06-16-2001

HEALTH: Bitter Medicine

Two years ago, Cindi and Greg Underwood began offering health insurance to
the 26 workers in their plumbing business. The labor market was tight in
Bonham, Texas, so they picked up the entire tab, to keep their employees
from jumping to competitors. Pacific Life & Annuity charged the
Underwoods $85 a month for each of their employees who enrolled in its
preferred provider organization.


It's time for the Underwoods to renew their contract with Pacific Life,
and they're debating what to do. The problem is money. Pacific Life now
wants a monthly premium of $135 per employee, a 59 percent increase from
the original rate.


The Underwoods are weighing their options. Could they handle the increase
if they passed along 20 percent or 30 percent of the health plan's cost to
their workers? "If we drop our share to as low as 50 percent, I think
a lot of [the employees] won't want to do it," said Cindi Underwood.
"A lot of them are making just $7 an hour. They're
helpers."


Health insurance is the most important benefit a business can give to its
employees, Cindi Underwood states with conviction. Nevertheless, she
sighs, "there is a chance we'll have to stop offering coverage."
And that decision would add another 20 people to the ranks of the 43
million uninsured Americans.


The Underwoods' apprehension is hardly unique. The yearly cost of health
insurance has of late been going up by double digits, calling to mind the
huge increases that scared the nation in the early 1990s and prompted
President Clinton to seek-unsuccessfully-a mammoth overhaul of the health
care system. Big businesses are reporting health plan rate increases of 12
percent to 14 percent, and smaller businesses are seeing hikes of 18
percent to 20 percent, according to Kate Sullivan, director of health care
policy at the U.S. Chamber of Commerce. Some are getting hit even harder.
"I get phone calls from small businesses desperate to find any
insurance because they just got a rate increase of 30 percent," she
says.


Concern is beginning to escalate into alarm. "We'll reach the point
of panic before the next presidential election," predicts Paul
Ginsburg, president of the Center for Studying Health System Change, a
nonpartisan research organization. "The environment two years from
now will be like the early `90s."


Except that, Ginsburg said, "we'll be in worse shape, because there
will be no broader vision to deal with costs." Although Clinton's
health care reform effort failed in Congress, it did help spur the growth
of managed care plans, which many employers believed would dramatically
lower costs by steering participants to networks of doctors and hospitals
that would take discounted payments and would more closely oversee-or
manage-participants' health care.


Managed care hasn't lived up to its billing in terms of savings. But then,
how could it? Consumers have bitterly fought against the very methods that
enabled managed care companies to save money-such as requiring
participants to use limited networks of physicians and hospitals, and to
get referrals from primary care physicians before seeing specialists and
pre-certifications before going to hospitals. "We had some
significant cost reductions in managed care-and then we proceeded to
dismantle it," Ginsburg said.


In recent years, medical advances, particularly in prescription drugs and
in diagnostic tools, have contributed dramatically to health care costs.
Add to that the demands of doctors and hospitals for significantly higher
compensation, and any hope for restraining costs is gone.


"What we need is a good stiff recession," said Jon Gabel, vice
president of the Health Research and Educational Trust, a nonprofit
organization affiliated with the American Hospital Association. "At
that point, employers can give employees some bitter medicine. We can get
back to true managed care or higher patient cost-sharing. But as long as
employers can't find the workers that they need, they'll be very reluctant
to take tough measures."


Double Digits-and Rising


Health insurance costs have been on the rise for several years, but you
might not have noticed. So far, employers have absorbed much of the
increase, because of the strong economy and the competitive job market.
With premium hikes now into the double digits, though, and the economy
beginning to slacken, anxious employers are ready to share the burden with
their employees.


For 55-year-old Beverly Anderson, the increases are already too much.
Anderson works part-time at a telemarketing company in Stillwater, Okla.
She signed up for the company's HMO two years ago, paying $16.69 in
premiums every week, and a $20 co-payment for each visit to the doctor.
Anderson has diabetes and needs regular physician monitoring, so she
figured that the HMO would help keep her on track.


A couple of months ago, however, Anderson decided to drop her insurance.
Her company still offered the HMO, but it was passing along a 33 percent
premium increase to employees, bringing Anderson's tab to $25 a week.
"That's not a lot of money, but to me, it is," she said. "I
was just barely getting by. I just decided that I couldn't afford
it."


When it comes to the rising cost of health insurance, small businesses
typically get hit the hardest. "Unfortunately, small employers are
increasingly getting shoved out of the system," said John Emling,
manager of legislative affairs at the National Federation of Independent
Business. "Nationally, there are almost 43 million uninsured, and
small businesses employ 60 percent of them." Emling said he hears
from plenty of small businesses that are facing 25 percent increases in
premiums. He's heard some stories of 85 percent increases.


But large companies are fretting as well. The Federal Employee Health
Benefits Program, the health insurance system for federal workers,
typically serves as a bellwether for insurance prices because it is tied
to the commercial market. In 2001, FEHBP premiums rose by 10.5
percent.


