Health care cost increase at an alarming rate
(from Maine Townsman, November2000)
by John Benoit, Employee Benefits Advisor, The Holden Agency

Nearly everywhere healthcare consumers turn they run into options and choices about new, alternative healthcare treatments. Direct to consumer advertising on TV is infiltrating our homes making consumers of healthcare more knowledgeable and demanding about healthcare options.  Simultaneously, consumers are demanding lower costs for health insurance as they receive double digit increases in their insurance premiums.  Politicians at the state and federal level debate the issue while Blue Ribbon Commissions are formed to find solutions and yet nothing appears to be happening to address this pending crisis. 

       The scenario above illustrates the inherent conflict in healthcare today. On one hand, consumers are demanding progressive and innovative solutions to their healthcare needs, but on the other hand they are unable to correlate these technologies to increased costs. The public demands the most advanced medical treatment without regard to the cost. This incongruous demand for the best in medical technology and lower costs challenges the healthcare and health insurance industries.

How bad is it?

       A recent study performed by the Department of Professional Regulations and the Department of Insurance in the State of Maine suggests the crisis is real. The accompanying graph (on page 14) illustrates the per member per month cost of healthcare, exclusive of administrative fees from 1994 through June 30, 2000. This graph identifies the per member cost for all domestic HMO’s in the State of Maine. As you can see since 1998 there has been a rapid increase in costs. Unfortunately, even self-funded plans like the Maine Municipal Employees Health Trust, have not escaped this trend and recent premium hikes reflect what is going on in the broader market.

       The current healthcare environment is troubling.  During 1998 and 1999 the health insurance industry lost in excess of $150 million.  These losses were the result of insufficient premium to cover claims costs and not the result of inefficient management.  Because of these loses the health insurance market is going through a period of consolidation.  In 1990 the State enjoyed a competitive market of more than 20 health plans actively marketing their product.  Today the number has been reduced to four.  There are a number of causes that have led to higher premiums and a consolidating market, including: 

       Community Rating – This concept was enacted to restrict a health insurance carrier's ability to underwrite a risk when establishing premium for a defined group.  Through this regulation small employers (under 50 individuals covered) were allowed to change carriers, regardless of health risk, and obtain competitive premiums.  Health insurance plans were no longer allowed to accept or reject groups or determine an adequate premium when underwriting a group. 

       Portability – This regulation allowed consumers of health insurance to change health plans within 90 days of the termination date of their coverage and avoid being exposed to pre-existing conditions exclusions.  Because of this regulation employees were no longer obligated to stay with an employer due to health status.

       One can argue these two initiatives resolved the issue of access to health insurance in Maine but in doing so created a new dilemma: how to determine the health risks and therefore the costs associated with a shifting and fragmented risk pool when the ability to underwrite the risk has been eliminated?

       Although the justifications for these reforms were admirable, the results were also predictable.  Carriers who had developed large preferred risk pools under the pre-community rated era were required to accept risk without disclosure or withdraw from the market completely.  The carriers that remained found themselves in an increasingly competitive market as employers were allowed to select a carrier regardless of the health risks contained in each employer group. These preferred risk pools became fragmented into smaller competing markets.  During this same period, managed care organizations began to dominate the Maine market.  Carriers such as Travelers, US Life, Principal Financial, John Alden and Golden Rule were confronted with the requirement to establish pricing for groups whose risks were unidentified. Additionally, competitive HMO pricing entered the market with Harvard, Blue Cross, NYLCare, Healthsource and Tufts competing for market share. 

       As managed care options became more prevalent, it became apparent these managed care organizations (MCO’s) were unable to negotiate the same type of provider discounts that were available in other markets. This was due in part to the rural nature of our state (lack of competition) as well as the Medicare funding shortfall. 

       In traditional markets, HMO’s typically establish a select or narrow network in order to obtain discounts to support lower pricing.  Given the demographic distribution of Maine’s population over a broad geographic area, combined with the desire of competing managed care organizations to obtain market share, select networks were abandoned for broader “any provider” programs.

       In retrospect consumers drove this evolution.  Historically, consumers have demanded open access but have been unable to correlate this demand to increased costs. The combined impact of these factors resulted in a health insurance market that was forced to compete aggressively for business with little or no understanding of the underlying cost or risk within this market.  The result has been a rapid consolidation of the health insurance market place into a less competitive environment. 

