Healthcare Town Hall

Although some of the reform elements discussed since the launch of the Milliman Medical Index may provide a one-time reduction in the growth of healthcare costs, the primary drivers of historical cost growth as yet remain largely unaddressed by healthcare reform. Those drivers include:

• Separation of treatment decisions and financial responsibility for those decisions. The majority of treatment decisions are ultimately made by doctors and patients. The majority of the cost of care, however, is borne by the employer. As described in the Milliman Medical Index, out-of-pocket expenses incurred at the point of care only represent about 17% of total healthcare cost for the family of four. This means that the cost vs. benefit decision is not being made by the person who is responsible for most of the cost.
• Fee-for-service payments to healthcare providers. In most PPO-style employer group health plans, healthcare providers are paid on a fee-for-service basis, meaning that they get paid for each service they provide. This method is fair to providers in that there is a direct link between the work that they do and their compensation. However, it also provides no incentive for providers to deliver care in only the most efficient manner.
• Defensive medicine. The threat of malpractice lawsuits gives providers a powerful incentive to perform tests or procedures that could be construed as demonstrating diligence in their treatment, but that may not always be medically necessary.
•  Administrative complexity. Our healthcare system is fraught with administrative requirements, in both delivery and financing. Competitive pressures help minimize those costs, but broader industry efforts may be needed to induce universal implementation of electronic health records (EHR) or other technological efficiencies that will produce major cost reductions. Introduction of the healthcare exchanges may accelerate implementation of some such administrative efficiencies.

The healthcare reform package is a huge step towards universal coverage of all Americans. However, its effect on large employer group health insurance costs may be modest—unless reform can somehow bring about changes to the underlying cost of care.

Cost, Reform Milliman Medical Index

For some people, such as the uninsured, healthcare reform may have a dramatic effect on their healthcare costs. For the family of four that is the basis for the Milliman Medical Index, however, the long-term effects are likely to be more modest. This post looks at the long-term effects of reform on costs, specifically from the perspective of a family of four with employer-sponsored health insurance. The effects may be much different for other people.

Some of the major provisions that might to affect cost growth are:

• Minimum benefit standards that improve access to preventive and medically necessary care. First-dollar coverage does increase usage of preventive care, but can ultimately reduce other healthcare costs. Similarly, defining an essential benefit package without restrictive benefit maximums or cost-sharing levels does reduce financial barriers that might otherwise prevent people from getting care at the right time in the right treatment setting. These provisions are likely to increase total costs in the short term but will hopefully result in lower costs in the long term.
• Reduced distribution costs that are due to use of exchanges. Group health insurance sold through the exchange might be expected to have lower expenses for sales (lower commissions), marketing (standardized benefit plans and pricing might mean that price is the primary differentiator among companies), and underwriting. Most people covered by group health insurance are in large employer group plans, which might continue to be sold outside the exchanges, and will therefore not be directly affected by the exchanges.
• Increased use of managed care. Federal support will be available to test innovations in managed care, including accountable care organizations (ACOs) and Consumer Operated and Oriented Plans (CO-OPs). These integrated delivery systems can provide a more direct connection between treatment decisions and provider financial accountability for those decisions. They often give providers a financial incentive to manage patient care and costs. As with our family of four, most people covered by employer group plans are in PPO-style plans, where care may be relatively unmanaged. Through ACOs, CO-OPs, or other mechanisms, healthcare reform may provide significant incentives for healthcare management and cost control.
• Reduced cost of coverage for early retirees.  Some employers provide full or partial coverage for retirees who are not yet eligible for Medicare. Those employers, or the retirees themselves, might find it more cost-effective to purchase insurance through the exchanges where age-based premium rate restrictions may create built-in subsidies for older enrollees.  The temporary reinsurance pool for early retirees will also affect employers’ strategies.

Cost, Reform Milliman Medical Index

A new article in Insurance Made Easy uses the Milliman Medical Index to showcase the plight of the hypothetical employee “Sam.” Here is an excerpt:

[T]otal compensation is finite. When benefit costs increase, less money is available for salaries or bonuses.

It is critical to understand the degree to which healthcare costs are eroding available funds for take-home pay. According to the Milliman 2010 Medical Index, this year’s premium cost for a family of four will exceed $18,000. Employers will cover about $11,000 (more than half) of that on average (probably much more in Sam’s case!). Knowing Sam, he would definitely find a way to get a plan he likes for less than $18,000—if he understood that it was his own money…

The most alarming thing about the $18,000 price tag published by Milliman last month is that it was just over $9,000 as recently as 2002. This means that in less than a decade workers making a 50K salary have had to absorb an additional 9K (almost 20%) in their total compensation costs that is NOT going to salary.

Cost Milliman Medical Index, total compensation

American Medical News looks at the Milliman Medical Index and what it has to say about physician cost increases. Here’s an excerpt:

[Between 2009 and 2010] the annual rate of increase for physician costs declined from 6% to 5%.

