What do you anticipate regarding the level of health care costs?

I am hearing this question more and more often. I believe we may be viewing the trend of health care costs much in the same manner in which the stock market is being viewed. The thought in back of our minds is: When will the correction occur in the stock market? The thought with regard to health care is: When will health care costs start increasing again?

Most employers have been very happy with the moderation in health care costs during the past three years. The A. Foster Higgins & Co. Inc. survey shows the following changes in health care costs during the past three years.

1994: -1.1%.

1995: 2.1%.

1996: 2.5%.

The decrease in 1994 was preceded by an 8% increase in 1993. It was a pleasant change of pace for employers to have little to no increase in their health care costs and, in some cases, to experience cost decreases.

Reasons for cost moderation

There are several reasons that health care costs moderated during the past three years. They include:

Shifting employees into managed care and away from indemnity plans. This is the main approach employers have taken to help control their health care costs. Enrollment in managed care plans was 77% in 1996, compared with just 48% in 1992. This is a significant shift in a relatively short period.

Employer cost-shifting. This took the form of implementing or increasing premium contributions made by employees, increasing deductibles and increasing copayments. For the most part, premium contributions have been experience-rated based on the type of plan in which an employee is enrolled. Therefore, those employees opting for the generally higher-priced indemnity plans were required to contribute proportionately more than those individuals in the lower-priced managed care plans.

Price competition by health plans. As employers have shifted to managed care, the health plans were very eager to obtain additional business. To increase their market share, some health plans knowingly pegged their rates at unprofitable levels.

Factors affecting health care costs

A number of factors will help push up the cost of health care. These include:

Pressure on health care plan earnings. Any organization can use a strategy of lower prices to obtain additional business for only a limited period of time. As the health care plans' pricing strategy begins to depress earnings, changes will be made quickly in that strategy. Some for-profit health plans have experienced a significant drop in their stock prices when lower earnings were reported.

Managed care backlash. As health care plans decreased rates or did not increase rates, they worked hard on controlling costs, which in some cases resulted in restricting care. There have been some unfortunate examples of proper health care not being administered. As a result, an anti-managed care campaign is fully in motion. Most significant has been the anti-managed care legislation being passed at the state level.

Legislation by body part has become the norm. At the federal level, legislation was passed in 1996 to require minimum hospital stays after childbirth and to put mental health benefits on an equal level with regular medical benefits (BI, Sept. 23, 1996).

The type of legislation being passed at the state level includes requiring coverage for non-urgent emergency room visits, requiring managed care doctors to discuss their financial arrangements-e.g. do the doctors have incentives to withhold care?-and requiring doctors to discuss with patients all treatment options, including expensive options. This type of legislation will result in health care cost increases.

Another form of managed care backlash is an increasing trend toward doctors joining labor unions. Those doctors who think the managed care organizations are controlling too tightly how they practice medicine are resisting this and are joining labor unions in an attempt to regain control of how they practice medicine.

Aging baby boomers. This large group is getting older. Of course, as this group ages, it will consume additional health care services. Also, the intensity of treatment will increase, which translates to higher health care costs.

New medical treatments and techniques. As medical research continues, a significant increase in new treatments and techniques is anticipated. The upside of this is that individuals will have longer and healthier lives. The downside is that new treatments and techniques are typically more expensive.

Issues that may help reduce costs

A few items may be working in our favor regarding controlling health care costs.

Increased focus on quality. While costs have been moderating during the past several years, employers increasingly have been focusing on quality initiatives. Quality initiatives such as the National Committee for Quality Assurance, which provides accreditation of health plans and provides data and report cards through HEDIS, and the Foundation for Accountability are helping a great deal in the quality health care movement. Also, there are significant efforts in the area of outcome management. In the long term, this focus on increased quality will pay dividends in more effective and efficient health care delivery.

Increased cooperative efforts among employers, health plans and providers. Some employers are joining forces and are partnering with health care plans to improve quality and control costs. Examples include the Pacific Business Group on Health in San Francisco, Gateway Purchasing Assn. in St. Louis and the National HMO Purchasing Coalition. These groups have been successful in improving quality and lowering costs.

Other employers are bypassing the health plan and are contracting directly with providers. An example is the Minneapolis Business Health Care Action Group, a coalition of 25 employers. Other efforts have focused on identifying health plans that provide the highest level of patient satisfaction and quality, such as the Chicago Health Plan Value Project, sponsored by the Chicago Business Group on Health. This same group is considering expanding into a purchasing coalition. The outcome of these efforts is providing employees valuable information-satisfaction and quality indicators-upon which employees can make informed choices of health care plans.

Mergers and acquisitions. Mergers and acquisitions have received a fair amount of attention. There has been M&A activity with health plans as well as providers, such as hospital systems. If health plans and providers both are getting larger, then their respective increases in size, which equates to clout, is probably offset in the marketplace. That means there may not be an impact on price. Employers can hope these larger plans and providers reduce redundancies and become more efficient.

It is very difficult to predict what will happen with regard to health care costs. Many variables impact health care costs, only some of which have been discussed here. I am confident we will see increasing health care costs, most likely at levels higher than we have seen in the past three to five years.

As benefit professionals, we need to review our organizations' situations and take steps to help control costs. We cannot be complacent, but rather continually manage our health care costs. We need to avoid the knee-jerk reaction when high increases in health care costs are reported. What is needed is a long-term goal and a strategy to work toward that goal each year.

Material in this article does not constitute accounting, tax, investment, legal or business advice. Employers should review their specific situation with professional advisers.

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