Why Healthcare Costs are Surging—And What to Do About it

Thom Bales, Health Services Sector Leader, PwC

Philip Sclafani, Pharmaceutical & Life Sciences Lead, PwC

The escalating cost of healthcare has become a critical issue, with PwC projecting an 8% increase in patient treatment costs in 2025, the highest rise in 13 years. A mix of cost inflators and deflators determined the projected surge, creating a complex landscape for healthcare providers, payers, and employers.

WHAT IS DRIVING COSTS UP?

New prescription drug launches. One significant inflator is the introduction and usage of new treatments, including GLP-1s, CNS drugs, and the growth in new drugs for other rare conditions. Current on-market medicines are seeing spiked use, and new drugs for rare conditions will drive costs higher. While these innovations are crucial for advancing healthcare, their high costs are notable.

Inflationary impact on healthcare providers. The healthcare expenditure index has risen, with hospital services growing by 6.3% in Q4 2023 compared to 2022. Despite improved hospital performance in 2024, providers face operational challenges and rising expenses. They are turning to commercial health plan contracts to recoup growing operating costs due to greater regulation related to Medicare and Medicaid fee schedules.

Utilization and cost of behavioral health. Post-pandemic, there’s been a surge in utilization of behavioral health services (i.e., mental health therapists and counselors), coupled with a shortage of skilled workers. The rising demand for these services and workers, along with reimbursement challenges, indicate future cost inflation in this sector.

While these factors drive up costs, several deflators help alleviate some of the pressure.

WHAT IS EASING THE BURDEN?

Impact of biosimilars. Expanding in the US pharmacy benefit market, biosimilar drugs—parallel to the generic versions of capsules or pills, but for biologics—have resulted in significant savings. In 2023, the savings came from increased competition driving discounts and rebates on biologics. In 2024, the rise in biosimilar adoption, especially private label biosimilars, continues to ease the financial burden.

Holistic approach to affordability. The sector is focusing on total cost of care management to combat inflationary pressures. Healthcare systems are establishing functions to moderate medical cost trends and improve affordability by reducing over-utilization and enhancing operational efficiency. “Affordability command centers” have been set up to focus on interconnected components that determine premium costs. These centers aim to reduce wasteful spending and improve medical management operations.

WHAT IS THE PATH FORWARD?

The healthcare industry faces a pivotal moment, with a mix of challenges and opportunities. Finding sustainable solutions is not just about cutting costs; it’s about enhancing patient outcomes and helping to solidify the long-term viability of our healthcare system.

What can health plans and “payviders” do? Health plans and payviders should prioritize value-based care and cost management. Establishing dedicated functions, such as affordability command centers, can help champion an end-to-end affordability process by focusing on all interconnected components, including benchmarking, target setting, ideation, execution, and more. They need to evaluate coverage for obesity and weight-loss drugs, make informed formulary decisions for new therapies, explore innovative payment models for behavioral health, promote biosimilars, reduce wasteful spending, invest in artificial intelligence for efficiency, and seek partnerships for better cost management.

What can providers do? They can address workforce shortages, leverage technology, optimize margins through alternative payment models, specialize in behavioral health, and collaborate with health plans for clear reimbursement. Following evidence-based guidelines, participating in value-based care arrangements, and providing transparent outcomes to employers are key strategies.

What can employers do? Employers can help by maintaining cost sharing to retain talent, controlling expenses through plan design and provider choices, and improving employee assistance programs for behavioral health. Innovations in mental health support and collaboration for affordable, comprehensive coverage are essential steps.

Payviders, providers, and employers all play a role in protecting the healthcare system and its patients. By leveraging advancements in care delivery, improving operational efficiency, and fostering greater transparency, the industry can navigate this complex landscape and work toward a sustainable future. 

Thom Bales is Health Services Sector Leader, and Philip Sclafani is Pharmaceutical & Life Sciences Lead; Both with PwC