Find episode transcript below.
JENNY COLAPIETRO:
00:00:03:24 Welcome to our Next in Health podcast. I'm Jenny Colapietro, PwC's Consulting Commercial Leader. And today, we're excited to have the authors of the 2025 Medical Costs Trend: Behind the Numbers report with us.
00:00:16:03 We have Thom Bales, the leader of our Health sector; Philip Sclafani, a Principal in our Pharmaceutical & Life Sciences team; and Julian Levin, a Principal in our Heath Actuarial team. Gentlemen, welcome to the podcast.
THOM BALES:
00:00:32:21 Thank you, Jenny. Great to be here.
JULIAN LEVIN:
00:00:34:10 Thank you.
JENNIFER COLAPIETRO:
00:00:35:22 Thom, perhaps you could kick us off by telling us what this medical cost trend report is all about. What's the headline for medical cost trend for 2025?
THOM BALES:
00:00:45:21 Thank you, Jenny, and happy to. And maybe as we get into it, just to step back. Our Health Research Institute surveys and speaks with actuaries at US Health plans every year, and we've done this for over 10 years now to generate an estimate of medical cost trend for the upcoming year. These surveys and interviews are conducted from April through May in a given year.
00:01:07:23 They cover plans that cover greater than 100 million employer-sponsored large and small group members and 10 million marketplace members. So, it covers the commercial business related to the small and the large group, and these individual.
00:01:22:02 What it doesn't do is cover Medicare and Medicaid, just to be clear, which is available via CMS. And the headline this year is that we're looking at the highest medical cost trend in commercial spending in 13 years.
00:01:34:07 And that's significant for a number of factors. I mean, first of all, we saw a decline for many years following the introduction of the Affordable Care Act, and then we saw a little bit of a plateau during the COVID years. And then this year, we're now projecting an 8% year-over-year trend increase for the group market and 7.5% for the individual market.
00:01:56:19 And just to dig into that just a little bit. Health insurers use these projections to calculate their premiums for the coming year. And it's their best prediction based on historical trend in the most recent year, things that they think are going to come through in the future year. And for an individual, or an employer, just in practical terms it means that if a plan costs $10,000, next year, it's going to cost $10,800.
00:02:23:01 And so in turn, employers use this information to make adjustments to their benefit plan design, how they think about their overall benefit plan for their employees, and the different actions they can take to help offset some of the health insurance cost increases year over year.
JENNIFER COLAPIETRO:
00:02:40:13 Wow. We're looking at the highest medical cost trend in commercial spending in 13 years. Thom, what's driving this high-cost trend? Can you share some of the major inflators?
THOM BALES:
00:02:50:07 Yes. And as a part of the survey, we asked the health plans to list their top three inflators and deflators for each year. And for this year, the most significant inflator and it's probably no surprise — is actually inflation and providers looking to combat the inflationary pressure that they're feeling on labor, on durable medical equipment, their cost to operate, their efforts to try to improve their margins, and taking that inflation that they witnessed.
00:03:18:18 And they've now been witnessing this for a couple of years and turning that into contract negotiations with the health plans in an attempt to try to offset some of that with the reimbursement from the health plans. And this is primarily our private insurance contracts — just remember, because we're talking about the commercial individual business here. But it's trying to offset their cost of actual operations that they experience.
00:03:41:24 And for many of our health systems, this is a real issue. I think, last week, one of the major rating agencies commented on the fact of the matter is, even with these kinds of offsets, even with these kinds of pass-through, most of the health systems in the U.S. continue to spend more than the revenue that they earn. And this has become a bit of a chronic story for many of them.
00:04:02:17 So the impact for health plans is that they then feel these contract negotiations come through. They then have to go and pass this on to the employers and/or talk to the employers about what's the different kind of a benefit design that they then present to their employee. So that's the number one inflator. Phil, you want to talk to what some of the other inflators are?
