There are plenty of surveys and studies on the topic, but they essentially agree: Health care costs are rising. Over the last decade, the annual increase in health insurance premiums has ranged from 8 percent to 12 percent. Many companies have experienced much larger increases, thanks to the designs of their health plans and the way their employees use them.
The increases reflect the rising costs of medical procedures and treatments, which in many cases have risen at an even faster rate. One reason is better, expensive technology that's making a legitimate difference in people's lives. There are new specialty drugs, with billions of dollars in research costs, that are geared to help 1 percent or one-half of 1 percent of the population who have a particular disease but had no treatment before. It is literally keeping people alive who would have died ten years ago without these drugs.
Another major part of cost increases, though, is the growing size of hospital chains and physician groups. They buy all the hospitals or all the physician groups in a specific geographic area with the sole purpose of having the leverage against the insurance company to demand 50 percent and 60 percent increases, year-over-year, in what they’re reimbursed.
The insurance companies can then say the provider is demanding too large a profit margin, and can't have the increase, and risk the provider dropping out of the network. At that point, insurance companies tell employers that the provider can no longer provide in-network care to its employees. The employees might then be up in arms over losing a name-brand medical provider in the area, and press their employer to change insurers.
Instead, to avoid losing business, the insurance company might accept the provider's rate increase, then turn around and charge huge premium increases to the employer to cover the cost of reimbursing those doctors and hospitals.
The only reason health-insurance premiums haven't risen even more is because every year many, many employers change their plan designs to put more of the cost onto employees, the end consumer of healthcare. With higher deductibles or higher co-pays, the employees pay more out of their pockets (and the insurance company pays less) when they go to seek services. A company with 20 per cent annual increases is more likely to take a much more aggressive approach and eliminate their HMO option, pushing employees into high-deductible plans.
What will the prices of health-insurance premium look like, going forward, as the Affordable Care Act is implemented? It's hard to say. Over the last three to four years, health care cost increases have been declining by about a half a percent or so each year, from a high of 12 percent to 14 percent about four or five years ago to a 7.5 percent or 8 percent increase now. In the near term, that's not expected to change in the employer marketplace. A lot of people within the government will tell you that the healthcare reform efforts are going to level off premium increases for individuals and employers. People in the private sector will tell you that that’s not necessarily going to be the case. All we know for sure is that the next two to three years are going to be very interesting.
Many people don’t realize the gigantic variation in prices for health care services. Employees and employers think that by knowing the cost, they can shop around and save, for example, $50 on an MRI exam.
In the San Francisco Bay area, as an example, you can get an MRI in your lower back for roughly $400 or less, and you can get that exact same MRI, with no quality difference at all, for $4,000 from a facility just a few miles away. You can get arthroscopic knee surgery for $16,000 on the low end and roughly $60,000 on the high end. So when people are on these traditional HMO or PPO plans, they go wherever their doctor or their friend recommends, or go to the closest place down the street. They get their MRI or their knee surgery or their colonoscopy or their hip surgery and they have no idea what that place charges – and have little to no incentive to care because they are paying only a co-pay no matter where they get the service. If they go to a more expensive facility, the employer ends up paying the difference in cost.
As recently as five years ago, it was a rare circumstance where somebody would call up a doctor or call up the hospital and say “I need to know what the price is for this procedure.” They would tell you, “We don’t know.” Or they would say, “What insurance do you have, we’ll call your insurance company and see how much your deductible is or how much you would owe.” But they had a very difficult time because they were not used to the question.They had a very difficult time telling people “This is actually what the cost is for that service." And you still get some of that today if you ask a doctor how much the MRI is going to cost – he or she may look at you and say, “What do you care? The insurance company is going to pay for it."
That is now changing because of the growth of high-deductible health plans. People are on the hook for a lot more money out of their own pockets. Providers are now getting used to hearing consumers say “I want to know how much this is going to cost.” But there's room for improvement.
I use a couple of analogies with employers and their employees. Imagine you need to buy a new car. You drive down the street and you pull into the first car dealership you see. You’re walking down the row of cars and see a brand new BMW and, next to it, a brand new Honda Civic. Both are good cars that will get you to work and back. But obviously the BMW has all the bells and whistles, and is really nice and fast. You’re on a budget, so you need to know how much more the BMW costs. And yet the sales person says to you, “They cost the exact same amount – if you want the BMW, we’ll just charge your employer for the additional cost.”
