The challenges facing health benefits in the new millennium are multifarious.
If you're a CFO or HR executive responsible for managing your company's health benefit plan, “heads up!” Medical cost trends are accelerating to levels last seen ten years ago. Companies and their employees will increasingly face difficult choices on where and how medical care is received – and how it will be paid for. This article discusses the root causes of today's increasing healthcare trend and the likely effects; examining similarities to market conditions of the late 1970s and 1980s as well as emerging issues which will put additional pressure on the healthcare delivery system of the 2000s.
In the previous inflationary cycle, it took more than a decade to change delivery systems and promote effective competition to ‘manage' care and costs. We believe today's inflationary cycle will also last a decade or more – and it will take longer to slay the trend dragon since the challenges that the healthcare industry currently faces are more complex and severe than those of the last cycle.
What exactly is healthcare trend? Benefits professionals use the term ‘trend' as a synonym for inflation. It actually consists of:
Today's trend is a combination of older, residual marketplace conditions and emerging political, regulatory and economic factors. Both areas need to be examined.
Residual trend drivers
Managed care market initiatives backfired The explosion of PPO, POS and HMO plans initially reduced access to covered care in exchange for lower out-of-pocket expenses. HMOs in particular featured ‘closed delivery systems' designed to steer patients to selected ‘efficient' providers. Many of these same providers, seeking less insurance company control and greater autonomy, shifted to a capitated reimbursement system, effectively creating mini-HMOs among the medical groups – integrated delivery systems that couldn't wait to beat the health insurers at their own risk management game.
Further, the market expanded to welcome dozens of new local and regional health plans and the rush for market share produced by new levels of competition depressed premiums for several years. Unfortunately, this ‘market share' mentality failed to account for steady increases in pharmaceutical drug benefit expense and continued cost shifting by the federal government.
Providers accepting capitated payment systems had little experience in the business side of managing risk – either financially or operationally. As a result, the very system designed to give providers the independence they craved pushed many to the brink of insolvency, forcing mergers and acquisitions. Emerging from the financial rubble, health plans are now returning to the more expensive (and more restrictive) fee-for-service reimbursement models (and procedural reviews) as ‘the lesser of two evils'.
Market share underwriting took its toll on the burgeoning local and regional health insurers. Most experienced severe financial difficulties, resulting in closures or mergers with larger health plans. In addition, many of the largest national plans have also consolidated, leaving a ‘cartel' market with just a handful of truly viable national insurers for employers to select from.
Employer complacency and employee entitlement attitudes emerged
HMO plan designs with little patient ‘out-of-pocket' exposure spurred a misguided belief among consumers that benefits coverage equalled access to care. As consumers decided they wanted greater access, they collectively influenced state legislators to expand the scope and delivery of covered services through expensive new mandated benefits or ‘any willing provider' laws which required the inclusion of less effective physicians in health plan networks.
During this period of artificial price stability and an expanding technology-driven economy, employers also became complacent about health care costs. The drive to recruit employees (increasingly, ‘rich' benefit plans were often a key recruiting tool) and produce new products overwhelmed all other market influences.
It can certainly be argued that today's employees are ‘spoilt' – demanding access to any care they want but unwilling to pay for it.
Pharmacy costs keep accelerating
Whether it all works as advertised is open to debate, but Americans love modern pharma-medicine. Per capita pharmacy expenditures have increased 20% to 24% annually for several years, depending on whose statistics are used. Pharmacy costs now represent almost 15% of total health plan claims expense, up from 10% just a few short years ago.
Emerging trend drivers
Provider roll-ups haven't delivered on their promise to improve operating costs.
Consolidated provider entities haven't driven costs from the healthcare system any more effectively than they have in other financial services industry sectors. Provider-based group purchasing initiatives have also been a bust, lacking discipline as individual purchasing departments continue to buy according to local preferences. The promise of integrated financial and care systems remains illusory, as the fragmented governance of hospital systems resists any attempts at centrally managed decision-making and execution.
