Employer health care costs are expected to reach a four-year high in 2020, in part due to rising prescription drug prices—and that is prompting many employers to re-think their approach to health insurance, according to a PwC Health Research Institute report.

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Report details

The report is based on PwC Health Research Institute's national consumer survey of 2,500 adults and its annual survey of more than 550 employers from 37 industries. In addition, PwC researchers interviewed 55 health industry executives, health benefit experts, and actuaries.

Findings

PwC projected that private employer medical costs will increase by an average of 6% in 2020, up from an annual rate of increase of about 5.5% across the past three years.

The researchers noted that the cost increase was driven in part by drug and medical service price increases, which continue to outpace the growth rate for utilization. The report also noted an increase in new high-priced specialty drugs entering the U.S. market and that such drugs make up more than 40% of employer drug spending. Overall, the report found drug spending is expected to grow by more than 3% in 2020 and about 6% annually between 2023 and 2027.

In addition, the report predicted employers will spend more in 2020 on chronic disease management and mental health care, as the number of individual with diabetes and heart disease is expected to rise and more employers expand access to mental health care services.

How employers are controlling costs

While employers in the past have sought to lower health care spending by encouraging workers to shop around for lower-cost care and by shifting more workers to high-deductible health plans, today many are taking a new approach. According to the report, more employers are contracting directly with health systems to negotiate better prices for high-cost procedures.

PwC said it expects employers increasingly to take a similar approach with primary care, with more employers contracting with local health systems, providers such as One Medical, and off-site health clinics such as CVS Health's new health hubs.

In addition, PwC said more employers may offer financial incentives to encourage workers to manage chronic conditions, such as diabetes and heart disease.

To address the rising cost of specialty drugs, PwC said more large employers are expected to turn to biosimilars, which are lower-cost version of biologic drugs developed using living organisms, such as tissues or genes. However, the report said it may take time to get provider buy-in. According to CNBC, PwC research shows nearly three in four doctors are hesitant to recommend biosimilars.