PHILIP SCLAFANI:
00:04:25:00 Yeah, happy to. Thanks, Thom. So, another major inflator in here sits on the prescription drug side. So expanded use of some drugs already on the market, as well as the launch of some new innovative therapies that we're tracking, potentially gaining FDA approval and coming to market. So, we've all heard for the past couple of years now about the surge in GLP-1 use that were already used for type 2 diabetes.
00:04:48:23 But now expanding in weight loss and obesity really expected to be kind of the largest single inflator on the prescription drug side as more use happens both in the type 2 diabetes side, but more so on the obesity weight loss management side. Kind of had a little bit of an intersection of the utilization itself expected to increase the shortages that the manufacturers of those drugs have been having are now ending. And coverage by commercial plans is slowly starting to increase.
00:05:16:14 So we definitely see the potential for significant inflation there. And that's what we kind of heard from the market in the survey. In addition to the GLP-1s, there are also some novel therapies in CNS looking at some of the central nervous system conditions that either just launched, so exciting new therapies in Alzheimer's, which hasn't really had any new innovative treatment options for decades now.
00:05:38:08 There are two treatment options on the market that are expected to grow in use and budget impact; near-term pipeline looking at areas like Parkinson's could also have some breakthroughs in therapies coming to market; as well as kind of the other side of CNS looking at some behavioral conditions — schizophrenia, depression.
00:05:54:08 And other CNS conditions that could drive some new incremental utilization, as well as in the case of some of these, a shift to higher cost therapy is that maybe new mechanisms of action help different patient segments. But we'll take what is currently a generic use and sort of transition it to those innovative higher cost therapies.
00:06:13:14 Lastly in this bucket, we're also keeping an eye on some upcoming drugs for rare and ultra-rare conditions. So, over the past couple of years, we've had more of these cell and gene therapies, and personalized therapies coming to market, and they treat very small patient populations — 50, 100, yeah, 1,000 patients in some cases, and they can cost several million dollars per treatment.
00:06:33:07 Sometimes their curative, sometimes very long duration. So, it's not exactly the same as taking a pill every day. But these small populations at significant high costs are just starting to add up, as we have more and more of these therapies that are helping these rare and untreated patient populations.
00:06:48:02 So, we'll continue to see the benefit to those patients that have more and more treatments available. But as we start to add up these small patient populations, they're becoming larger collectively at that high price tag.
THOM BALES:
00:06:59:07 And then our third and last inflator is the behavioral health spend. This is one that's, I think really interesting. It's something that we've been watching for a few years now. And if you look back at our previous Behind the Numbers reports, you'll see it on our trends to watch. Behavioral health, as always, at least over the last five years, it's been trending well into the double digits.
00:07:19:11 It's just been such a small portion of the total cost of care that it hasn't had a significant top-line trend impact. What we've seen over the last five years is the behavioral health cost has doubled now, and it's over 3% of total cost of care. And now it is having, that double-digit trend is having a meaningful impact on the total healthcare dollar.
00:07:39:05 We're expecting that to continue. We see the supply really being constrained, especially through the insurer system. There's a whole lot of spend happening outside of the network in and outside of the insurer's purview. And as we see some of that start to come into network and just folks continuing to utilize these kinds of services more going forward, we expect this to continue to be a double-digit trend item out for the next 10 years or so.
00:08:04:08 And so we'll continue likely to be one of these trends that sticks on our list, just as there's really no end in sight here. And when we'll see those double-digit trends let up, and now behavioral health has made up enough of the portion of that total healthcare dollar.
JENNIFER COLAPIETRO:
00:08:17:13 Okay. So that gives us a great understanding of the major inflators. Let's talk about the flip side. What can help bring this cost trend down? And what are the major cost deflators? Phil, can we start with you?