Health plan consolidation has enabled insurers to raise prices with little fear of client erosion
The insurer roll-ups haven't delivered on their financial promises, either – but as we move into uncertain economic times, insurer margins are increasing as employers and their employees discover the paucity of effective systems that cover wide geographic areas. Self-insurance has been the historical next-best alternative for many employers. But so far, most employers haven't been willing to assume the financial risks implicit in such arrangements and the stop-loss insurance markets that help moderate these risks are also under significant profit pressure.
Providers face government regulations and unfunded mandates that accelerate operating costs and deplete capital budgets.
From a provider's perspective, this is a seemingly endless list. Examples include:
So what's next?
Revenue-driven negotiating cartels
Their collective financial difficulties have led providers to consolidate into negotiating cartels to increase bargaining leverage and boost revenue received from the health plans. The provider cartels have adopted an openly hostile negotiating style in the hope of bringing public pressure to bear on the health plans. In fact, political pressure from the California legislature recently was credited with helping Sutter Health, the largest provider system in California, negotiate a more favorable new contract with Blue Cross of California, the largest health plan in the state. This settlement was reached after a 50-day ‘strike' that directly impacted access to medical care for millions of covered employees and dependents.
While the settlement details are private, Sutter is known to have demanded revenue increases of over 50% for its 26 hospitals and seven medical groups as well as contractual language allowing the Sutter system to grow even larger at the expense of their smaller competitors. Sutter is now issuing contract termination notices to other health plans to force similar or better health plan financial deals. Many experienced observers believe this negotiation cycle may greatly influence the future of the health benefits industry, as employers struggle to deal with suddenly increased claim costs.
Choice of health plans is important to employees
Among the immediate effects of the Sutter/Blue Cross dispute is an escalating employee demand to freely select and change health plans. Recently-issued IRS Section 125 regulations now allow employers to modify their benefit plans and give employees the option to change their health plan elections when their access to care is ‘significantly curtailed'.
The internet will be the connectivity catalyst for the health care industry
Probably the most promising development will be the growth of consumerism driven by the internet and increased access to information. Pushed by HIPAA compliance (discussed above), the development of industry standards will finally interconnect fragmented systems and accelerate both the scope and effectiveness of internet applications. Whether this development will wring costs from the system is unclear, though it's reasonable to assume that technological developments will change the mix and type of future administrative expense.
Employers will face tough cost allocation decisions
A rock and a hard place? Employers will either absorb increased health care costs and pass them along in product pricing or shift the additional expense to today's ‘entitled' employees. Whether the job market has enough tension to resist this trend will be fascinating to watch over the next 12 to 24 months.
The proposed ‘Patients' Bill of Rights' legislation is likely to increase costs if adopted
This proposed statute would force health plans to pay for newer, more expensive treatments that would have previously been denied as investigative or experimental.
Fee-for-service reimbursement and evidence-based treatment protocols will replace capitated autonomy
Only the largest provider groups will be able to successfully manage capitated budgets, and it's likely the health plans will focus future utilisation management efforts on physicians who fail to adopt evidence-based medical protocols (which the providers will continue to deride as ‘cookbook' medicine).
More employers will explore self-funding
Employers will become frustrated with the limited choice of insured health plans. Since many believe their claim experience is better than the norm, they'll look to self-funding options to reduce fixed expense and to increase control of their health benefits cost structure.
One variation on the self-funding theme that's gaining initial acceptance is a so-called ‘defined contribution' plan, which combines features of self-funding with mass customisation of plan design on an individual consumer basis using the internet. The initial employer pilots being conducted over the next 12 to 24 months will either reveal the ‘new best way' or record another failed benefit funding and design experiment.
The only certain prediction regarding health benefits in the 2000s is that they will be significantly more expensive and will evolve quickly as the various forces described above continue to converge and collide. Longer term, financial and HR executives, benefit managers and their advisers will need all the vision and creativity they can muster to find solutions that continue to meet the needs of employees and support corporate objectives. In the near term, employers should immediately plan for increased cost burdens and to periodically re-examine their benefit promises – to ensure they remain both competitive and sustainable.