The California Public Employees' Retirement System, one of the nation's
largest public purchasers of private health insurance, has already
received the bad news for 2002. When it solicited bids from health plans
for next year's contracts, CalPERS was presented with numbers that were 20
percent higher than its current costs. CalPERS got tough, dropping some
health plans and negotiating others down to increases in the neighborhood
of 13 percent. In the end, CalPERS participants next year will face
premiums that are 6 percent higher than this year's; they will pay for the
rest of the increase in larger deductibles and co-payments.


Multiple factors are driving the cost increases, starting with the nature
of the insurance underwriting cycle. Beginning in 1994, when health care
cost increases were small, insurance companies expanded into new markets,
charging artificially low rates to beat competitors and gain market share.
As a result of the competition, premiums lagged behind actual spending for
covered services. Eventually, as insurers lost money, some withdrew from
markets and others started raising premiums.


What's really worrying health care analysts, though, is the multitude of
other factors that will keep forcing prices up. In a survey sponsored by
the Kaiser Family Foundation and the Health Research and Educational
Trust, 75 percent of employers identified prescription drug costs as
contributing "a lot" to the rising cost of premiums. Nearly half
said that hospital expenses contributed "a lot" to the increase;
42 percent cited medical technology; 37 percent, physician expenses; 18
percent, insurer profits; and 10 percent, richer benefit packages.


Spending on prescription drugs accounted for 40 percent of the cost
increase in medical claims last year, according to Gabel. The cost of
prescriptions rose by 19 percent from 1999 to 2000, due in part to the
development of breakthrough medicines, the improvement of existing drugs,
and consumer advertising, such as the television commercial that urges
allergy sufferers to ask their doctors for Claritin.


Then there's the managed care backlash. Responding to employees' demand
for more choice of physicians and less management of care, more employers
are offering preferred provider organizations, which don't require
referrals for specialists, and which allow participants to use doctors
outside of a plan's network, for a higher cost. The percentage of workers
who have the option of choosing a PPO has nearly quadrupled since 1988,
from 18 percent to 66 percent. Meanwhile, the percentage of workers who
have the option of choosing an HMO has been dropping-from 64 percent in
1996, to 55 percent in 2000.


This shift comes at a cost: The greater the choice of doctors and
hospitals, and the looser the management of covered services, the higher
the price tag.


Moreover, doctors and hospitals, claiming they have been held hostage to
low managed care compensation for half a dozen years, are now demanding
payment increases as much as 30 percent. Insurance companies are starting
to give in and cooperate.


Ginsburg estimates that, in about half of all markets, health plans have
experienced contract showdowns with doctors and hospitals this year.
"This is a turnabout," Ginsburg said. "In the beginning,
hospitals were contract takers. Now they're contract breakers. Consumers
want a broad choice of hospitals. You can't [deny them] Massachusetts
General."


"We're finally seeing doctors saying, `This is enough,' " said
Thomas Reardon, a board member at the American Medical Association.
Reardon cited Aetna U. S. Healthcare, an insurance company that used to
require participating doctors to serve patients in all of its health
plans, even though doctors complained that the Aetna HMO didn't pay enough
to cover their costs. Aetna also allowed itself to change its contracts
without notice. The tactics worked because, in some markets, Aetna had a
strong market share, and physicians couldn't afford not to sign on. But
enough doctors stood up to Aetna that the insurer is now compromising.
"Physicians are gaining clout," Reardon said.


Reed Tuckson, senior vice president of UnitedHealth Group, a large
insurer, said that his company is "listening very hard to doctors.
We're working with doctors to find ways of paying them that they'll find
predictably consistent and that they think is rational."


Insurers also blame recently enacted state laws that regulate cost
increases in managed care. And Congress is considering patients' rights
legislation that managed care companies complain will make matters even
worse.


"Members of Congress for a number of years have been having
patient-protection debates as if costs don't matter," said Karen
Ignagni, president of the American Association of Health Plans, which
represents managed health care plans. "In a number of markets, we're
seeing hospital rates increase by 30 percent. Physician fees are
increasing, and there's pressure to have more open networks-and less
utilization review and application of tools that restrain costs."
Ignagni argues that patients' rights legislation that allows broad ability
for patients to sue health plans would only exacerbate insurers' cost
troubles.


"While we're very proud that we offer a range of alternatives, we've
made it clear that the range of choices does have cost consequences,"
said Ignagni. "In a strong economy, it's not necessarily transparent
to employers. In a thicker economy, it becomes a direct
trade-off."


So, What Now?


Employers are in a bind. Despite rising costs, they say they feel a sense
of responsibility to their workers, and that they understand that
employees would not fare nearly as well buying insurance on their own.
Some older and sicker people might not be able to buy insurance at all,
and others might find it prohibitively expensive.


So what does life after managed care look like? The answer is that there
isn't a grand vision for controlling costs. Indeed, health policy analysts
expect managed care to be around for a long while. But they agree that
managed care is evolving.


In the meantime, don't expect employers to keep eating all of the
increases in health care costs. A March survey conducted by Watson Wyatt
Worldwide, the Washington Business Group on Health, and the Healthcare
Financial Management Association found that seven out of 10 employers plan
to pass at least some of the increase on to their employees, and that 14
percent plan to reduce or eliminate coverage for certain services. More
than 70 percent of respondents said they planned to increase employee
premiums. About half said they would raise employee co-payments and
cost-sharing.