       In addition to the above, many believe costs within the healthcare system have escalated because the healthcare system has not been held accountable to perform as a competitive market.  Maine has in excess of 40 hospitals to provide rural and acute care access to all Maine citizens, yet consumers of health care have no way to compare the outcomes (quality) and cost of the services these hospitals provide.  We simply have not structured a health care system that allows consumers (business and individuals) to select a system of care, compare that system of care to established clinical and cost benchmarks and hold the system of care accountable to performance.

       It is not possible to end this discussion of healthcare cost drivers by simply identifying a failed system that underpriced the cost and therefore failed to resolve our problems.  Reality speaks differently. Many people do not recognize that the premium rates in Maine do not support the actual cost of health care in our state.  During the past several years the increases in health insurance premiums in the small group market have only recently manifested themselves into the costs paid by large health plans for many years.

What does all of this mean?

       It appears the health insurance market has suppressed pricing below actual costs and the current escalation in premiums are only now supporting the cost of medical services in our state. Therefore, perhaps the most important question is what are the underlying drivers of healthcare cost in Maine and what can be done to stabilize these costs?

       The preliminary report, "Findings of the Year 2000 Blue Ribbon Commission on Health Care", identifies several critical causes. 

       Use of costly procedures and treatment. Technological advances in medicine and innovations in drug therapies have increased costs at a record pace.

       Lack of consumer awareness about price.  Consumers are insulated from the cost and therefore don’t ask and aren’t told.

       Unhealthy behavior in lifestyles.  Use of tobacco combined with a lack of exercise generates poor health. 

       Emotions and expectations.  During the time of need we demand and expect the best regardless of cost or efficiencies.  Our system has fostered this to be part of our human nature.

       Aging population.  An interesting statistical finding indicates the cost of an employee and spouse is greater than full family coverage.  Yet most health plans charge less than the two-person rate because it would seem to make sense.  Bottom line, the employee and spouse is older and therefore incur more expense. The baby boomer generation is in full swing.

       Administration inefficiencies and government mandates. At the insurance carrier and provider level, the administrative burdens are significant.

       Poor quality of outcomes.  More important than the cost is the inability of consumers to have access to information on clinical outcomes and the performance of an integrated healthcare system. We routinely access health care without regard to the ability to assess information that is critical to our decision making process.

       Environmental Factors.  Ozone depletion, asbestos and lead paint.

       Significant Medicare Shortfalls.  Reimbursements for expenses by Medicare beneficiaries incurred in Maine hospitals are at the lowest levels in the country.

       In addition to the findings of the Blue Ribbon Commission there are other startling statistics in our state. The number of claims between $25,000 and $75,000 within large risk pools are up significantly. Additionally, major regional variations exist with regard to expenses incurred per capita.  Lastly, there appears to be excess capacity at many of Maine hospitals.  A recent analysis performed by the Maine Health Information Center (MHIC) indicates the occupancy rate in Maine hospitals in 1999 was approximately 55%, with Maine’s largest hospital at or above 70% while many of the smaller hospitals were in the 20-40% range.

       Although it is easy to become discouraged by this information the current health care crisis presents a unique opportunity for society to ask important questions about our system of care and then proceed to address the problem being presented:

       1) What is the appropriate percentage of the gross domestic product (GDP) that should be spent on health care?

       2) What is the best way to allocate these resources to encourage innovation, require accountability and reduce administrative/frictional inefficiencies?

       Whether you advocate universal access or market driven reform, there are certain fundamental changes that should be included in either model.

       1) The ability to spread risk, particularly catastrophic risk, more broadly.

       2) The ability to assess systems of care and judge performance.

       3) Incorporating technological advances into the delivery of health care both on a clinical and information basis.

       4) Improving health status and providing incentives for healthier lifestyles.

       5) Requiring the underinsured and uninsured to participate in the health care model and providing subsidy where appropriate.

Conclusion

       Many people look to the experts, government officials or their employer to resolve this crisis.  In reality the solutions rest with each of us.  We need to become more responsible to ourselves, accountable for our actions and knowledgeable consumers.  We need to demand structural changes to the system that will allow a market system to act like a market or a universal health care system that engages the consumer to actively participate in health care decisions.  It is unrealistic to think our current system can survive without fundamental reform.  Before the current robust economy slows we need to develop and then convene the intellectual capital within our state to address this smoldering crisis.

       Stay tuned, health care reform will require your participation.