Medical cost trend: Behind the numbers 2025
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.
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.
Drastically different cost management neededAs 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.
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.
life insurance update 2025
Health insurance update 2025