# Presentation: 125340

## Death, Taxes, and Rising Health Care Costs

- Robert E. Hurley, Ph.D.
- Virginia Commonwealth University

## Session Overview

- Cost pressures
- The move to managed care
- Early success; later decline
- Consequences for States
- Private sector responses
- Tasks before you

## The Elusive Pursuit of Sustainable, Affordable Health Care Coverage

- Purchasers of health benefits have long struggled to expand  coverage, promote access, and contain costs—simultaneously
- Public policymakers have assisted efforts with a variety of policy interventions to try to affect health care markets
- States have pursued many strategies:  certificate of need, rate regulation, investment in safety net providers, reform of insurance markets, mandated benefits and services, expanded public coverage, consumer protection initiatives
- Cost containment, in particular, has proven to be elusive

## Annual Change in Private Health Spending per Capita (Adjusted for Inflation), 1961-2001

**Medicare and Medicaid Implemented**

**Voluntary Effort**

**Managed Care and Threat of Health Reform**

**Wage and **
**Price **
**Controls**

**Altman and Levitt, 2002**

- 9.1

** ****Aged (>65)**
** ****Disabled**
** ****Low income**

** ****Employee **
** ****Dependents**

**Insurance**
**carrier/Health**
**plan/TPA**

**Direct**
**Purchase**

**Direct**
**Purchase**

**Health Care Providers**

**Government**

**Employer**

**80 mil.**

**170 mil.**

**Uninsured = 45 mil****.**

- The U.S. Health System ― A Simplified View

## Employer/Sponsored Indemnity Coverage

***A system built around spending someone else’s money . . .and an unmanaged system, at that ***
_**Employer sponsorship**_**―****subsidized premiums and limited cost sharing, health benefits as non-cash compensation shielded from income tax**
_**Indemnity**_**―****freedom of choice of providers, providers fees not  negotiated, little/no medical management, varied benefit packages**

## National employee enrollment by type of plan

**Percent of All Covered Employees**

- .

**National employee enrollment by type of plan**

**Gabel et al, KFF, 2002**

## Increases in Health Insurance Premiums Compared to Other Indicators, 1988

**18%**
**	****	****	****	****	****	****	****     ****12.7%****	**
**	****	****8.5%**
**  ****	****	****	****	****	****	****      ****8.3%****	**
** ****	****	****	****	**
**	****	****	****	****	****	****4.8%       **
**	****	****	****	****	****	****	****	****3.4%**
**	****	****	****	****	****	****	****	****1.6%**
**	****	****	****	**

**Gabel et al, KFF, 2002**

- 5.1%
- 4.1%

## Percent of Premium Paid by Covered Workers

**Gabel et al, 2004**

## The Purchaser Revolution

- The employers make their move

## Purchasers Attempt To Promote Competition via Managed Care

- Private purchasers embraced managed care to exert more control over health benefits and costs
- Managed care organizations (MCOs) charged with being aggressive purchasing agents
- MCOs design/develop products to match purchaser (and consumer) demands with provider capacity and capabilities
- Products to promote competitive dynamics to curb cost growth/improve efficiency/reduce cost shifting

## From Indemnity to Managed Care

- _Indemnity_—freedom of choice of providers, providers fees not negotiated, little/no medical management, varied benefit packages
- _Managed care_—network-based delivery systems, negotiated payments, medical management, typically richer benefits
- HMO—narrower networks, aggressive medical management, some risk-based payment
- PPO—broader networks, limited medical management,           discounted prices payment
- POS—HMO with out-of-network options (“leaky HMO”)

## National employee enrollment by type of plan

**Percent of All Covered Employees**

- .

**National employee enrollment by type of plan**

**Gabel et al, KFF, 2002**

## Increases in Health Insurance Premiums Compared to Other Indicators, 1988-1999

**18%**
**	****	****	****	****	****	****	****     ****12.7%****	**
**	****	****8.5%**
**  ****	****	****	****	****	****	****      ****8.3%****	**
** ****	****	****	****	**
**	****	****	****	****	****	****4.8%       **
**	****	****	****	****	****	****	****	****3.4%**
**	****	****	****	****    ****.8% ****	****	****	****	****1.6%**
**	****	****	****	**

**Gabel et al, KFF, 2002**

## State Governments In 1990s Hitched Their Wagons to Managed Care and Market-based Models

- State employee health benefits programs came to rely extensively on managed care products
- By 2000, more than half (56%) of Medicaid beneficiaries  enrolled in managed care arrangements
- Many States enrolled SCHIP eligible children in managed care plans
- Sustainability of coverage expansions conditioned on expectation of controlling cost increases
- States promoted coverage and benefit expansions with       various mandates on health plans

## Bringing on a Counterrevolution

- Suppression of cost-shifting
- Consumer and provider backlash
- “Uncontrollable cost pressures”
- Declining public payments

## The Decline of Cost-Shifting—1990-2000(payments received as a % of actual costs)

**127%**
** ****89%**
** ****80%**

**112%**
**100%**
** ****96%**

**MedPAC, 2002**

## Median U.S. Physician Income, 1988-1998 (in thousands)

-  **$**

**Modern Healthcare, 2001**

## Percent of Groups with “Unfavorable” Rating(Kaiser Family Foundation, National Survey of Prescription Drugs, Sept. 2000)

