Medical cost trend: Behind the numbers: PwC

Medical cost growth will rise to highest level in 13 years; a renewed call to action to address affordability

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.

Drastically different cost management needed

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.

What is medical cost trend?

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.

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Healthcare inflators

Inflator: Inflationary impact on healthcare providers

Inflator
Implications

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

Inflator: New prescription drug launches, including GLP-1s, CNS drugs, and growth in other rare and chronic conditions

Inflator
Implications

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.

Source: Employer Health

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.

Source: Employer Health

Inflator: Utilization and cost of behavioral health

Inflator
Implications

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. 

Healthcare deflators

Biosimilar drugs have resulted in savings in recent years as many were approved and launched. The adoption of Humira biosimilars was slow before April of 2024, but since April there’s been a sharp rise in adoption with the launch of private label biosimilars. This new private label model can be a strong force that speeds up future biosimilar adoption.

Source: IQVIA Institute for Human Data Science

Health plans and payviders: The launch of private label biosimilars may mark a turning point in the market where the potential of biosimilar savings can be more fully realized. PBMs have already, or are likely to, introduce new terms to reduce the number of rebates to health plans when shifting formularies to lower-priced biosimilars. Health plans should still expect to see net deflationary benefits by paying less for biosimilars. In addition to evaluating cost savings, health plans seeking to promote exclusive/biosimilar incorporation into formularies should consider a variety of other factors. Among those considerations: how to convert existing reference biologic users and costs beyond drug acquisition such as provider and patient education and patient visits for transition.

Pharmaceutical manufacturers: For companies with innovator drugs facing biosimilar competition, the days of biosimilar defense strategies that preserved market share may be ending as new models emerge. For biosimilar manufacturers, the new private label partnership opportunities combined with pricing approaches offer potential to capture a wide range of commercial and government business much closer to launch than previous biosimilar launches. The biosimilar market in 2025 and beyond has the potential to be a dynamic market in which manufacturers can monitor competitive events, consider drug, portfolio and pipeline implications, and evolve their strategies to best achieve brand and franchise goals.

Source: IQVIA Institute for Human Data Science

Deflator: Reassessing total cost of care with a holistic approach to affordability

Deflator
Implications

The sector is at an inflection point.

This year, 60% of the health plans we surveyed ranked “managing total cost of care” as among the top three cost deflators. In the face of unprecedented inflationary pressures and the lack of new deflators, a common theme emerged during the interviews: refocused attention to total cost of care management and hope for more savings through improving existing initiatives or finding new opportunities while keeping or improving the quality of care.

Health plans’ traditional efforts to improve affordability have not led to sustainable results, largely due to a siloed approach centered on improving operations without addressing underlying deficiencies in dependent functions; greater focus on easy-to-tackle levers (e.g., administrative cost) and lesser focus on initiatives that are complex (e.g., medical cost, care management, provider collaboration); and lack of a dedicated enterprise function to monitor, evaluate and implement initiatives to improve profitability (revenue and cost).

Recently, health plans’ affordability efforts have matured by establishing a dedicated function – an affordability command center focused on interconnected components that determine premium costs, including medical expenses, revenue risk, operational expenses and margins. This dedicated function champions an end-to-end affordability process by engaging the enterprise across benchmarking, target setting, ideation, vetting and selection, execution, and performance management.

By executing this holistic approach through a dedicated function, health plans are striving to moderate medical cost trends and improve affordability by reducing over-utilization, improving efficiency of operations, and enhancing the effectiveness of medical management operations.

Health plans are striving to moderate medical cost trends and improve affordability by reducing over-utilization, improving efficiency of operations and enhancing the effectiveness of medical management operations.

Health plans and payviders: Health plans are reducing wasteful spending, leading to transformative changes in the marketplace such as new PBM models, integration of medical and pharmacy benefits, enhanced transparency and easier health plan navigation. While national health plans have a long history of managing the total cost of care and improving their capabilities, medium and small plans and payviders often face investment challenges and are unable to keep up with large insurers. Smaller plans will likely have to look to external vendors or collaborative investments with other like-minded health plans to build competitive total cost of care management capabilities.

Providers: Providers have a critical role in educating members about choices in obtaining healthcare services. Reducing unnecessary spending will likely require providers to adhere to evidence-based guidelines. Providers can also continue to participate in value-based care arrangements that reward them for reducing wasteful spending.

Employers: Employers are seeking more transparency and better reporting to understand the outcomes and effectiveness of their health plan’s portfolio of cost of care management efforts. Additionally, employer demand for better value for their employees is leading health plans to change plan design and confirm demonstrated outcomes from their vendors.

Health plans are striving to moderate medical cost trends and improve affordability by reducing over-utilization, improving efficiency of operations and enhancing the effectiveness of medical management operations.

Other healthcare trends to watch

Price transparency data presents a valuable asset for contract negotiation, but first providers and health plans need to overcome challenges in transforming and analyzing data. The CMS 2024 Hospital Outpatient Prospective Payment System (OPPS) requires more data standardization, with multi-faceted implications for both hospitals and payers.

None of the health plans we surveyed explicitly factored in the impact of GenAI in estimating the 2024-25 medical cost trend. However, GenAI and artificial intelligence are expected to play a significant role in making healthcare more affordable as payers and providers are leveraging GenAI across different areas of the value chain.

The net impact of Medicaid redetermination could be an inflator or deflator as redetermination ends, as most plans we surveyed indicated the impact to be neutral or low on the 2025 medical cost trend. The millions of individuals no longer eligible for Medicaid or Children’s Health Insurance Program (CHIP) coverage are seeking coverage in the ACA Individual and employer-sponsored insurance (ESI) markets.

The No Suprises Act may have an impact on in-network and out-of-network rates, most notably for care provided by emergency rooms, radiology, anesthesia and pathology.

The law, implemented in 2022, prohibits providers who are out of a patient’s network from sending a bill to the patient if patients couldn’t have known they were receiving care out of their health plan’s network, as may be the case when emergency services are needed.

The expected higher initial drug prices stemming from the Inflation Reduction Act (IRA) of 2022 can serve as an inflator in the Commercial market where negotiated maximum prices don’t exist. The Congressional Budget Office (CBO) expects that manufacturers will set higher initial prices on new drugs to allow for slower price growth that falls within the inflation-adjusted benchmark set forth by Health and Human Services (HHS). In the longer term, the CBO expects an overall decrease in net drug prices across government and private coverage as the regulation increases negotiation pressures on manufacturers and forces manufacturers to offset potentially higher prices with higher rebates.

About this research

To generate an estimate of the cost to treat patients for the coming year, HRI surveyed and interviewed actuaries at more than 20 US health plans to generate an estimate of medical cost trend for the coming year. These plans cover 100 million employer-sponsored large and small group members and 10 million Affordable Care Act (ACA) marketplace members. The scope of this analysis includes both small and large group (Group) and ACA marketplace (Individual) plans. The Individual market has seen significant growth, from 12 million enrolled in 2021 to 21.5 million in 2024. Competition within the marketplace has intensified in recent years as major health plans in the Group market have entered the Individual marketplace. The impact of major factors driving medical costs resonates across both markets. Meanwhile, distinct considerations apply to the Individual market. This report does not focus on trends in Medicare and Medicaid.