PHILIP SCLAFANI:
00:08:32:04 Thanks, Jenny. So, the flip side of the drug spending that we talked about before that's going to increase treatment costs and budget impacts are the biosimilars coming to market, which we look at as one of the significant deflators this year, and going forward. Biosimilars are also in our Behind the Numbers report last year.
00:08:47:04 And the launch of Biosimilars for the first time in the US market on the pharmacy benefit side did a good job of driving down costs, actually, but in a little bit different way than we're seeing this year. So, last year, with the launch of those Biosimilars in 2023, we largely saw driving down costs by actually the new competition driving the innovator therapy to go ahead and lower their price, offer increased rebates, and they kept the lion's share of the market with that.
00:09:15:01 And Biosimilars really didn't get a significant amount of uptake. This year, really as of April 1st, even we've kind of seen a new model come, so these private label biosimilar models that the PBMs and the vertically integrated organizations have launched. And it's really been a big shift in still having biosimilars drive cost reductions and act as a future deflator.
00:09:35:17 But now we're seeing the Biosimilars themselves get significant uptake. So, we've already seen two models launch earlier this year and a third announced amongst the major PBM. So, we do expect to see greater cost reductions now as these private label models take hold with the current biosimilars in the market, and then we see several major Biosimilars expected to come to market as early as 1/1/'25 looking forward.
00:09:59:04 So, definitely more to come here. Wouldn't be surprising if biosimilars are a deflator in our report next year again. And we'll be keeping an eye here to see what kind of impact they have with these new models.
THOM BALE:
00:10:08:12 And then on the medical side, there really isn't a sort of macro effect that's pushing costs down. We really are only seeing inflators purely focused on medical. So, what we've seen is health plans really having to look inward to identify ways to reduce the medical cost of care trends. And one of the ways that they've been doing that is focusing on cost of care management and affordability.
00:10:30:03 And so while these sorts of programs have existed for a long time, especially at the larger health plans, they've historically been very siloed and different areas coming up separately with different initiatives to try to attack the higher cost of health care trending. But what we've seen plans starting to do more recently is really coming together with a more formalized affordability function.
00:10:50:21 And what that serves is a centralized function in the organization, where they're able to take a more methodical approach to understanding what is driving healthcare trends. And they are doing that by starting with just looking at the really detailed service category level of health care claims cost across inpatient/outpatient, professional and pharmacy.
00:11:10:02 And benchmarking that data against some of the rich data that's out there to understand — Is it utilization? Is it unit cost? How can we start to attack this? And they're identifying where there are some outliers. They're setting targets. And they're getting the right folks from the organization together to ideate and to think about how to fix this on a go-forward basis.
00:11:28.5 And that same function then is working with those folks to monitor and execute on them and make sure that they're hitting those targets. So it's something that the actuaries feel comfortable taking some credit for as they're doing their pricing. And what we've seen as we've talked to different health plans is, while historically there's really been an advantage over some of the largest nationals where they've been able to execute on this a whole lot better, they're continuing to do that, but they've been able to achieve the low-hanging fruit.
00:11:51:18 And so while they're still able to maybe push down the increase by a point or so every year, they're having to think of new and creative ways to do that while some of the smaller regional plans are able to do a little bit of catchup. But we've seen that with a couple of other plans started this year that saw really huge decreases relative to the rest of the market, potentially flat trend or low-single-digit trend, because they were able to capitalize on a lot of these affordability initiatives that they hadn't done in the past.
JENNIFER COLAPIETRO:
00:12:17:22 So those are the major inflators and deflators. I guess, as we look, Julian, on future impact, are there other big trends that we should be keeping an eye on?
JULIAN LEVIN:
00:12:27:10 Yeah, absolutely. And this is a part of the report that we think about every year, because it's such a rich conversation when we talk to these health plans. And there are so many things that are top of mind for them. There were five that we identified this year that either had sort of mixed indications from the folks that we talked to, either positive and negative, or just it wasn't quite clear how to take it.