I use that analogy at employee meetings because of how ridiculous it sounds. Healthcare is like every single employee having a BMW in the parking lot, because the actual consumers don’t know what the real price is and frankly don’t care. They go to any doctor, any hospital, any pharmacy, and pay their co-pays. The providers like this system because they can charge essentially whatever they want and somebody else is paying the bill. The insurance company is always the one that gets blamed when the costs are really high.
There's another analogy: Can you tell me of any place where you can walk in and say “I want that? How much?” And they look at you and tell you, “We’re not going to tell you how much it costs. Buy it and we’ll bill you later.”
So our health care system is a crazy, complicated and very often completely irrational system. As people are educated about how it works, what the problems are, and what they really can and should be asking about, the more doctors and hospitals are going to have to compete on cost and quality, and the lower the costs are going to become.
Just as consumers have little idea whether the provider they've chosen is a low-cost option, they also have no idea whether that place is where they should be going to for quality care.
We increasingly have more and more quality transparency in, for example, how many knee surgeries a particular facility does, along with associated data: What their rate of readmission is, what their infection rate is. And yet, it's not as far along as cost transparency, because it's simply harder to evaluate.
Some things don't have quality statistics. If you go for an MRI exam, with the exception of very small nuances, an MRI is going to be an MRI. Go to the machine, it scans you, and a doctor reads it. They haven’t come up metrics for everything.
The other issue is that doctors and hospitals have been resisting quality metrics because they aren't sure that they're necessarily accurate, or that they'll be read and interpreted correctly. There are various government requirements on reporting on quality for certain procedures. And what a lot of hospitals will say is, “Well, we have a much bigger population of indigent or uninsured patients who don’t take their follow-up medications or follow their treatment plans correctly. They end up back into our hospital emergency room through no fault of ours. That’s being reflected in our 'quality' data, and that’s not fair."
So we’ve still got some ways to go. It is getting a lot better, however, and any quality data is better than no quality data at all. And if people are more educated about these things, they can do some shopping. Lower cost facilities are often also higher quality, so you get better health care outcomes at a much lower cost. That helps save the employees money and keeps them healthier. It also and saves the employer money, because their claims dollars at the end of the year are much lower, resulting in a much lower renewal rate for the following year.
This is not some sort of political statement about whether health care reform is good or bad. The fact is, there are fees that the government is imposing on every large group employer plan that support this health care-reform effort. So on top of insurance or health care cost increases, you are also getting government-mandated fees on employers. So the idea of health care reform making everything cheaper is not happening in the short term.
Here is an example: There is a $63 fee, charged each year, on each employer-plan participant, for the Affordable Care Act's high risk reinsurance pools. An employer that has a thousand people on its plan will have to pay $63,000 to the government on top of insurance costs. There are a couple of other ACA fees for employers that are smaller, but they add up. There are also new fees for the insurance companies; they are turning around and adding that cost into the employer's next premium increase. Estimates of that range from one to four percent added onto employers' premium increases.
If we get to 2018, and the regulations all still look the same, there will be what's being called the "Cadillac tax." That says that any employer who is offering a plan with premiums above a specified cost must pay a 40 percent tax on the amount of the premium above that threshold. The numbers and the tax may vary by geography – employers in Silicon Valley with traditional HMO plans are far more likely to trigger the tax than an employer in a state like Kentucky, for example.
The penalty can be large, however, for an employer that offers an expensive traditional HMO plan. I have a client who modeled the change, and with their current number of employees and assumed premium increases each year, they estimate they will pay $1.6 million in taxes in 2018 on their HMO plan.
This goes back to to the issues of cost and quality transparency, where you can get a procedure for $16,000 or $60,000, and the cheaper procedure might be better from a quality standpoint.
Most employees believe that as long as they see an in-network provider and pay their co-pay, the insurance company will be paying the same amount for their care as for anyone else's. This couldn’t be farther from the truth; but as long as someone else is paying, employees will never know or care what the price differences are. This has led to many people viewing the process of learning about the price and quality differences as a headache they don't want to deal with – and can avoid by staying on an HMO or PPO and paying those co-pays.
So these are the two issues we really need to overcome. First of all, people need to have the incentive to actually learn to be a better consumer of healthcare. Secondly, when they do have that incentive, they need to have the tools and resources to be able to find out what these prices are. That, too, has been a real challenge.