Trend: Why Next Year Costs More

Medical trend is the year-over-year growth rate in the cost of caring for the same population. It is the quiet assumption inside every capitation rate, benchmark, and budget, and one of the easiest ways for a risk contract to go wrong.

What drives trend

Trend is not one thing. It decomposes into two main forces, sometimes a third:

• Unit cost: the price of each service. Hospital rates, drug prices, and physician fees rising over time.
• Utilization: the volume of services used. More visits, more imaging, more admissions per member.
• Mix and intensity: a shift toward more expensive services or sicker case mix, even at stable prices and volumes.

A rate-setter has to project all of these forward. “Trend is 6 percent” is shorthand for a bundle of assumptions about prices and volumes across every service category.

Why it decides who wins

Trend enters a contract as a projection, and projections can be wrong in a way that costs real money.

Worth remembering: if a benchmark or rate is built on 5 percent trend and actual costs grow 7 percent, the risk-bearing organization eats the 2-point gap. On a large population, a two-point trend miss is a budget-breaking number. This is why the trend assumption is one of the most negotiated figures in any risk deal.

Trend compounds

Because trend applies year over year, it compounds. A multi-year contract with a benchmark trended at 4 percent while real costs grow 6 percent falls further behind every year, not by a fixed amount. Small annual differences become large cumulative gaps, which is why multi-year risk arrangements live or die on the trend assumption baked into their benchmarks (Module 3).

Key takeaways

• Trend is the annual growth rate in per-capita cost for the same population.
• It is driven by unit cost, utilization, and mix or intensity, all of which must be projected.
• A trend miss is absorbed by whoever bears the risk, and because trend compounds, small errors grow over a multi-year contract.