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Era of Affordable Health Care Costs May Be Coming to an End

December 1, 1998
Related Topics: Finance/Taxes, Health and Wellness, Featured Article
We're in a precarious environment here. Providing quality health care benefits while maintaining a rein on health care costs has proven to be as delicate as heart surgery. And it will take the unwavering patience and skill of a physician to provide good, affordable care in the altered setting of the coming decade.

Scalpel in hand, the managed care industry has cut costs with amazing dispatch, allowing employers to enjoy a flatline of expenditures for several years. Although the savings has sometimes slashed muscle as well as diseased tissue, for many benefits providers, it was like taking a deep breath after years of double-digit inflation in health care services. Indeed, there was only five percent average annual growth from 1993 to 1996.

But that era may be coming to an end.

The Health Care Financing Administration in the U.S. Department of Health and Human Services projects health care costs will double by the year 2007 -- from $1 trillion in 1996 to $2.1 trillion.

"The managed care industry, in economic terms, really is at a crisis point," says Tom Beauregard, principal at Hewitt Associates LLC, based in Lincolnshire, Illinois. "We are seeing a definite up-tick -- as high as 10 percent depending on the delivery system -- and there's a lot of evidence that these increases will continue for the next several years. 1999 is a wake-up call for employers who are realizing that managed care strategies will require some refinement."

As evidence, Hewitt points to the following changes in premium costs from 1997 to 1998: HMOs increased 1.8 percent, indemnity programs increased 9 percent, POSs increased 1.5 percent and PPOs increased 4.1 percent. Projections for 1999 (based on current negotiations): HMOs at more than 8 percent, indemnity programs at more than 10 percent, POSs at more than 8 percent and PPOs at more than 9 percent.

The 1997 annual progress report by New York City-based William M. Mercer, Inc. (entitled "Mercer/Foster Higgins National Survey of Employer-sponsored Health Plans") suggests that most organizations are budgeting an average of 7 percent increase, and other studies put it even higher.

Managed care has backfired with high costs and poor quality.
There are several reasons for these increases. Currently, managed care represents about 85 percent of American employees who are covered by health benefits. Almost 50 percent are fully insured through an HMO or employee-insured arrangement. Most people agree that managed care revolutionized the health care delivery system in the United States, making it more efficient by slicing away duplication of services, erecting price ceilings and discouraging unnecessary procedures.

The dollar savings for Corporate America from this revolution finally have been achieved. While managed care reduced waste and duplication of services, its zealousness in cost-cutting has its own negative effects. In order to have a 50 percent market share, many HMOs practiced competitive measures to sign up employers and their employees. Consequently, many lost money in an effort to compete. Now, they must recover those losses, as well as anticipate higher medical costs in general.

Furthermore, there will be increases in costs for prescription drugs -- rising as much as 10 percent each year. More patients are taking prescriptions as a way to cut hospital and doctor visits, and more, expensive new drugs are being introduced daily to aging boomers. Most patients in HMOs do not pay for drugs.

In addition, managed care will have to respond to more federal and state regulations as a direct result of media and consumer groups who have remained dogged in their pursuit of treatment quality and patient care.

Horror stories from patients and doctors regarding poor treatment and lack of access to treatment may be overemphasized by the media, but exist nonetheless, and consumers are adamant in their desire for greater quality and greater choice. As the Mercer study points out, the greatest growth over the past five years has been in PPO and POS plans, not HMOs, and the nature of these plans means they're not as likely to strictly control costs.

"The shocker is that the last two or three years had very small increases. Everyone is concerned about what this is about," says Blaine Bos, principal with William M. Mercer, Inc. "Is this a one-year phenomenon or are we now looking at another trend?"

And that's what has people concerned. "We moved head-fast in terms of both our employees and our purchasing strategies toward managed care because we believed it was a long-term solution, and not a silver bullet. If it's just another silver bullet, where do we find the next silver bullet? It wouldn't be a good long-term strategy. Or do we need to be looking elsewhere for a long-term health care-management strategy?"

Treat concerns by questioning strategy and priorities.
The fear about health care cost inflation should compel us to examine our company's health care strategy -- to include cost, quality of care, access and customer service. HR is in a perfect position to look at this patient and do a thorough examination about the company's health care management benefits. Employers are interested in providing an important benefit to employees on a tax-deductible basis when costs are manageable. HR can actually affect change.

Explains Bos: "Health plan providers are reactive to the purchasers' demands. In other words, as purchasers rethink their strategies, health plans will react in order to survive, or they will cease to exist. Already, the effective plans are truly managing care."

Thus, this crisis point may require intensive care from HR if quality and access -- as well as cost -- are important. Look at the available data. Employers are able to clearly differentiate between plans. Specifically, there's clinical-quality data, administrative-effectiveness information, employee-satisfaction rankings. In addition to industry and government sources, Hewitt's Health Value Initiative is a collection of very specific financial information from 300 employers.

With those basic sets of information, HR can step back and ask, how should we be contracting? What are our priorities? Is the company a low-margin business? If so, the focus may be trained on the financial element. If the company is attempting to retain employees in a high-turnover environment, other issues would be most important. Those are employers who might want to focus more on employee satisfaction than on financial efficiency.

"If you can come to a priority stage and derive how you want to be contracting to the managed-care plan, and make that link to your broader business strategy, then you can identify the plan that best feeds your organization's needs," says Beauregard. "The bottom line of the financial data on these plans is to give the employer a great way to differentiate. For a lot of employers, this is the first time they're going through a specific priority process."

This era of disequilibrium may prove to aid long-term health. As HR practitioners who have tremendous influence, if not complete control, over these decisions, the benefits and positive prognosis can be enormous. Managing costs has become a possibility over the past several years. Now, the challenge, doctor, is to manage these costs while maintaining care.

Workforce, Workforce, December 1998, Vol. 77, No. 12, pp.127-128.

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