00:12:46:11 It didn't have an impact yet, but something that they thought might be either inflator or deflator going forward. So, the first of those five is the new CMS price transparency data that's been published over the last couple of years. That data is incredibly valuable in theory, really rich, specific unit cost benchmarks by carrier, by provider. And it's something health plans and providers are both wrangling with and both trying to use to their advantage.
00:13:11:01 And so still early, and plans are getting comfortable with it. And really this could go either way, depending on which side of the coin is able to use it more effectively. The second is generative AI and how that's getting implemented. So far, none of the health plans that we talked to were yet able to take credit for that as far as a medical impact and the medical cost trend.
00:13:29:19 But it is something that they're paying close attention to, and certainly we are seeing to-date impacts on how they're monitoring their trends and how they're thinking about some of the internal administrative functions. But they're still figuring out the right place to put that where they can really impact the healthcare dollar most effectively. The third is Medicaid redetermination.
00:13:46:15 This had very little impact on the group insurance market, but really a huge impact on individual. We saw record growth in the exchanges this year, largely due to Medicaid redetermination. I think, on net, health plans tended to see this as a deflator and likely was one of the contributing reasons to why our individual market trend was half a point lower than group.
00:14:08:01 But it was really hard to measure, and I think that the impacts were relatively small, and again, only impacted that one product line and really didn't have much of an impact on the group. The third is the No Surprises Act that was passed in 2022 and seeing how that's having an impact on out-of-network rates, notably for emergency rooms, radiology, anesthesia, and pathology.
00:14:29:17 And that's something that, I think, initially was speculated to be a deflator. It's still early, but seeing some of those settlement processes play out, it's looking like it may be a slight inflator. But again, it's too early to tell, and it's not impacting a huge amount of dollars to date. And the last is the implications of the IRA, or the Inflation Reduction Act.
00:14:49:03 So there are some interesting parts of that legislation that are largely focused on the Medicare market and how they're controlling pharmacy spend and cost increases. There's no direct impact on commercial, but we do see potential impacts on how the manufacturers are thinking about bringing their drugs to market and pricing them in the commercial market. That may be impacted, but we don't quite have a full feel on what the impact is going to be to date.
JENNIFER COLAPIETRO:
00:15:15:09 So let's bring this back to the impact on our listeners. So what does this all mean for everyone, the employers and consumers on the demand side, as well as for the health plans and providers on the supply side? And is there a role for pharma in all of this? I'd love to do a round-robin and just hear from all of you with your thoughts on this.
00:15:35:07 Thom, you want to kick us off?
THOM BALES:
00:15:36:18 Thank you, Jenny. I think, at the highest level across all of the stakeholders and for each one of us who are in this industry, this medical costs trend, the 8% year-over-year growth, it's a renewed call to action for addressing healthcare affordability across the entire healthcare ecosystem. Every stakeholder is impacted here, and everyone has a role to play in thinking about overall system transformation.
00:15:59:23 And in particular at this time, I think, as we think about balancing innovation with responsibility, which has been a topic for the last couple of years, we have to really work harder to find ways to introduce that innovation, specifically with an eye towards what artificial intelligence can bring us related to quality, what it can also bring us related to productivity, to access, and to engagement.
00:16:22:22 And we believe that there's real opportunity there. Phil, you want to hit on PBMs?
PHILIP SCLAFANI:
00:16:27:15 Thanks, Thom. So PBMs are sort of in an interesting spot this year trying to manage these inflators, still having to be able to develop benefit designs that meet the needs of the wide range of health plans and employers they represent, and really trying to get the right balance between being able to access to these newer, innovative therapies, or expanding use of GLP-1s for those employers and patients that want access, while still being able to manage utilization and overall affordability.
00:16:53:17 So to do that, they've been continuing to vertically integrate with different models, creating new pharmacy benefit designs and models, integrating medical and pharmacy benefits over the years to try to harmonize some of the differences in costs we see there. All the major PBMs and/or pharmacy chains have launched new cost-plus pharmacy models that should help on that side as well.
