What’s behind the spiraling cost of health care?

By Sue Mathiesen
Technical Services Director
McGraw Wentworth

Here's the bottom line: Health-care cost increases are in the double-digit range and likely to stay that way.

Survey data from Towers Perrin, an international consulting firm, indicates the average change in health benefits cost increased 11.2 percent in 2001 and 13.7 percent in 2002 and is expected to increase 15 percent in 2003.

In Southeast Michigan, the trend for 2003 is on average 19 percent for Blue Cross Blue Shield of Michigan, 17 percent for Blue Care Network and 14 percent for Health Alliance Plan. The increases are even more substantial for some small employers.

Every company has reviewed strategies to help manage these increases. The most popular strategies have been increasing the employees' portion of the premium or making plan design changes.

Most employers understand the incremental changes that can be made year over year to manage cost increases. However, experts predict that there is no end in sight for double-digit inflation. That's why it's important to understand some of the key drivers of the cost increase, many of which employers cannot influence.

What is driving the rise in health-care benefit costs?

• Aging population: On average, health-care costs triple between the 20-29 age bracket and the 50-64 age bracket, and triple again between 50-64 and the 75-plus age bracket.
• Chronic health conditions: The overall health of our nation is declining. Chronic health conditions are no longer just confined to the elderly. Obesity is increasing, as is the incidence of diabetes. Heart disease is also on the increase. Smoking continues at a high rate across the country. Medical expenses for a chronically ill patient average $3,074 per year. Medical expenses for patients without chronic conditions average $817 per year.

Employers can affect chronic health conditions by sponsoring focused disease management and wellness programs. Studies show that employers who offer lifestyle improvement programs can effectively manage their health-care costs.

• New technologies and prescription treatments: With the increase in chronic conditions, there has been an improvement in treatment protocols. With new medications and technology, patients have greater opportunity to manage their conditions. New technologies and drugs, however, have a significant impact on health-care spending. Typically, new technology results in better efficiency and lower cost. This is not the case in the health-care industry.
• Medicare/Medicaid/federal employee health program shortfalls create payment gap: Government-sponsored programs set "approved amounts" and payment guidelines that providers must accept. The approved amounts are significantly lower than "retail" cost. Services for Medicare or Medicaid patients are not any less expensive than for private patients. Therefore, providers look to balance their income by charging private patients more to close the income gap. Seventy-three percent of all health-care dollars are funneled through federally sponsored health programs. Therefore, decreases in reimbursements in this area mean that premiums must increase costs substantially and over proportionally in the private sector.
• Care for the uninsured costs everybody: Today many organizations are downsizing. Most individuals have an opportunity to elect COBRA, but the premiums are substantial and many can't afford the coverage. Emergency rooms cannot condition receipt of care on insurance coverage status. Consequently, when an uninsured person receives treatment, in all likelihood the provider will not receive compensation. The providers will offset these costs by charging insured patients a more substantial fee for service.
• Attitudes toward health-care increases utilization: Americans demand and expect the highest standards when receiving health care. Most people do not understand the "true cost" of the health-care services they receive. Some employers are encouraging employees to be more involved in the cost of their care by sponsoring consumer driven medical programs. These programs increase participants' out of pocket cost and encourage them to spend their health-care dollars wisely.

These are just a few factors responsible for double-digit increases in health-care costs. There is no end in sight to these increases and there is no apparent solution. The feasibility of a national health-care program will always be a topic for discussion. But a national health-care program will not eliminate the major cost drivers. Instead, it will attempt to control cost through rationing care, which is the polar opposite of how care is received now.

There is no immediate resolution to this issue. Employers will continue to review the incremental changes that can be made to manage cost increases across the organization. Likewise, employees need to take responsibility for their health and, if necessary, make lifestyle changes. The issues driving health-care increases are complex and interwoven. It is apparent that the solution is not an easy one and may not be found in the immediate future.

McGraw Wentworth is a broker/consultant in Troy specializing in employee group benefits for mid-sized organizations. For more information on this and other health-care issues, visit www.mcgrawwentworth.com.

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Major drivers of health-care cost

Medical advances 23%
General inflation 20%
Rising provider expenses 20%
Increased consumer demand 16%
Government mandates and regulations 8%
Litigation and risk management 8%
Other 5%

Source: PricewaterhouseCoopers, April 2002