## Percent Increase in Rx Spending vs. Total Health Care Spending, 1990-2002

**Percent**

**Source: HCFA/CMS**

## Medicare Makes Its Move—BBA* of 1997Percent Annual Increase in National Health Expenditures (NHE)                          vs. Private insurance and Medicare

***Balanced Budget Act**

**Modern Healthcare, 2001**

## Increases in Health Insurance Premiums Compared to Other Indicators, 1988-2004

**   ****18%**
**	****	****	****	****	****	****	****13.9%**
**	****	****	****	****	****	****	****        **
**	****	****	****   ****	****	****	****	****           ****11.2%**
** ****	****	****  ****8.5%**
**  ****	****	****	****	****	****	****    ****8.3%****	**
** ****	****	****	****	****	****         ****4.8%****	**
**	****	****	****	****	****                                     ****2.3%**
**  ****	****	****	****	****	****	****	****           ****2.2%**
**	****	****	****	****  ****.8%**

**Gabel et al, KFF, 2004**

## Contemporary Picture

- Premium increases remain near or at double digits
- Private coverage likely to continue to decline
- Private-sector managed care plans lose traction in cost control efforts with providers
- Continued increases in major cost drivers: labor, technology, pharmacy, malpractice, and administrative cost
- Public payers continue to shift more pressure to private payers
- Increased consumer cost participation inevitable

## Managed Care—Managing to Hold On

- Broader networks/looser products (PPO)
- Targeted disease management programs to focus on high-cost users
- Incentive-based compensation systems for providers to promote quality
- Expanded consumer cost sharing and consumer engagement in choices
- Raising premiums faster than costs

## National employee enrollment by type of plan

**Percent of All Covered Employees**

- .

**National employee enrollment by type of plan**

**Gabel et al, KFF, 2002**

## Implications for State Policymakers

- Sharply rising health care expenses affect:
- State employee benefits costs
- Medicaid and SCHIP expenditures
- Coverage expansions—past and future
- Financing for safety net providers
- Sustainability of private coverage—potentially                       increasing enrollment in public programs
- Demands for both deregulation and new regulation

## Medicaid—The Land Where Managed Care Succeeded, So Far

- Managed care in Medicaid has fared better than in commercial sector because it is grounded in assumption that resources are limited
- States have stayed with HMO product in part because substantial cost-shifting to consumer not an option
- Most (but not all) States generally satisfied with prepaid health plans and ability to hold them accountable for cost and quality standards
- Medicaid managed care emerging as lucrative industry for specialized plans; new opportunities to place greater demands on plans

## The Private Sector Response 

- Disenchanted with managed care organizations, growing             doubts about their ability to affect health care markets
- Belief that expanded coverage/benefits with reduced out of pocket costs for employee/consumer is THE problem and needs to be reversed
- Drumbeat building for a variety of “consumer directed health product” (CDHP) designs
- Is this inspiration or desperation?

## Percentage of Large Employers (>200 workers) Planning Selected Benefit Changes in Next Year

**Gabel et al, KFF, 2004   Likely= Very/Somewhat likely; Not=Other**

## Consumer Directed Products (CDHP)— A Continuum Perspective

**No premium contribution and “first dollar” coverage**

**Cash in lieu of benefits**

**Premium contributions and cost sharing**

**Sharply increased out-of-pocket costs/benefits buy-down**

**High-deductible plan option with**
**health savings/reimbursement accounts **

**Defined contribution**
**       ****plans**

## CDHP:  Managed Care Under New Management

**EMPLOYEE’S**
**Spending**
**Account**

**EMPLOYER**

**High Deductible**
**Insurance**
**Policy**

- $

- $

**Routine/**
**Discretionary**
**Care**

**High- **
**Cost**
**Care**

## Policy Concerns with Consumer Directed Products	

- Information to support consumers remains badly underdeveloped
- Potential to lose group-based negotiating clout
- Deferred/forgone care could lead to higher costs
- Uncompensated care could rise sharply
- Healthy likely to opt out of conventional insurance
- Less healthy try to maintain comprehensive coverage
- Risk-pooling undermined; premiums could soar
- Fewer of the less healthy can afford coverage—become uninsured

## The Tasks Before You

- Sustain past coverage expansions and explore new configurations of public and private arrangements
- Review strategies for purchasing care for Medicaid           and SCHIP beneficiaries
- Revisit benefit designs and delivery system options           for State employees
- Re-appraise regulatory and other interventions to bolster   private insurance markets
- Consider consequences of consumer directed products

## Annual Change in Private Health Spending per Capita (adjusted for inflation), 1961-2001

**Medicare and Medicaid Implemented**

**Voluntary Effort**

**Managed Care and Threat of Health Reform**

**Wage and **
**Price **
**Controls**

**What**
**Next?**

**Altman and Levitt, 2002**

## “You can always count on the Americans to     do the right thing, after exhausting all other alternatives.”
				Winston S. Churchill

- 				Winston S. Churchill