At the beginning of 1998, business wondered whether the slight increase in health-care costs in the U.S. was a one-year blip or the beginning of yet another round of higher-than-inflation cost increases. This year, there's no uncertainty. For the first time in five years, health-care cost increases will be higher than the rate of inflation in the U.S., regardless of whose forecast or research is used. Indeed, the increase in premium costs of 7% projected by New York-based consultant Towers Perrin (TP) for 1999 is nearly twice the level of 1998 and the first time that projected premium cost increases have been higher than 5% since 1994. Even worse, the 231 companies surveyed by TP "see little likelihood that health-care cost increases will slow . . . anytime soon" to the sub-4% increases of the last four years, says William J. Falk, director of actuarial practice for TP's Chicago-based health-and-welfare practice. Although those surveyed do not expect a return to the double-digit cost increases of the early 1990s, nearly all expect increases averaging between 8% and 10% for 2000 and more than half -- 51% -- expect their premiums to be even "somewhat higher" beyond 2000, says Falk. Why the increase and why now? There are a number of factors, not the least of which is that managed-care organizations are "now trying to recoup losses that occurred in recent years when they held prices artificially low" in an effort to gain market share, says Harvey Sobel, principal and consulting actuary in the Secaucus, N.J., office of New York-based Buck Consultants Inc. "Managed-care organizations are facing higher administrative expenses, increasing utilization, and intensive costs associated with marketing and increasing enrollment. That pressure to increase earnings is contributing to higher managed-care rates." Costs also are going up because the underlying causes that have pushed spending for health care in the U.S. upward for years, and which helped trigger the national outcry for health-care reform in 1994, have not gone away. Indeed, many of today's problems are the same ones that existed in 1992 when IndustryWeek outlined an agenda for health-care reform. That is:
- There are no nationwide standards of care, standardized administrative forms, or standardized ways of gathering information to measure quality of care.
- Medicare and Medicaid cost-shifting continues. There have been very few changes in Medicare and Medicaid except to make more categories of people eligible and to reduce further what the government will pay for care, which raises how much paying patients must be charged.
- Continued managed-care discounts, which now extend to 61% of the population and 85% of the employer-insured population, cut health-care costs for those insured populations, but shift costs elsewhere.
- After four years of moderation, the cost of providing health care to employees is rising as it did in the late '80s and early '90s -- faster than inflation.
"The factors that drove the movement toward national health-care reform five years ago are still there today," says John Erb, area vice president of Arthur J. Gallagher & Co.'s Gallagher Benefit Services, Boca Raton, Fla. There are cost pressures from other areas as well. First, there's an increased demand for heath-care services from an aging population. Second, new and more expensive drug treatments have kept pharmaceutical price increases near 10%, with a projected rise of 15% for 1999. Third, a continuing stream of mandated health-care coverage triggered by restrictions placed on health-care utilization by managed care has brought back costs that health-care organizations had tried to eliminate. For example, the federal government has mandated: two-day stays for mothers and their newborns, reconstructive breast surgeries, health care for young children in homes under certain income levels, and mental-health parity; that is, no discrimination in what health care plans pay for physical or mental illnesses. Add to that the more than 2,000 health-care mandates that have been adopted in individual states. "Each individual mandate might not seem like much," says Neil Trautwein, National Assn. of Manufacturers (NAM) health-care lobbyist. "But when you layer them, it adds up to a significant cost." And President Clinton's call in his State of the Union address for Congress to enact the patients' bill of rights for health-care users, a proposal that was narrowly defeated in 1998, would certainly add to health-care inflation. "[It] is a clumsy attempt to wave big government's wand over the health-care system [when it should be] focusing on improving quality through market-based solutions," says NAM President Jerry Jasinowski. "Now is the time . . . to reach a careful consensus on health-care reform without creating . . . mandates and lawsuits that actually reduce the quality of care." Yet what should concern business most -- from a cost standpoint -- are:
- The aging of the population.
- The narrowing of the gap between the cost of providing health care to employees in a traditional indemnity plan and the cost of providing a managed-care plan. The latter includes preferred-provider organizations (PPOs), point-of-service (POS) plans, and health- maintenance organizations (HMOs).
