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CCH® BENEFITS — 7/1/08

Medical Cost Growth To Level Off In 2009 Due To Better Care Management, Prevention

From Spencer's Benefits Reports: After five years of slowing annual health care cost growth, that trend will level off at 9.6% in 2009 (compared with 9.9% in 2008), in large part due to improved medical management of costly medical conditions and higher rates of generic drug use, according to a recently-released report from PricewaterhouseCoopers’ Health Research Institute (HRI).

Conversely, working to spur medical cost growth are increased hospital construction and higher cost shifting from the uninsured, Medicare, and Medicaid, the HRI study, Behind the Numbers: Medical Cost Trends for 2009, observed. The HRI study is based on analysis of historical and prospective cost trends and influences, of reports for publicly traded health plans, and on a survey of more than 500 employers and “provider-based” health plans covering more than 11 million lives.

The HRI defines “medical cost trend” as “the projected increase in the costs of medical services assumed in setting premiums for health insurance plans.” Medical cost trend, in turn, is affected by, among other factors, increases in the number of services used which may reflect demographic changes, new technologies, and advertising. Furthermore, medical cost trend does not necessarily anticipate premium increases as employer changes to benefits and plan design affect the premium, the HRI observed.

More employers will rely on wellness, prevention, and disease management in the future, rather than on shifting more costs to employees, the HRI found. The HRI anticipates that cost shifting, primarily from hospitals, to private payers in 2009 will represent nearly 36% of spending as Medicare implements new cost-containment programs such as pay-for-performance and denies payment for medical costs related to certain preventable hospital errors. A minority of employers (38%) surveyed said they expected to increase employee cost-sharing through plan design. Health plans, too, recognize that their competitiveness in a shrinking market requires greater focus on higher accountability and consumer responsiveness.

According to the HRI analysis, medical costs represent 87% of the average health insurance premium, while administrative costs account for 13%, a share which has been relatively stable over the past 40 years. As a share of medical costs, physician services account for one-third, inpatient hospital for 20%, and outpatient hospital for 15%, with the rate of growth higher in this last component as more services are provided in outpatient settings. Prescription drug costs represent 14% of premiums. The growth in drug spending has slowed largely due to the much greater use of generic drugs and because there have been fewer new drugs in the market, although the use of expensive biotechnology drugs has increased.

Wellness Programs

Wellness programs have become much more prevalent with two-thirds of employers using them and nearly half of employers finding them at least somewhat effective at lowering costs and many even crediting the programs with instilling increased productivity and employee loyalty as well as a reflection of “corporate responsibility.” However, the HRI points out that only about one-third (34%) have integrated their wellness strategy with occupational health, 28% have integrated it with a return to work program, 26% with absence management, and 18% with workers’ compensation. Nearly two-thirds (63%) of employers also say that they employ disease management programs to control such high cost conditions as asthma, diabetes, cancer, and heart disease.

If past recessions are any indication, the HRI noted, the current looming economic recession points to an increase in health care as a share of the gross domestic product (GDP) and to health care prices increasing more than in prices for general goods. The upcoming national election also could mean substantial changes in health care in 2009, including providing coverage to the uninsured which ultimately could reduce cost-shifting and benefit payers and providers, the HRI said.

“In summary, payers and employers should assume the following features of our health care system for the next five to 10 years,” the HRI report concludes:

• The trend in costs and premiums can be expected to increase again, possibly soon.
• The long-term trend in real healthcare costs may be lower than it has been in the past.
• The lack of policy solutions for the uninsured and underpayments by Medicare and Medicaid could accelerate premium increases higher than medical cost growth.”

For more information, visit http://www.pwc.com.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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