Healthcare costs to grow 7% next year: PwC

By Alex Kacik / June 29, 2023

Healthcare costs are expected to rise 7% next year as providers deal with higher expenses and seek rate increases during contract negotiations with insurers.

The projection by PricewaterhouseCoopers' Health Research Institute tops the consultancy's estimates in 2022 and 2023, which were 5.5% and 6%, respectively.

For their annual report, PwC researchers spoke with actuaries who work with insurers covering 100 million employer-sponsored members and 10 million Affordable Care Act members to forecast healthcare inflation. The results were weighted by each health plan’s size.

Generally, the projections have been close to actual cost growth, but researchers sometimes revise previous estimates, said Thom Bales, U.S. services health sector lead at PwC. For instance, the 6.5% 2022 cost growth projection was adjusted to 5.5%. 

Looking ahead to 2024, providers’ expense growth and subsequent rate increases, along with pharmaceutical price hikes, will drive healthcare inflation, PwC researchers said.

Here's what PwC predicts the industry will experience next year.

Providers will pass on higher labor, supply expenses

Hospitals, physician groups and other providers have experienced significant labor and supply costs increases over the past three years amid a surge in clinicians retiring or leaving the industry, the prevalence of staffing agencies and temporary clinical staff, and inflation. As a result, providers are expected to lobby for higher rate increases in contract negotiations with insurers.

Consolidation of physician groups and hospitals is expected to increase providers' negotiating leverage. A number of studies show that consolidation leads to higher prices and often translates to higher premiums, increased patient cost-sharing and stagnant wages for workers.

A lag persists in data regarding providers' price increases, depending on the timing of contract negotiations with insurers, Bales said. "The impacts of the inflationary pressures that health systems are facing have not been full realized," he said. 

Drug price hikes may hit double-digits

Drug manufacturers' price increases are expected to be in the high single- or double-digits next year, driven by the introduction of expensive pharmaceuticals such as gene and cell therapies. The median annual price for new drugs increased from $180,000 in 2021 to $222,000 in 2022, researchers noted.

Meanwhile, providers are spending more to manage a rising number of drug shortages as they source alternative treatments and train staff to manage unfamiliar products. Although more biosimilars—less expensive versions of drugs resembling biologics—are coming to market, adoption among physicians and patients has been relatively slow.

About two-thirds of insurers rank biosimilars as a primary lever to reduce healthcare costs, Bales noted. "There is an opportunity for greater adoption [of biosimilars]," he said. 

Outpatient shift may offset increases

Insurers reported a decrease in inpatient utilization and a corresponding shift to lower-cost outpatient, virtual and home-based care settings. That has dented hospital revenue, which is also threatened by proposals to expand site-neutral payments.

It is unclear whether inpatient utilization and the decline in hospital-based surgeries will recover to pre-pandemic levels, PwC researchers said. Insurers expect that cost growth will primarily stem from provider and pharmaceutical price hikes rather than an uptick in utilization. 

Employers hold the power

Employers will demand lower-cost options from insurers. They will push for health plans with narrow networks that funnel patients to low-cost, high-quality providers, according to the report. Employers will also likely encourage the use of telehealth for counseling and other mental health treatment, potentially limiting cost growth.

"Employers continue to be very active in trying to manage the cost, quality and experience of care for their employees."