Why are Health Care Costs rising?

Health care costs – and consequently the rates your employer pays for your employee health plan – have grown four times the rate of inflation over the last decade. Employers have seen their health insurance premiums increase 119 percent since 1999. Total health insurance costs for employers could reach nearly $850 billion by 2019.

Why are costs rising so high, so fast? This edition of Know Your Employee Benefits explains the factors leading to the continuing onslaught of health care costs.

National Health Care Costs
As health care costs climb, the amount your employer must pay for your health benefits also increases. Unfortunately, the trend of health benefit costs rising faster than the rate of inflation is expected to continue.

Do you know how much your employer pays for your health benefits? According to the 2008 Hewitt Health Value Initiative, the average cost of health care benefits for active employees is expected to climb from $8,331 in 2008 to $8,863 in 2009. For a family of four, the cost is about $13,000 a year. That’s in addition to salaries and hourly wages, and any other benefits an employer provides.

Unpredictable and uncontrollable health insurance rate increases are having a very serious financial impact on most employers. To begin to understand why employee medical plan rates are rising so dramatically, you must first understand that the overall costs of health care are skyrocketing across the United States.

Why are Costs Rising?
Several market conditions working together have led to steep increases. Understanding these factors will help you be aware of the reasons behind any benefit or employee contribution (the amount you are required to pay out of your paycheck) changes your employer decides to make.

The Aging of America
It is an inescapable fact: the U.S. population is aging. According to the U.S. Census Bureau, the number of Americans age 65 and older is expected to nearly double by 2025, and the elderly population (80 and older) will increase 80 percent. As the population ages, there is a subsequent rise in the occurrence of chronic diseases like asthma, heart disease, and cancer, and a resultant need for more resources to fight these diseases. This leads to elevated utilization of prescription drugs and other medical services, and an overall increase in health care spending.

The Dramatic Rise of Prescription Drug Costs
Prescription drug costs continue to represent an increasingly large portion of health care expenditures. According to the Centers for Medicare & Medicaid Services (CMS), spending in the U.S. for prescription drugs was $216.7 billion in 2006, more than five times what was spent in 1990. The U.S. Department of Health and Human Services (HHS) projects U.S. prescription drug spending to reach $515.7 billion in 2017 – a 138 percent increase from 2006.

While prescription drug spending has been a fairly small proportion of national health care spending compared to spending for hospital and physician services (10 percent compared to 31 and 21 percent, respectively), it has been one of the fastest-growing components, until recently growing at double-digit rates.
The reasons for the increase in spending on prescription drugs are many, and include the following:
Increased use – More people are using more prescription drugs, thereby driving up spending. From 1997 to 2007, the number of prescriptions purchased increased 27 percent.
Increased prices – Prescription drug prices increased at 3.5 percent in 2006 (the most recent data available). In 2007, the average brand name prescription drug price was over three times the average generic price.
Changes in the types of drugs used – If new drugs are used in place of older, less expensive medications, they can increase overall drug spending. This can also occur if new drugs supplement rather than replace existing drug treatments.
Advertising – Prescription use in general and movement to higher-priced drugs can be influenced by advertisements. Spending for consumer advertising in 2007 was more than four times what was spent in 1996. Critics of direct-to-consumer (DTC) advertising feel that promotion of drugs to consumers instead of doctors creates inappropriate consumer demand and utilization of certain medications. In addition, many feel that drug prices could be lower if drug manufacturers did not spend huge sums of money on advertising.
Profits – From 1995 to 2002, the number-one most profitable industry in the nation was pharmaceutical manufacturing. By 2007, it fell to third, but it’s still a significant factor in overall health care costs.
Insurance coverage – Individuals with insurance are more likely to use prescription drugs than those without, and the growing prevalence of managed care plans – which usually offer generous drug benefits – has fueled increased prescription drug use.
Conditions of senior citizens – With the general aging of the population, there is a higher incidence of chronic disease, and a resultant increase in the use of pharmaceuticals to treat those conditions.

The Consolidation of Insurance Companies
During the economic boom of the 1990s, competition among insurance carriers and managed care companies was fierce. In order to gain market share, many large insurance companies acquired smaller, weaker firms and kept their rates low in order to stay competitive. This practice has taken its toll, leading to dips in profitability and stock prices for a large number of insurance carriers. Now, those companies that have survived are faced with much less competition and are committed to returning to profitability, which has ultimately resulted in increased rates for employers.

The Weakening of the Managed Care System
Also in the 1990s, employers began offering plans that allowed patients to see out-of-network doctors or those that had less strict referral processes, such as Point-of-Service (POS) plans. In addition, many employers making health plan purchase decisions focused on keeping employees happy by ensuring that most doctors in an area were in a chosen network, rather than choosing narrower networks with deeper discounts. All of this has led to a general weakening of the managed care system. With the level of premium increases over the last few years, many employers have backed away from offering rich benefits, and instead have implemented a number of tactics to reduce costs.

Political Environment and Government Regulation
Health insurance, and more specifically managed care, is one of the most regulated insurance sectors on both the state and federal levels, and has become one of the most highly debated topics in the political arena. State and federal mandated benefits have increased twenty-five-fold over the last three decades. Often these mandates duplicate or conflict with each other, and usually come with increased costs for the health care system. There are over 1,500 mandated benefits at the state and federal level. Each of these has a cost associated with it, and together they have had a significant impact on health care costs.

Issues such as prescription drugs for seniors, Medicare reform, and coverage for the uninsured will also continue to play a big role on political and legislative agendas in the coming years, likely increasing costs as well.

Increased Utilization and Consumer Demand
Utilization of many health care services has risen over the last decade. A number of factors such as improvements in medical technology, the influence of managed care, elevated consumer awareness and demand, and a boost in the number of practicing physicians caused health services like the number of surgical procedures and the number of prescription drugs dispensed to rise significantly. Other services such as breast cancer screenings, immunizations for children, and diagnostic procedures like CT and MRI have also experienced sharp utilization increases.

Health Care Spending and Medical Cost Inflation
Overall health care spending and medical cost inflation are also ascending, due to many of the factors discussed above. By 2018, national health care expenditures are expected to reach $4.4 trillion – more than double what it was in 2007.

What Does it all Mean?
Your employer, like others, is undoubtedly trying to determine how to keep accelerating health plan rates from having a serious financial impact on your company. Many firms absorbed the increasing costs for years to avoid further burdening their employees. Now, most are realizing that they will have to pass portions of the costs on to employees in the form of greater contributions from their paychecks, or benefit designs that require them to pay more out-of-pocket for the medical services they use (increased coinsurance, co-payments, or deductibles).

Keep the facts in this brochure in mind if your employer reduces your health benefits, or asks you to pay more. These measures will go a long way toward keeping you and your company healthy for the long-term.

This entry was posted in Uncategorized and tagged , , , , , , . Bookmark the permalink.

Leave a Reply