Indeed, TP's survey indicates that the yearly cost for an employer to provide an employee different types of family health plans ranges from $5,508 for HMOs to $6,348 for traditional indemnity insurance plans, a difference of $840. In between are POS plans ($5,796) and PPOs ($6,168). "The gap between the cost of managed-care plans and non-managed-care plans is closing," says Sobel. "Tightly controlled HMOs are loosening their restrictions on utilization to attract more members, and utilization rates for fee-for-service and PPO plans are migrating toward [that] of managed-care plans." That suggests, says Erb, that the ability of managed-care plans "to control the malignant inflation in health-care costs has yet to be proven." When combined with the aging of the U.S. population, the uncertainty over managed care's ability to contain costs long-range has many convinced that the U.S. soon will need to find another way to pay for health care. (In the last 11 years, the percentage of the U.S. population covered by employment-based health insurance has declined one percentage point per year -- from 68% in 1988 to 57% today.) "The third-party approach to health-care financing will not and cannot survive the onslaught of the graying Baby Boomers," asserts William Styring, economist and senior fellow, Hudson Institute, Indianapolis. "The current employment-based insurance system for health care will collapse" and be replaced, he predicts, by tax credits, individual medical savings accounts (that employers can contribute to), or both. As he explains, for decades the ratio of Americans aged 24-to-65 to those 65 and older has been approximately 4:1. But starting in 2011 as 76 million Baby Boomers begin to reach 65, that ratio will begin to drop dramatically until it slides to 2.3:1 in 2030. "The health-care implications of this graying of America are enormous," says Styring. "The payroll taxes on the young that would be necessary to maintain Social Security and Medicare . . . when the Boomers retire are unthinkable -- probably 37% by 2020 and 51% by 2030." And Erb is convinced that the "point at which voluntary employer-sponsored health-care plans won't work anymore" will come much sooner than that. "I think we will reach that point in the next five years" because of demographic factors, the use of high-cost medical technology, and the renewed rise in health-care costs. "We are already spending a lot of money per capita for health care in this country -- more than in any other country," says Erb. Indeed, the annual per capita health-care cost in the U.S. is $3,925 compared with $2,500 in Switzerland, the next most expensive country. Now that health-care costs are again rising toward annual increases in double digits, says Erb, "you will see an even bigger outcry against managed care, because you have a deadly combination" of rising premiums and controlled care. "We have achieved a one-time savings with managed care," he says, "because if everyone is getting discounts, then it is no longer a discount. And, as a nation, we don't have a Plan B or a son of managed care." Yet others, such as Sally Coberly, director of public policy for the Washington Business Group on Health, argue that there are still untapped methods for managing health care better in the U.S. "We need, as a nation, to collect information in the same way, agree on quality measures, and develop a systematic way of getting that information back to purchasers and consumers," says Coberly. What's more, she adds, the U.S. must address the "vast variations in medical practices" across the country, the "huge overcapacity" of hospitals and providers, and inefficient processes in the health-care industry. Health-care costs will increase "because we have an aging population," says Coberly. "But we can do a better job [of managing health care] with the money we have." On a micro level, for example, employers can reduce their costs by increasing co-pays in medical and pharmaceutical plans and increasing the level of employee contributions. But until costs rise two or three years in a row, says Sobel, it's much more likely that companies will attempt to manage illness more effectively, encourage prevention and wellness among their employees, and hold providers more accountable for delivering cost-efficient benefits and quality of care. Some employers, says Erb, might "try to cap their contributions at a certain level because of the disparity in costs between plans." Indeed, 52% of the employers surveyed in November by the Baylor College of Medicine said that they planned to introduce a defined-contribution plan for health care within their organization; that is, set limits on what they will contribute toward health care regardless of which type of plan an employee chooses. "Employers tend to overestimate the adverse reaction of employees to additional cost-shifting," says Erb. "But I think the employee will understand the concept of 'if you pick a more expensive plan, you pay more.' Everyone wants a Cadillac, but how many of us can afford one?"
Average Monthly Costs, 1999
| Type of plan || Employee Only || Employee/spouse || Family || Increase from 1998 |
| Indemnity || $200 || $396 || $529 || 8% |
| Preferred-provider Organizations ||$178 ||$374 ||$514 ||4% |
|Point-of-service plans ||$171 ||$349 ||$483 ||5% |
| Health-maintenance organizations || $161 ||$328 ||$459 ||8% |