2009 will see health cost inflation of nearly 10%, according to PricewaterhouseCooper’s (PwC’s) report, Behind the Numbers: Medical Cost Trends for 2009. Medical inflation ran about 10% in 2007, as well.
PwC says that since the mid-1960s, the biggest jumps in the percentage of GDP allocated to health care in the U.S. happen during and leading up to recessions. Thus, health care becomes more of a burden for both the private sector (employers and consumers) and for the government (public sector).
Underneath this double-digit increase are both cautionary and hopeful trends:
The recession: PwC notes that if there is a recession in 2009, the economy will depend more on the health industry. Historical data demonstrates that health care’s share of the GDP increases during economic downturns.
The upside of wellness: In 2009, more employers will adopt wellness and disease management programs in partnership with health plans, who are increasingly competing for fewer potential enrollees as employers drop health insurance coverage. Health plans are trying to innovate more personalized approaches that target insureds’ specific challenges.
Generics substitution will flatten; watch out for expensive specialty drugs: Generic substitution of more expensive branded prescription drugs will have peaked by 2009, at around 2/3 of all prescriptions. No major blockbuster drug will go off patent in 2009. PwC calculates that prescription drugs comprise 14% of benefit premiums. This could increase based on expensive specialty drugs that are available, although more plans and employers are introducing four-tiered plans. Expect the compound growth rate for specialty drugs that treat cancer and other conditions to grow 13% between 2007 and 2010 — versus only 1% for “small molecule” drugs. Three in four employers have already instituted 3-tier drug plans, which have been effective in stemming Rx cost growth for employers.
Health Populi’s Hot Points: PwC expects that the impact of a recession on health care is likely to be, “extremely mild, or nonexistent, with the exception of the availability of credit. The most likely change would be a spike in the ratio of health spending to GDP.” I would call attention to my recent discussion on the Kaiser Family Foundation‘s “new math of unemployment and uninsurance:” that is their finding that, for every 1% in unemployment, there is an influx of an additional 1.1 million uninsured Americans.
If the U.S. does experience a recession beyond 2009 — as the consumer credit markets continue to suffer, the price of petrol and food and consumer goods continue to increase, and jobs are lost — the impact of lost jobs will grow the ranks of the uninsured. PwC opines that a lack of public policy addressing the uninsured population would accelerate the private sector’s premium increases. Such a situation would negatively impact employers’ ability to continue to provide health insurance for their employees. The expected double-digit increase in premiums at this challenging time for the American economy is sobering news for all stakeholders.
Ben Bernanke, the Federal Reserve Chairman, has begun to talk about this problem in the larger context of the macroeconomy and global finance. You can read his recent speech on the topic of health care finance challenges here.