Despite newly insured people being added to the system, American healthcare inflation is expected to fall to 6.5% in 2014, says a new report by the Health Research Institute, part of PricewaterhouseCoopers LLP.

Healthcare inflation in 2014 will drop even lower than this year "Defying historical patterns", the authors wrote.

Continued downward pressure is expected for the health sector, mainly because of aggressive and creative steps taken by employers, elements of the ACA (Affordable Care Act), and new locations and models for delivering care.

Healthcare organizations have had to adapt to a more modest growth rate after being squeezed on reimbursements and going through the ravages of a recession "hangover". This trend will continue well into next year as healthcare organizations seek out cheaper locations for providing care and taking on less costly personnel.

The recession was followed by stops and starts and then a "tepid" recovery. People's personal wealth has either slowed down in growth or declined; all this has had a dampening effect on the demand for healthcare. The authors wrote "As we reported a year ago, the sluggish recovery has created a 'new normal' in healthcare spending patterns".

As patients have to bear more of the costs for their medical bills, procedures are being questioned, delayed or even cancelled, as are imaging and elective services. It is early days yet to confirm whether ACOs (accountable care organizations) can deliver significant savings.

Healthcare spending will be slowed down further by the ACO system as hospitals strive to keep down expensive readmissions or face penalties, and employers continue using their new powers to influence employee behavior, and either discontinue or increase premiums, which in some cases might shoot up by 50%.

While preparing this report, the Health Research Institute interviewed industry executives, health policy experts and health plan actuaries. The authors also analyzed data from PricewaterhouseCoopers' 2013 Touchstone Survey, which included over 1,000 employers from 35 different industries.

Four factors slow down medical cost trend for next year (2014):

  • Health care continues moving from expensive locations, i.e. hospitals, to more reasonably priced retail clinics and mobile health. Patients appreciate the lower costs and convenience. In some cases, medical bills can be two-thirds lower when compared to traditional healthcare sites.

  • Major employers are contracting with large health systems for complicated and more expensive procedures, such as spinal fusion or heart surgery. Even when taking into account travel costs (some "high performance networks" may be far away), these big-name health systems work out a lot cheaper.

  • There is an estimated "waste" of 30% in the health system, which drives up costs. In December 2011, Dr. Donald M. Berwick, head of Medicare and Medicaid said that up to 30% of spending on health is waste with absolutely no benefit to patients. The federal government's new readmission penalties punish wasteful health care facilities. According to government figures, in 2012 hospital readmissions went down by almost 70,000. The numbers should be even more impressive next year, the authors added, as hospitals concentrate on discharge planning, compliance and continuum of care.

  • According to PwC's (PricewaterhouseCooper's) 2013 Touchstone survey, 17% of employers offer only a high deductible health plan to employees today. Another 44% are considering doing the same. When employees have to pay more for their healthcare, they tend to become more cost-conscious.

What will inflate medical cost trend in 2014?

  • The recent adoption of generic drugs helped slow down overall medical inflation. However, there are many new expensive complex biologics that will push inflation up. The authors wrote "Approvals of new biologics now outpace traditional therapies, and that pattern will continue in 2014 as research efforts target complex cases such as cancer."

  • Since 2009, health industry consolidation has risen by over 50%. The authors expect this trend to continue into next year, which will result in rising prices in some markets. The report quotes a recent study which found that hospital mergers can lead to price rises of up to 20.3%. In markets with one dominant system, these price hikes are generally more pronounced.

What does this mean for your business?

The authors wrote:

"Employer engagement and individual consumers are a powerful and growing force in the health ecosystem. To succeed, healthcare organizations should fashion strategies around new demands for value."

Kelly Barnes, partner and US health industries leader, discusses HRI's projected spending growth rate for 2014


An article in Health Affairs (December 2010 issue) informed that 2.4% of America's health care spending is spent on medical malpractice systems every year.

Written by Christian Nordqvist