Employers should expect higher health care costs in 2024, outpacing inflation

Increases in medical costs are outpacing inflation, a new report has found. The 45th National Healthcare Trend Survey by Buck, a Gallagher Company, is a longstanding effort to track the trends in health care costs and the latest twice-yearly report found that health provider systems are trying to rebound from revenue lost during the COVID-19 pandemic. It also found that like the U.S. economy in general, health care has been undergoing a period of higher inflation.

The report, which surveyed nearly 100 insurers and health plan administrators, found that the overall medical trend reported was averaging 6.8% to 7.3%, up 50 to 100 basis points from the trends reported in the prior survey–although the report noted a wide range of variation. “As the price of gas, food, and other goods and services increases due to inflation, medical trend factors used by insurers to set premium rates have clearly been incrementally affected as well,” said Kelly Conlin, managing director and chief actuary, U.S. Health Financial & Actuarial Consulting at Gallagher. “But we’re also seeing greater use of diagnostic tests and increased spending on research and development. While this investment may ultimately be the key to containing health care cost increases and improving patient outcomes, these advances tend to result in higher upfront development costs.”

Other factors emerged from the report as well; mergers and consolidations have given provider systems more bargaining power to negotiate higher prices, and drug costs continue to play a big role in increasing health care costs.

Medical trends - a rebound from COVID

Conlin pointed out that there was a sharp drop in health care utilization in many areas during the COVID-19 pandemic of 2020 and into 2021. “It has a long tail,” she said of the disease’s impact on health care. “During COVID, hospitals were unable to do a lot of elective surgeries and also had to pay more money to provide services.”

She added that the higher medical cost trend would likely continue through at least the next year. “The cost of them delivering care has increased, so they’re going to need to be reimbursed for that,” she said.

The report noted that medical trends have historically outpaced general inflationary increases. With more consolidation of hospitals and health systems, providers are in a better position for contract negotiations with health plans and health plan sponsors. In addition, there has been a general increase in testing and lab work, which is also driving up costs.

Drug trends - new medications and a demand for weight loss drugs

Health insurers in the survey reported a weighted average prescription drug trend of 9.8% – up from 9.3% from the prior survey, the report said. Several factors were in play—aggressive marketing campaigns for brand-name drugs; an increase in usage of high-cost gene therapy, biotech drugs and other specialty medications; and increases in the price for generic drugs.

The report noted an increased focus on pharmaceutical products that improve the quality of life and/or enhance lifestyles. In particular, weight loss drugs such as Ozempic and Wegovy have become acclaimed for their ability to help people manage their weight. Conlin noted that the frequency and high profile of marketing efforts are driving demand. “When you have advertisements during an NFL playoff game, you know those drugs are getting a lot attention,” she said. “I think they’re here to stay.”

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Conlin added that for some employers, weight-loss drugs have become the number-one drug category. “I think that’s something employers really do need to focus on—their strategy around coverage of weight loss drugs,” Conlin said.

In addition to that category, specialty drugs, such as biologics or gene therapies, are also growing in use. “There’s a lot going on, in gene therapies in particular,” Conlin said. “There are a lot of different ways that employers can help manage these costs. It’s an important time to roll up our sleeves and look at the data… to figure out what is driving the cost, think about what vendors are being used, and if there are areas to operate more efficiently.”

She noted that many specialty drugs fall under a medical plan rather than a pharmacy plan; and that employers may want to review those in the medical area and try to find cost savings. “A lot of those specialty drug costs are in the medical plan, and they get a little blurry,” she noted.