Health Care Costs: Up, Up and Away

Health Care Costs: Up, Up and Away

There's one given when it comes to the cost of medical insurance: Employers and employees will pay more in the new year.

By Bob Andelman

Contributing Writer

There are two sure things we can tell you about health care costs in 2004.

They're going up.

And up.

And the face of health care is evolving again, but what it will look like by year's end is anyone's guess.

OK, maybe that adds up to three things we know. But the list of unknowns is much greater.

Etienne Pracht is an assistant professor of economics in the Department of Health Policy & Management at the University of South Florida's College of Public Health in Tampa. He says that premiums rose about 14% in each of the last two years "and there is no reason to believe it's not going to continue going up.

"The astonishing thing," he adds, "is that if you compare that to the overall inflation rate, which was 2.2% last year, it's a big difference."

Harvey Sobel, a principal and consulting actuary at Mellon's Human Resources & Investor Solutions (www.mellon.com/hris/) in Secaucus, N.J., agrees that rates are definitely going up.

"People like us who follow these things get excited when they don't go up as much," Sobel says. "But they're still going up. Most employers we consult with are still seeing double-digit increases, so they're concerned. There are so many forces pushing them up, and we don't see much relief."

Health care costs began their rise in 1981 and have consistently outstripped the overall inflation rate, Pracht says. "There are many reasons. This is a very technology-driven industry. Americans always want Cadillac medicine - the best."

The issue then becomes a matter of how will insurance pay for services?

"If you're asking me what will happen to health care insurance for employees and how big companies will react - I don't think they have a strategy," Pracht says. "In the '90s, the strategy was managed care. But they used that up and there was a big backlash."

None of the options facing business will win them support with employees or investors. They can do nothing and absorb the evitable increases in premiums, a scenario which Pracht describes as most "likely." Or, he says, they can pass that increase on - sometimes.

"The other strategy would be to not offer health benefits, which would be very unpopular," he says. "So it is unlikely they would do that. Of course, the law doesn't say what kind of deductible or co-payment a company might demand. At some point, having no plan is better than some plan. What they're left with is passing on more direct costs - higher co-pays and higher deductibles. You can say, 'We're still offering a health plan, we're not increasing premiums, but you have to pay more yourself.' It's a face-saving, PR thing."

Another possibility Pracht suggests is that companies may change their definition of who is eligible for subsidized health care. Who do they offer benefits to? Only to full timers? Only to upper management? Or do they offer it to everybody?

"I think the strategy will probably be, 'We'll offer health care insurance, and yes, you'll be eligible, but you're going to have to absorb more costs.' And I think we'll see some people say, 'Well, it's not worth it to me.' So the take-up rate might go down," Pracht says.

More companies might offer bare bones plans that only cover expenses if the employee is hospitalized. If they want to see a doctor, they would pay for that out of pocket. If the doctor wants to do lab tests, the employee would pay it - "which is originally what insurance was about," Pracht says.

A few years ago, during the Internet boom, there was talk about e-commerce, consumer-driven, consumer-choice plans, where the consumer picks an online plan and the employer paid toward that. But Pracht says that among the drawbacks were the loss of benefits inherent to a large group, and the plans quickly became more expensive.

Rising health care costs will continue to stretch the bridge between big corporations and small companies in the New Year. Small companies start out any comparison between the two with higher costs for their employees because there are fewer of them. A small company might subsidize 50% of health insurance costs, while a big corporation might cover 80%. The small company employees already have higher out-of-pocket costs so any further increases will make a bigger dent.

"It's like chewing gum," Pracht says. "If you buy a pack a week for $1 and it goes up 10 cents, so what? But if you buy a 1,000 packs a month and they increase the price 10%, that's another $100. Suddenly, the impact gets larger. So the impact of rising health insurance costs on small companies is a major problem."

The federal government's move into prescription drug costs introduces another wrinkle, Sobel says.

"I'm a little bit cynical cause I've been doing this a long time. We said 20 years ago that employers wouldn't continue swallowing increases but they are," Sobel says. "Our clients are modifying plans and introducing more cost sharing with employees. Companies have separated from the idea of wringing costs by going to HMOs because everyone liked the (non-HMO) plans. We've abandoned the managed care concept of micro-managing."

So what's the solution? Sobel isn't sure. Better to ask what won't work.

"Most employers can't, by themselves, affect the whole system," he says. "There are groups banding together to take quality initiatives. But many are moving to networks offering better deals. Maybe you consolidate vendors. There are PPOs and insurers that have negotiated better deals. Providers are savvy at trading off between volume and discounts. If Joe Blow says, 'I want 30% off,' they'll say, 'Take a hike.' But if it is Blue Cross/Blue Shield with 3 billion enrollees, they have to listen."

Consumer driven plans are another possibility that some are toying with as an option. A consumer-driven plan typically has a high deductible and instead of instantly paying out of pocket for claims, these plans have a spending account assigned to each participant. "It becomes the employee's account," Sobel says. "The employee is encouraged to use it expeditiously and watch it grow, saving it to use down the road when they need it. They view it more as their money. When it's your money, you use it more carefully than when it's somebody else's. This is another vehicle for employers if they don't want a straight vanilla plan. But these require a lot of attention because they can be confusing.

Clearly, the U.S. health care system is in flux.

"In a sense the market is kind of boring now," Pracht says. "During the '90s, the backlash we saw resulted in managed care taking off. What's going to happen after the next backlash? Things might calm down, but then you'll have another backlash. Is it going to become universal health care where the government has to take over? It probably will be big business asking for a different system. We're waiting to see what the next big thing will be. Cost-containment is still important, but it's evolving."

"Maybe the professor is right," Sobel says. "Something else needs to happen."

How Does

BayCare Cope?

How does a health care business with 15,000 employees handle its own rising health care insurance costs?

"Education and communications," says Lana Bilchak, director of benefits for Clearwater-based BayCare Health Systems, the administrative arm of several large hospitals in the Tampa Bay area, including St. Joseph's-Baptist Health Care and Morton Plant Health Care.

"We have the same concerns and struggles that any other employer has," she says. "Employers can't pay for all the costs as they go up and up.

"We know from surveying our team members that the medical plan is the most important benefit they have. We set a goal to subsidize our employee medical plan by about 75%. So our team members pay 25% overall.

"The advantage we have is that we're self-insured and we charge ourselves costs," Bilchak says. "We don't charge our team members more than it costs us."

So there it is, the solution to rising health care costs: buy your own hospitals.

"Because we're self-insured and use our own providers and facilities, we control those costs more. And we aggressively manage our care. We make sure our team members are educated in the cost of health care. We show them what other employers are doing and how we compare to that," Bilchak says.

There is a disadvantage to the BayCare plan. "It's a known fact that health care workers are higher utilizers of medical care," Bilchak says.

She concurs with others who say rates will continue to rise in 2004. BayCare's employee health care program will not be any more immune than others.

"There are new procedures and technologies, and salaries will go up, and the actual costs have to be passed along. But as a self-insured system, maybe our costs don't go up as much," she says.