Health Action in Depth
November 2002
Worrisome Changes Loom in the Private Health Insurance Market
The news wasn't good--a recent survey reported that employers experienced a 12.7 percent increase in the cost of health insurance premiums from 2001 to 2002. This massive jump was the second consecutive year of double-digit premium increases and the highest one-year increase since 1990. And two different surveys of large employers released this fall found that health plan costs would increase by 15 percent in 2003. Uwe Reinhardt, a Princeton University health economist, asserts that we should get used to the idea of double-digit health insurance increases for the next 10 years.
Naturally, employers turn around and pass some of those cost increases on to their employees-for example, by imposing higher deductibles, higher copayments, instituting tiered formularies for prescription drug coverage, and reducing benefits. Many workers are now paying more and getting less coverage, if they are covered at all. What is driving these cost increases? And what kinds of private market reforms are being proposed to stem the tide of such increases?
Why Are Private Health Insurance Costs Going Up?
There are three factors that are typically mentioned in discussions of why private health coverage costs are escalating: the medical underwriting cycle; medical inflation; and the loosening of managed care. These three factors are together creating what some might call a "perfect storm" that is leading to radically increased health insurance costs.
The first factor often cited as the cause for the recent rise in insurance premiums is what's known as the medical underwriting cycle. Medical underwriting is the process by which insurance companies set premiums by looking at factors such as age, sex, and medical history and then determining how much a person or group is likely to incur in the way of medical bills. In what is called a "normal" underwriting cycle, insurance companies drop their prices or hold prices steady to get more customers; once they've gained new customers, they raise their prices to make up for losses and boost profits. So, prices go up and down in a sort of see-saw fashion. Right now, we're in the upswing or what's known as the "hard phase" of the cycle, when insurers are raising their prices.
At the same time that insurers are raising their prices, we are also seeing the second factor--genuine medical inflation. This inflation is largely driven by increases in prescription drug, physician, and hospital costs. Private insurance spending on prescription drugs grew by about 20 percent a year from 1995 to 2000; this spending represented 30 percent of the total growth in private insurance costs for that period. Private insurance spending on hospital and physician charges together made up 45 percent of the increase in private insurance costs during that same time frame.
A significant portion of the growth in physician and hospital costs has been driven by the high demand for, and use of, technological advances in medicine. These advances include new surgical innovations and new diagnostic and treatment devices. As medical science advances, providers use more complex technologies (such as heart bypass surgery), which cost more. So, some people need (and receive) more advanced care that is more expensive, which increases overall health care costs.
There may be questions about the value of some of these services or how widely they are used. However, most health care spending is for medical interventions that are necessary to treat a condition-the use of such technologies often leads to improved quality of life and extended life spans, and who doesn't want the best care? What's more, any discussion of who really needs or deserves more expensive care quickly finds itself on a slippery slope-Who would make such decisions? What criteria would they use? What would happen to those who didn't get the care their doctors said was necessary?
It should also be noted that at least some of this "consumer demand" is really a demand that is fed by physicians, who are usually the ones that recommend the latest technological advances. It's easy to blame consumers, but they aren't the only ones who should be held accountable for the demand for, and use of, medical breakthroughs. (See the box, "Are Consumers to Blame for Rising Health Care Costs?")
The third factor often pointed to as the cause of the increase in private health insurance costs is the move away from-or loosening of-managed care. The widespread use of tightly controlled managed care, specifically HMOs, is credited with slowing down health care spending in the mid-90s. But while managed care was successful in stabilizing spending on health care in the short term, many believe this stabilization represented a one-time savings. This savings resulted from two factors: The first factor was that some excess use of services was probably squeezed out.
The second factor is that some necessary care was also squeezed out; that is, consumers trying to see the right specialist or get some other kind of care sometimes grew so frustrated with the cumbersome restrictions of their health plans that they gave up and decided they wouldn't see the doctor or get that care after all. That means that some of the cost savings were not achieved because managed care worked as intended, but because, in some instances, it didn't work at all. And as noted in the box on page 5, care that is delayed often ultimately costs more because the underlying health problem in question has frequently grown more advanced and requires more intensive, expensive care.
So, the "successful" curbing of health care costs came at the expense of control over health care choices and access to specialists and services. Frustration over loss of choice and access led to a backlash in the late '90s. Employers, finding themselves in a tight labor market at the time, sought plans with fewer referral and authorization rules-such as PPOs-to hold on to their employees or attract new ones. Now we're seeing less control over visits to specialists and the use of expensive diagnostic tests-and the cost increases that go with this trend.
Other factors also contribute to increasing health costs: "Drug companies, for example, have enormous profits year after year, pay their executives huge salaries, and regularly raise drug prices faster than inflation," observes Families USA's Ron Pollack. While these elements aren't a major cost driver, they are especially hard to stomach when consumers are asked to pay more and get less in response to rising costs.
What Are Employers Doing to Rein in Costs?
To combat burgeoning health costs, employers are taking two kinds of actions: they are passing more of those costs along to employees, and they are looking at ways of restructuring employee health benefits.
Paying More, Getting Less?
Nearly two-thirds of all Americans are covered by employer-sponsored health insurance, including workers, their dependents, and retirees. According to an annual survey released by the Kaiser Family Foundation this fall, sharply rising health care costs and the economic downturn have resulted in employers imposing higher premiums and cost-sharing on workers and even cutting back on the scope of health benefits they offer. For example, a whopping 56 percent of large firms (those with 200 or more employees) increased the amount that employees paid for health insurance premiums in 2002. And the percentage of all businesses reporting a decrease in benefits more than doubled over the last two years, from 7 percent in 2000 to 11 percent in 2001 to 17 percent in 2002.