Some employers are also changing the way they manage their health plans.
To ease the administrative burden, some companies are using outside
vendors to price health plan options, select and manage health plans,
design plans, and educate employees.


Nearly 60 percent of employers in Watson Wyatt's 2000 survey said they
would be either "somewhat likely" or "very likely" to
shift purchasing decisions to employees if costs continued to rise. And
employers have made good on that promise. Some are even considering
"defined-contribution" systems, under which they would give each
employee the same amount for a health plan, no matter which one they
chose.


"There's nothing like a 6.5 percent unemployment rate to allow
employers to do that," said Gabel. "Will the first
defined-contribution plan please turn on the lights?"


Evolution, Not Revolution


Managed care's touted cost-saving techniques are going by the wayside.
Requirements that participants get specialist referrals and pick from a
single list of doctors are already things of the past in many health
plans.


The future lies in consumer choice. Managed care plans are implementing
new techniques that save money but also give patients more control over
their health care, when they select a health plan and when they use
medical services.


Many health plans are implementing tiered prescription drug benefits, for
example. If patients get a generic drug, they pay one price. If they (or
their doctors) choose a brand name drug that has no generic alternative,
they pay more. If they buy a brand-name drug even though a generic
alternative exists, they pay even more. "It's cost-sharing that a
consumer can avoid much of if he's willing to constrain his choice,"
Ginsburg said. "It's accepted by more consumers than if you just
said, `You have to pay the first $200.' "


Instead of having one network of physicians and hospitals to choose from,
health plans are beginning to offer a network within a network. The core
network of doctors and hospitals is the most economical. If a person
chooses to see a doctor in the broader network, the cost is higher. In
some plans, a person can choose to see a doctor outside of both networks,
at a yet-higher cost. "They're giving people at the point of service
the decision about whether to pay more for more choice," Ginsburg
said.


Openness is essential, according to Tuckson of UnitedHealth Group.
"We can't play around with this and hide the cost increases. We can't
play the American people dumb," he said. Insurance companies can be
flexible, said Tuckson. But he added: "We have to make a decision as
a society. What do we want? At the end of the day, if we want these
things, then you and the doctor need to decide you want these things.
We'll price out a package."


Howard Wizig, chairman of Vivius, a company that sells its own health plan
concept to insurance carriers, advocates allowing individuals to construct
their own networks of doctors, hospitals, and services. Different medical
providers and benefits come at different prices. Indeed, under this
approach, medical providers set their own prices. "This is price
transparency," Wizig said. "Five or 10 years from now,
consumer-driven health care will be as common as 401(k) plans are
now." Wizig says to expect the first plans of this kind to be
available in 2002.


In some ways, Wizig's concept fits the current definition of a
defined-contribution plan. An employer would still offer a range of health
care products to employees. But no matter which product an employee chose,
the employer's contribution would be the same. "This is being driven
by consumerism," he said. Wizig added that he's not sure how much
money his model would save: The overriding goal is value. "People
don't feel like they're getting value," he said.


Brian Dalbey, a vice president of sales for Lumenos, which markets
insurance concepts to employers, is promoting another health insurance
product that promotes consumer choice. Marketed to employers, it combines
a defined contri- bution with a "medical savings account," which
an employee can use to pay health expenses. Lumenos projects that this
approach can hold annual cost increases to between 7 percent and 9
percent. Dalbey says he expects 10 to 20 employers to begin offering this
type of health plan at the beginning of 2002. "I've met with 75
Fortune 500 employers in recent months," he said.


Under such a plan, employers would contribute a set amount of money toward
an employee's purchase of a catastrophic health insurance plan, which
would cover health care costs after a large deductible had been met. The
employer would also pay into a health savings account that the employee
could use to pay for medical expenses until the deductible was met. The
employee would decide which doctors to see and which hospitals to use.
Moreover, the employee could carry any unused money into the next year.
"As you give consumers more control, employers are betting on
behavior change. People spend their own money more carefully," said
Dalbey.


At what point does Congress get involved? With Democrats now controlling
the Senate, Congress may consider legislation this year to deal with the
problem of the uninsured-by expanding existing government programs, giving
people a tax break to buy insurance, or both. But Congress may be tied up
with other health care priorities, such as reforming Medicare and creating
a prescription drug benefit, as well as passing a patients' rights bill
(which some estimate would further raise prices).


If cost increases continue to escalate, however, and members of Congress
begin to hear angry complaints from constituents, pressure for action will
build. Health care costs could become an important issue in the next
presidential election, just as they were in 1992. Said Kenneth E. Thorpe,
chairman of the department of health policy and management at Emory
University's Rollins School of Public Health: "If we see two more
years like this, and, at the same time we see any kind of slackening in
employment levels-if we have people starting to lose jobs, and we see
[loss of] health insurance becoming an issue, at a time when premiums are
starting to rise at 10 or 11 percent a year-conditions for discussions
will emerge."


Marilyn Werber Serafini

National Journal