The nation's employers can expect a 9 percent jump in medical costs in 2011, according to a new report from PricewaterhouseCoopers, which details the reasons for the anticipated hike and highlights the possibility for savings over the long term – including the increasing use of electronic health records.

"Health reform delivers only a minor impact on the underlying medical cost trends in 2011 and introduces hundreds of changes in the healthcare system designed to reduce costs and improve efficiencies in the long-term," said Kelly A. Barnes, U.S. health industries leader at PricewaterhouseCoopers. "These changes could bring significant new cost savings opportunities for employers and payers as well as new choices and transparency for workers buying insurance."

The annual "Behind the Numbers," which was released Tuesday, includes findings of PwC's Health and Well-Being Touchstone Survey of more than 700 employers from 30 industries, as well as interviews with health plan actuaries and other executives whose companies provide health insurance for 47 million American workers and their families. The survey was completed in the first quarter of 2010. Companies ranged in size from small employers with fewer than 500 employees to large companies with more than 20,000 employees.

Electronic health record adoption and other information technology uptake is expected to be at its highest in 2010 and 2011, driven by federal stimulus funding in the HITECH Act, as both hospitals and physicians aim to prove meaningful use of the technology in order to quality for the bonuses and avoid penalties.

"The mandates of the HITECH Act, passed in 2009, lit a fire under health systems because of the potential bonuses and future penalties for not complying with the new regulations," the report asserts.

Nearly 70 percent of CIOs surveyed earlier this year by PwC and the College of Healthcare Information Management Executives – CHIME – said the new regulations accelerated health IT efforts they were going to invest in anyway.

When asked when their systems would incur most of the cost for implementing EHRs and other mandates, 34 percent said in 2010 and 47 percent said 2011.

PwC's report predicts that the majority of the American workforce will have a health insurance deductible of $400 or more, as more employers return to "indemnity style" cost-sharing by raising out-of-pocket limits, replacing co-pays with co-insurance and adding high-deductible plans.

Improving wellness programs and increased cost-sharing lead the planned changes employers will make in the benefit plan designs they will offer for next year.

PwC research also shows:

• Two-thirds (67 percent) of companies intend to expand or improve wellness programs inside the U.S.
• 42 percent intend to increase employee contributions for health insurance coverage.
• 41 percent intend to increase medical cost-sharing, including higher deductibles and co-pays, while only 26 percent intend to increase prescription drug cost-sharing.
• More employers are dropping health benefits for retirees. One-third of employers with over 5,000 workers subsidize pre-65 retiree medical coverage, down from 47 percent in 2009. Only 22 percent of employers with over 5,000 employees subsidize post-65 retiree medical coverage, down from 37 percent in 2009.

Provider consolidation expected

The biggest inflators of health benefit costs in 2011 will be in hospital and physician costs, which make up 81 percent of premium costs, PwC said.

Here are the reasons:

• Hospitals shifting costs from Medicare to private payers and employers is seen as the Number One reason for higher medical cost trends. In 2011, Medicare, which is the single largest payer for hospitals, will reduce payment rates to hospitals for the first time after seven years of increases that nearly matched or exceeded inflation increases. Some hospitals that benefitted from higher payments in 2008 and 2009 may be able to manage this type of cut by tapping their reserves. Yet, more are likely to shift more costs to commercial payers during their negotiations.
• Provider consolidation is increasing, which is expected to increase their bargaining power. More physicians are getting out of private practice and joining forces with local hospitals or larger physician groups. The number of physicians involved in mergers or acquisitions in 2009 was 2,910, nearly twice that of 2008. There has been record consolidation activity in 2010, and PricewaterhouseCoopers expects the trend to accelerate in 2011. Payers expect to see more negotiating power and higher prices in the short term, though the benefits of consolidation should create efficiencies that moderate rate increases in the future.
• Spurred by stimulus funding that begins in 2011 and Medicare penalties that begin in 2015, hospitals will invest billions of dollars in certified electronic health record (EHR) systems. While many hospital systems were planning to implement EHRs in the near future, the government's new regulations dramatically condensed their timelines to invest in technology, IT staff, training and process redesign. Healthcare CIOs surveyed by PwC said they will make their largest investments to meet the new EHR regulations in 2011. In the long term, EHRs are expected to help control costs.