While health care cost increases have slowed in the U.S., they're far from flat. The latest National Health Care Trend Survey from Xerox shows health care will cost 7.1 percent more in the coming year; that beats the rate of inflation. In fact, as The Kaiser Family Foundation reported earlier this year, if you look at the numbers since 1999, inflation has risen 43 percent, and employee earnings have gone up 54 percent, but health care premiums have spiked by 121 percent.

There are many factors in play that continue to drive health care costs upward.  Some are policy-based: more federal- and state-mandated coverage of some benefits; cost-shifting by providers because of continued limited reimbursement from Medicare and Medicaid; and some provisions of the Patient Protection and Affordable Care Act that shift more costs to commercial payers. Providers are also under increased regulatory scrutiny, resulting in fee increases to cover higher administration costs.

Greater use of diagnostic tests and treatments, and advances in other medical technologies may ultimately be the key to containing health care cost increases, but research and development in some cases cost more than the services — at least initially.

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The rise in health care costs also contributes to the continued increase in prescription drug costs, although the increase has slowed compared to previous years. This year, health insurers reported the average increase will be 12 percent.

The continued impact of specialty drugs continues to push up the drug trend. The trend factors still remain higher than inflation, for many of the same reasons that affect medical trends. Some of the reasons unique to prescription drugs include:

  • The increase in number and usage of "lifestyle" pharmaceutical products

  • Aggressive drug companies' marketing campaigns designed to get people to demand prescriptions for specific drugs

  • Increases in the number and usage of high-cost biotech drugs and other specialty medications, such as those used to treat Hepatitis C

  • Drug manufacturers establishing drug prices to help them recover their costs for research and development expenses, as well as to maintain or improve their profit margins and aggressive EPS targets

  • A dramatic increase in the number and expense of compounded pharmaceuticals

  • Aggressive increases in the price of some generics.

  • Drug manufacturer coupon programs that promote use of higher-cost branded drugs instead of less expensive alternatives

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

In addition to the projected health care cost increases, the final premium rate increase requested by an insurer will also reflect:

  • Changes in the insurer's administrative expenses and risk changes

  • Changes in benefit design

  • Changes in any explicit margins for conservatism

  • Recovery of any prior period losses

  • Mandated benefits, including the impact of the Affordable Care Act 

The 33rd National Health Care Trend Survey from Xerox is scheduled to be conducted in the first half of 2017.

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