While physician services account for the highest chunk of medical spending, 33%, the rate of cost increases in that area was slower than all other cost components, including inpatient care, outpatient care and pharmacy.

“Physician reimbursement rates have just historically trended at a lower rate than, for example, hospital costs,” said Chris Girod, co-author of the study.

Hospital outpatient care saw the highest increase in the past year, from 10% to 12%, due to an increase in average unit cost, which is the negotiated charge for each service.

Girod said hospitals, in a lot of markets, have a lot more control over cost levels than physicians do. “The bottom line is that hospitals tend to get compensated more on the basis of what they bill, and physicians are paid according to more fixed schedules.”

Cost Chirs Girod, Milliman Medical Index

A new article put out by the Healthcare Financial Management Association looks at the drivers of this year’s $1,303 increase in medical costs for the typical American family of four. Here’s an excerpt:

Over the past five years, pharmacy care and facility costs, especially outpatient facility costs, increased at a higher average annual rate than physician services, the report states. The largest dollar increase in 2010 was for inpatient facility care, which rose by $498 annually. The increase includes change in both utilization and average unit cost. Average unit cost reflects the negotiated charge for each service and the service mix, according to Milliman.

Most of the hospital and physician cost increases noted in the 2010 index have been driven by average unit cost, not utilization, which frames the future cost-control effort, according to the report. Hospital and physician services contributed $820 and $301, respectively, to the increase in total annual medical costs between 2009 and 2010, while pharmacy services contributed $151.

Cost Milliman Medical Index

The cost of healthcare for the typical American family of four increased by $1,303 this year, and both employers and employees are sharing this increase. We showed you this graph breaking down the cost share last week:

 But how does the employee/consumer portion of these costs break down across different components of care such as outpatient, inpatient, and pharmacy? Here is more detail:

Cost Cost share, Milliman Medical Index

Last year, Miami was the first city analyzed in the Milliman Medical Index to surpass $20,000 in medical costs for the typical family. This year, New York and Chicago join the club. Here is the full breakdown:

Here’s a closer look at the city-by-city list:

Cost Chicago, geographic cost disparity, Miami, Milliman Medical Index, New York

What follows is excerpted from the Milliman Medical Index:

Near-term reforms that will shift costs from employees to employers

We now know that several near-term provisions will shift costs from employees to employers:

• Expand dependent coverage for adult children up to age 26: For families such as the MMI typical family of four, with no adult dependents, this change may go completely unnoticed. There are, however, people with adult children that have found it difficult or impossible to obtain healthcare coverage. The uniform requirement for plans to allow coverage up to age 26 will provide these persons with affordable insurance options
• Remove lifetime and annual limits: Some plans currently have lifetime or annual limits on the dollar amount of benefits payable by the plan. These limits are more common in small group and individual plans but can also be found in some large group and Taft-Hartley plans. If an employee or employee’s family member has claims in excess of these limits, then they are currently responsible for the costs. Phase-out of these limits would shift those costs from the individual to the plan, thereby increasing the plan’s cost.
• Restrict cost sharing for preventive care: Coverage of certain preventive services without any cost sharing would also shift costs from the individual to the plan for any employees that are currently covered by plans that require out-of-pocket cost sharing for such services. The implications of this change in terms of utilization will vary, but it seems likely that this elimination of cost sharing for preventive services may lead to increased use of these and other services.
• Prohibit preexisting condition exclusions for children’s coverage: In some instances, employees and their families have found that coverage for certain existing conditions is limited when they take a new job and obtain coverage after a period of being uninsured. There will be prohibitions against such restriction for children’s coverage. Again, a cost of care now borne by the employee would shift to the plan.

Cost, Reform Milliman Medical Index

The Milliman Medical Index breaks down costs according to a number of key components. Here is what Health Leaders has to say about this year’s cost increase ($1,303 total):

Interestingly, the average costs were not attributed to more patients getting care, but on higher costs of certain kinds of care such as outpatient and inpatient services, which represent 17% and 31% of all costs. “The largest dollar increase this year was for inpatient facility care, which increased by $498 annually,” the report says.

Although physician costs are the biggest single piece of the cost pie, representing 33%, the rate of increase of their cost of care dropped from 6% to 5.2%.

To better understand the overall cost mix, consider the components of 2010 spending:

Cost, Milliman Medical Index Milliman Medical Index

The Milliman Medical Index indicates that 2010 medical costs for the typical American family of four are proceeding at a familiar rate. Modern Healthcare has the story:

The survey predicted that healthcare reform would not have a material effect on large-group benefit costs in 2010. “The cost of group insurance continues to increase at a historically consistent pace, even with reform now the law of the land. While there will be short-term cost implications, especially for particular employees and certain employers, this year reflects a continuation of the prevailing cost trends,” said study co-author Lorraine Mayne, Milliman principal and consulting actuary.

As we noted yesterday, the annual rate of increase only accelerated slightly—but the total dollar increase sets a new record.

Kaiser Health News picks up on the Modern Healthcare story and others.  And there’s this from UPI.

Cost Lorraine Mayne, Milliman Medical Index