From the GIC Fall 2002 Newsletter pdf format of fybfall2002.pdf

Rising health care costs are in the news daily. If you have skipped by these articles, or glossed over them, here's the problem in a nutshell - health care cost escalation is back, and it is causing employers grave concern about how to deal with this serious problem. A Mercer Human Resource Consulting survey revealed that average employer health care costs nationwide rising 13 percent this year; they are expected to increase 15 percent next year.

So why are costs skyrocketing? According to an April 2002 PricewaterhouseCoopers analysis, the following factors comprise rising health care costs:

22% - Drugs, medical devices and medical advances
18% - Rising provider expenses
15% - Government mandates and regulation
15% - Increased consumer demand
7% - Litigation and risk management
5% - Fraud, abuse, miscellaneous
18% - General inflation

Medical advances and prescription drugs have been a boon to improved quality of life, but their costs are the biggest factor driving health care costs. Consolidations of hospitals and other providers have given them greater leverage in negotiating costs with insurers. There are over 1,500 legislative health mandates at the state and federal level, each with its own cost. An aging population is increasing demand for new medications and costly procedures. The median malpractice award increased to $1 million in 2000; corresponding malpractice insurance premiums have skyrocketed.

The Employer Response

The Massachusetts Business Roundtable-sponsored white paper published in May 2002 recommended that companies encourage sharing responsibility and costs for health care with their employees. A Boston Globe editorial countered that employers and employees need to work on improving medical incentives, while keeping the concept behind insurance-shared responsibility and risk-intact.

Employers are searching for cost control alternatives and health plans are offering more options to assist. Harvard Pilgrim Health Care and Blue Cross Blue Shield recently introduced new high-deductible health plans. Under this plan type employees pay annual deductibles of $1000 to $5000 before their health coverage kicks in. Tufts Health Plan expected to offer a similar plan. Tufts Health Plan and Harvard Pilgrim Health Care offer a plan where employees pay higher copayments for surgery at academic teaching hospitals versus less expensive community hospitals.

Minnesota-based Patient Choice is testing the Massachusetts market with a plan to offer employers direct contracting with providers. Patient Choice would offer different priced networks. Participating employers would have lower cost networks; employees who want their medical care with more expensive doctors and hospitals would pay more.

Defined Benefit Plans, the industry standard, are also being modified. Under defined benefit plans, enrollees pay a fixed percentage of the premium with a set array of benefits. One major area university now tiers premiums based on employee salary; higher paid employees contribute more towards health insurance than lower paid employees.

An increasing number of employers are considering Defined Contribution Plans. Textron, Xerox, and Staples are among the early adopters of this option. In most Defined Contribution Plans the employee is responsible for premium and out-of-pocket medical expenses above the employer's fixed dollar contribution. If the enrollee selects a more expensive plan, he or she is responsible for the cost difference. Defined Contribution Plans come in different variations, such as medical savings accounts, where unused funds can be rolled into the next year, and medical spending accounts, with a "use or lose" provision.

These are all options being considered and evaluated by employers around the country. The GIC is keeping an eye on how these plans actually work out in practice.

This information provided by the Group Insurance Commission .