00:17:14:04 And in general, it is trying to make healthcare and health insurance easier to navigate for their patients and members. In parallel to that, though, we kind of see them looking at the rising costs of prescription drug benefits, and that's bringing increased scrutiny from Congress, from FTC and others. So, an interesting and definitely dynamic space as we look at the continued evolution here.
JULIAN LEVIN:
00:17:33:10 Health plans have a really critical role to play here. And they were in front and center as part of our survey, to begin with. They have a long history of managing the total cost of care, and it's a heavy focus for them just in terms of affordability of that premium dollar. They're the ones that feel it very directly when they're taking that premium dollar to market and have to convince consumers that they need to pay this premium to get covered.
00:17:54:00 So, they're going to need to continue to make heavy investments in that affordability function and making sure that ultimately healthcare is affordable to the employers and individuals that they're looking to sell to, and making those investments to ensure that that continues. From a provider standpoint, they're on the front lines spend starting with them.
00:18:12:06 And they have a critical role in educating members about how their choices impact their healthcare costs, helping to guide to the lowest-cost sites of care where they can, and reducing unnecessary spending by adhering to evidence-based guidelines.
00:18:27:21 There's also the continued push to move to value-based care and helping to align the incentives of the provider ultimately with the payer and looking to lower costs and sort of making it a win-win here for both constituents. On the employer side, there's a real opportunity, I think, to take a more active role in the management of the affordability and cost of care.
00:18:47:01 And employers can look to almost stand up many affordability kind of mindsets within the organizations, especially for the largest self-insured employers, where they really can impact the medical policy, network choices, and just the way that the insurance company interacts with their employees.
00:19:04:04 And there's an opportunity for them to help guide the carriers and work with them to help lower cost of care for themselves and for the employees that work for them.
JENNIFER COLAPIETRO:
00:19:12:20 And, Thom, do you want around this out with talking about the impact on the consumer side?
THOM BALES:
00:19:17:00 Yes. Thank you, Jenny. On the consumer side, just to give a little bit of a peek here, we actually just completed a really interesting survey on consumer experience behaviors, attitudes about health across a couple of thousand consumers across the U.S. And we're going to be releasing a formal article on that very shortly here. We heard from consumers who can't afford their healthcare, who have serious health issues,
00:19:39:21 and the fact of the matter is, as we continue to find that those that are feeling the affordability cost crunch at times are making decisions and choices around skipping their care, not filling prescriptions because of what this means to them economically. We also heard on the flip side to that a little bit around. For some consumers, for the right quality care for what they believe drives an impact to their quality of life,
00:20:04:23 interestingly, the willingness to possibly invest more into their healthcare. And so, we see two sides of it. Right now, though, this inflation continues to put a crunch on household spending for our consumers, and it is going to impact their decisions and their choices in the near term that I think for all of us, for the health plans and for the health systems, have to be thinking about when they make those kinds of choices, what are the long-term implications to the individual's health?
00:20:33:02 And then as an industry to our overall cost of care trend going forward. It's a clear signal that affordability remains a significant issue. I think we all know that. The challenge for all of us is to ask what can we be doing today to address that.
JENNIFER COLAPIETRO:
00:20:48:24 Well said. And this has been a wealth of great information. And we invite our listeners to read the Behind the Numbers 2025 report that will be linked in the show notes, and follow us on social media. Thom, Phil, and Julian, thank you for joining us today.
THOM BALES:
00:21:03:09 Thank you, Jenny.
JULIAN LEVIN:
00:21:04:20 Thank you.
JENNIFER COLAPIETRO:
00:21:05:09 For more on these topics and other health industry insights driven by policy, innovation, and care delivery changes, please subscribe to our podcast at pwc.com/us/nextinhealthpodcast. Until next time, this has been Next in Health.
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