Cost of Care

Published data quantify how cost increases will continue to affect the healthcare industry next year

Cost increases have been substantial throughout the pandemic, and the trend is not expected to abate in 2024.

September 7, 2023 2:01 pm

The cost to treat patients will accelerate next year, with ramifications across the healthcare industry, according to newly published projections.

PwC’s Health Research Institute reported that the cost of providing care will increase by 7% in 2024, up from a 6% increase this year and 5.5% in 2022. A 7% increase would tie 2021 for the highest annual change in the past decade.

“The higher medical cost trend in 2024 reflects health plans’ modeling for inflationary unit cost impacts with their contracted healthcare providers, as well as persistent double-digit pharmacy trends driven by specialty drugs and the increasing use of certain medications used to treat Type 2 Diabetes or weight loss,” the report states.

The outlook described in the report mirrors an estimate of the 2024 cost increase as gauged by an employers’ group. The International Foundation of Employee Benefit Plans released survey results previewing U.S. employers’ healthcare costs. Costs are expected to rise by 7% next year, according to survey findings.

Based on responses from about 170 employers, the report found that drivers of the rise in costs are likely to be:

  • Utilization arising from chronic conditions (22% of respondents)
  • Catastrophic claims (19%)
  • Prescription drugs and advanced therapies (16%)
  • Provider costs (14%)

Among the planned initiatives to stem the cost trend, some typically are met with concern or resistance by providers and consumers. The leading approaches, according to the survey, include:

  • Utilization initiatives such as prior authorization and case management (22% of respondents)
  • Cost-sharing initiatives (16%)
  • Work and wellness programs (13%)
  • Plan design initiatives such as high-deductible health plans (12%)
  • Purchaser initiatives such as telemedicine and centers of excellence (12%)

Implications for contracting

“In a persisting high inflationary environment, hospitals and providers will often be pushed to seek significant rate increases from payers,” the PwC report states.

For hospitals, much of the impetus will be the cost of recruiting and retaining an adequate clinical workforce, according to the report. Providers will look to commercial payers to fill the gap given what advocates see as inadequate increases from CMS. In FY24, for example, Medicare inpatient payment rates are set to rise by an average of 3.1%.

Drug prices also will contribute to cost inflation, according to the report, although the trend will be mitigated to a degree by the increasing availability of biosimilars.

Among the other anticipated cost deflators is the continued migration of care to outpatient settings and virtual care platforms.

Stagnating margins

Despite the long-term rise in costs, expenses were not the leading factor in hospitals’ decreased margins for July, relative to the previous month, according to Kaufman Hall’s latest National Hospital Flash Report.

Median year-to-date operating margin was 1.3%, down from 1.4% in June but still better than what was seen for most of 2022, when margins consistently were in negative territory.

The biggest driver of the slight July downturn was a dip in volumes, which affected revenues. Expense per calendar day dropped by 4% in June but was up 4% year-over-year, and the month-to-month change was not enough to offset the revenue fall-off.

“Labor continues to be the biggest share of hospital expenses, and expenses will likely continue to fluctuate due to inflation,” the report states.

The healthcare cost trend is evident in the Producer Price Index, a U.S. Bureau of Labor Statistics metric that measures an industry’s price changes in the provision of goods and services.

Not surprisingly, the healthcare industry’s PPI has spiked since the pandemic. Starting at a baseline of 100 in June 2009, the index increased by nearly 23%, to 122.9, over more than 10 years as of February 2020.

From there, in less than three and a half years, the index rose by 10.2%, to 135.5, as of July.


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