Medical inflation generally refers to the annual increase in the cost of medical treatment per insured life. It encompasses both changes in the average cost of treatment for the same basket of services and changes in the frequency of seeking treatment for a steady-state portfolio. It is impacted by anything that will change the cost per insured life for the same services, ranging from technological medical advances to shifts in costs and from social and national healthcare systems to private insurance payers. A change in the mix of services will impact the relative weights that each service contributes to the ‘basket’ of goods (similarly to a calculation of RPI). Using risk adjustment as a true measure of inflation, the effects of a change in the mix of lives in a portfolio would be stripped out, although most cited measures do not remove this element and instead quote inflation inclusive of mix changes.
Continuing from our first blog, which focussed on the potential impact of Brexit on PMI market size, in this blog we examine factors that will impact the average cost of treatments through the supply of medical professionals, cost of drugs, changes in general inflation and the economic health of the UK.
The figure below summarises how the topics we cover impact medical inflation.
Milliman has studied and published health plan administrative cost benchmarks for over 15 years. Our research has included direct observations of over 100 health plans supplemented with the review of many more statutory reports. Of the many trends and changes that we have observed during this time, one general statistical observation has stood out: health plan administrative costs generally increase at a rate of about 67% of the rate of increase in medical cost inflation. This equates to an annual rate of increase of 6% for the period 2006-2011.
Conceptually, administrative costs, over a period of time, should be affected by:
Increased efficiency through the use of electronic records and technology
General salary and cost of goods inflation
Regulation (positively or negatively)
Increases or decreases in administrative workload, such as claims, customer services calls, etc.
None of the above appear to be all that closely related to medical inflation. Salary and general inflation should be the primary driver of healthcare administrative cost inflation. But with an annual salary and goods inflation level of around 2%, we must look to some other cause of the 6% annual increase. Certainly, as we consumers collectively continue to expect and demand more medical services and prescription drugs, we can end up creating more administrative burden. But shouldn’t any increase in administrative transactions have been more than negated by the proliferation of advanced technologies and electronic transactions?
The long-run actuarial deficits of the Social Security and Medicare programs worsened in 2012, though in each case for different reasons. The actuarial deficit in the Medicare Hospital Insurance program increased primarily because the Trustees incorporated recommendations of the 2010-11 Medicare Technical Panel that long-run health cost growth rate assumptions be somewhat increased. The actuarial deficit in Social Security increased largely because of the incorporation of updated economic data and assumptions. Both Medicare and Social Security cannot sustain projected long-run program costs under currently scheduled financing, and legislative modifications are necessary to avoid disruptive consequences for beneficiaries and taxpayers.
These results are not very surprising as they are similar to previous reports. The Trustees strongly recommend action sooner than later:
Lawmakers should not delay addressing the long-run financial challenges facing Social Security and Medicare. If they take action sooner rather than later, more options and more time will be available to phase in changes so that the public has adequate time to prepare. Earlier action will also help elected officials minimize adverse impacts on vulnerable populations, including lower-income workers and people already dependent on program benefits.
As in past years, the Medicare actuary stated that cost projections based on current law may be unrealistic:
While the Part B projections in this report are reasonable in their portrayal of future costs under current law, they are not reasonable as an indication of actual future costs. Current law would require a physician fee reduction of an estimated 30.9 percent on January 1, 2013—an implausible expectation.
Further, while the Affordable Care Act makes important changes to the Medicare program and substantially improves its financial outlook, there is a strong likelihood that certain of these changes will not be viable in the long range. Specifically, the annual price updates for most categories of non-physician health services will be adjusted downward each year by the growth in economy-wide productivity. The best available evidence indicates that most health care providers cannot improve their productivity to this degree—or even approach such a level—as a result of the labor-intensive nature of these services.
The idea of implementing legislative controls of healthcare premium increases has been part of the reform bills for some time, but the idea has become more prominent in recent weeks. While it is tempting to look only at premium numbers when trying to control costs, there are actually a number of underlying factors: unit cost changes, medical inflation, utilization changes, member behavior, plan changes, premium “true-up,” and various leveraging.
Look first at the hospital components of this cost trend.
The inpatient cost trend increased from 7.1% to 7.7% this year. Utilization remained flat and the increase was instead driven by unit costs.
The outpatient cost trend increased from 9.4% to 10.2%, again largely due to an increase in unit costs.
The physician cost trend decelerated, though physician costs remain the biggest piece of the puzzle.
Pharmacy costs saw a deceleration in the cost trend but still increased higher than other components of care at 7.9%, with just under 40% of that due to increased utilization. The increased use of generics over previous years complicates this cost trend.
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