email protected](214) 754 5172

David Chin, MDPrincipal, Health Research [email protected](617) 530 4381

Robert DonderoPartner and Leader, HealthIndustries [email protected]

(214) 754 7448

Sandy LutzManaging [email protected](214) 754 5434

Benjamin [email protected](214) 754 5091

Serena FoongSenior [email protected](312) 298 3687

Adrian ChristieSenior [email protected](617) 530 7101

Maria [email protected]

(214) 754 4512

Health Research Institute Advisory Team

Michael ThompsonPrincipal

[email protected](646) 471 0720

Jack Rodgers, PhDManaging Director, Health Policy [email protected](202) 414 1646

Richard [email protected](310) 617 5567

Divyadarshi [email protected](646) 223 1426

Jason [email protected](813) 348 7801

Carolyn ChewSenior Associate

[email protected](415) 498 6405

8/7/2019 Med cost 2011

23/24

About PricewaterhouseCoopersPricewaterhouseCoopers (www.pwc.com)provides industry-focused assurance, tax

and advisory services to build public trustand enhance value for our clients and theirstakeholders. More than 163,000 peoplein 151 countries across our network sharetheir thinking, experience and solutions todevelop fresh perspectives and practicaladvice.

Health Research InstitutePricewaterhouseCoopers HealthResearch Institute (HRI) provides newintelligence, perspectives, and analysison trends affecting all health-related

industries, including healthcare providers,pharmaceuticals, health and life sciences,and payers. HRI helps executive decision-makers and stakeholders navigatechange through a process of fact-basedresearch and collaborative exchange thatdraws on a network of more than 3,000professionals with day-to-day experiencein the health industries. HRI is part ofPricewaterhouseCoopers larger initiativefor the healthrelated industries that bringstogether expertise and allows collaborationacross all sectors in the health continuum.

8/7/2019 Med cost 2011

24/24

This publication is printed on Mohawk Options 100PC. It is aForest Stewardship Council (FSC) certied stock using 100%post consumer waste (PCW) ber and manufactured withrenewable, non-polluting, wind-generated electricity.

To have a deeper conversation about how thissubject may affect your business, please contact:

Kelly BarnesHealth Industries Leader(214) [email protected]

Michael GalperUS Healthcare Payer Leader(213) [email protected]

Mike SwanickUS Pharmaceutical/Life Sciences Leader(267) [email protected]

Bob VallettaUS Healthcare Provider Leader(617) [email protected]

www.pwc.com/healthreformwww.pwc.com/healthcarewww.pwc.com/pharmawww.pwc.com/hri

Documents

Med cost 2011