Premiums: Average yearly premiums employers paid increased by 15 percent for individual coverage, from $2,650 in 2001 to $3,060 in 2002. For family coverage, premiums increased by 13 percent, from $7,053 in 2001 to $7,954 in 2002. These double-digit rate increases were similar across all firm sizes, industries, and regions of the country. And while the proportion of premiums workers pay has not increased-they pay 16 percent for single coverage and 27 percent for family coverage-because the premiums themselves are higher, employees end up paying more. So, employees' annual share for premiums increased from $359 to $454 for single coverage and from $1,801 to $2,084 for family coverage. Adding insult to injury, low-income workers are more likely to experience premium increases.
Deductibles: For PPO plans, which cover about half of all workers, the average deductible for seeing preferred providers increased by a massive 37 percent from $201 in 2001 to $276 in 2002.
Copayments: For those with PPO coverage, $10 continues to be the most common copayment amount for visits to a preferred provider. However, the percentage of workers with a copayment of $10 per visit fell from 41 in 2001 to 35 percent in 2002, while those paying $20 per visit increased from 16 to 25 percent.
Prescription drug coverage: According to the Kaiser study, 28 percent of businesses report that they increased the amount that workers paid for prescription drugs in 2002. While the copayments for generic and preferred drugs have increased slowly, the average copayment required for non-preferred drugs has risen sharply, from $16 in 2000 to $20 in 2001 to $26 in 2002. The same study found that the use of three-tiered cost-sharing arrangements for prescription drugs grew from 29 percent of covered workers in 2000 to 36 percent in 2001 to 57 percent in 2002. In such arrangements, the beneficiary pays the lowest price for generic drugs, a higher price for brand-name drugs that are on formulary (a list of approved drugs), and the highest price for brand-name drugs that are not on formulary. Some businesses have even instituted four-tier formularies, where there is a group of drugs that is simply not covered at all, meaning the beneficiary must pay the full cost of such drugs out-of-pocket.
These arrangements have two goals-encouraging beneficiaries to use lower-cost, generic drugs, and shifting some of the costs of the most expensive drugs from the insurer to the employee. Recent research has found that increasing copayments can cut drug spending by employees by more than 20 percent. According to that study, workers facing increased copayments for prescription drugs often switched to lower-price generics or cut back on prescription drug use altogether, sometimes substituting over-the-counter medication. And while this study did not examine whether people were going without essential medications, there is abundant evidence that increasing copayments can have an adverse impact on care, including prescription drug needs, especially among low-income employees.
Hospital coverage: Some employers are also looking toward tiered hospital coverage, similar to tiered drug coverage, to save them money. Under such plans, insurers charge beneficiaries higher copayments if they receive care at more expensive hospitals instead of at hospitals on a list of preferred (less expensive) facilities. One health care consultant has predicted that most major insurance companies intend to offer such plans within two years. It should be emphasized that the distinction among hospitals that is being made in these arrangements is based solely on price, not on quality of care provided. One very negative consequence of such coverage arrangements is that, because more is charged for care at some hospitals, they serve to restrict and sometimes eliminate the options available to consumers who can't afford the higher-cost facilities, especially low-income consumers. And, at the most extreme end of the spectrum, some plans are limiting their hospital networks by placing some hospitals off-limits, much like the fourth tier of prescription drug plans where no drugs in that class are covered.
Reprinted with permission. Copyright 2003 The New Yorker Collection from cartoonbank.com. All rights reserved. |
The rise in employee cost-sharing is likely to continue. A national survey of 460 companies conducted for UCLA's Anderson Forecast found that over 70 percent of businesses expect to change their health benefits next year, including reducing benefits and increasing worker cost-sharing.
While cost-sharing may be successful at reducing employers' share of health costs, it is doubtful that such measures will contain rising health costs overall. The U.S. has had the greatest amount of cost-sharing among industrialized countries by far-and the costliest health system with the worst record of controlling costs. This is in part because cost-sharing only affects such initial decisions as whether to see a doctor. Once a physician has decided that more intense medical care is necessary, consumers are likely to bite the bullet and agree to such care and whatever costs go along with it. As Professor Donald Light of the University of Medicine & Dentistry of New Jersey points out, "No evidence exists that co-pays lower the rate of increasing costs-they just make the sick pay some of them."
Aside from those businesses that are shifting health coverage costs to employees, some employers, especially small firms, are taking an even more drastic step-faced with skyrocketing health costs, they are dropping health coverage altogether. The proportion of small firms that offer employee health coverage has decreased from 65 percent in 1986 to 42 percent in 2002. Recent data from the U.S. Census Bureau on the number of uninsured serve to further highlight this problem. According to this data, the percentage of people with employer-sponsored coverage dropped from 63.6 percent in 2000 to 62.6 percent in 2001. This drop can be attributed almost solely to a drop in employer-sponsored health coverage of businesses with 25 or fewer employees. Coverage among workers at larger businesses remained largely unchanged.
What's the Bottom Line?
Right now, there is no consensus among health experts on how to put a halt to the steep increases in health care spending. There is, however, widespread agreement that employers will keep passing those increases on to consumers, and some will drop health coverage entirely. In our next issue, we'll examine some of the new health coverage arrangements employers are turning to in an effort to shift some of the health cost burden from themselves to their employees-a movement that is often (erroneously) called "consumer-driven" care.
Finding and Keeping Legislative Champions: This article from our newsletter Health Action discusses strategies advocates from several states have used to develop legislative champions for their legislative priorities. (November 2002)
