Health-Care Costs: The Painful Truth

Milliman USA's Steve Cigich explains why consumers will have to bear a bigger share of soaring medical expense

By now, your employer has probably sent out your benefits-enrollment package for 2003. And you've probably noticed a hike in your health-care premiums and costs, especially if you're in an HMO. Ouch.

Better get used to it. Steve Cigich, an actuary with consulting company Milliman USA, says employees will be asked to take on increasingly higher percentages of their health-care costs. Milliman, which recently completed its annual survey on employer health-care costs, estimates that HMO costs will rise 14% to 19% in 2003. According to the 2002 HMO Intercompany Rate Survey, HMO premiums for employers rose 16% to 22% in 2002, in line with the increases experienced in each of the last three years.

Cigich recently spoke with BusinessWeek Online Reporter David Shook about the factors driving up health-care costs and the effect of such soaring inflation. Edited excerpts of their conversation follow:

Q: What factors are driving the cost increases in premiums?


All health-care costs are rising. But the biggest increases are in outpatient and physician services, mainly expensive, high-tech treatments or diagnostic procedures -- radiation, MRIs, X-rays and lab tests, laparoscopic surgery, body scans.

This type of outpatient care is increasing in frequency and cost not only because of the higher acquisition cost of technology but also the higher demand from consumers. And there's also the tendency of doctors to do more expensive diagnostic tests simply for liability protection.

Q: The kinds of price increases both employers and employees are being hit with don't seem to be sustainable. What's the solution?


We're seeing the emergence of so-called consumer-driven health care, where employees play a greater role in decisions on their health care, have better access to information to make informed decisions, and share more in the costs.

This means more point-of-service plans, higher deductibles and co-payments, and in general, policies in which employees have more financial responsibility for their health care and where employers provide better information to employees on their choices. The employee share of total medical spending is 15% to 20%. I think we'll see that percentage increase quite a bit.

Q: I've heard the argument that if you raise deductibles and co-payments, employees will make more frugal decisions about their health care -- which implies that patients now make frivolous ones, such as visiting the doctor unnecessarily. This argument seems flawed.


Lots of people visit the doctor when they may not need to. We've looked at numerous studies which show that when you give the employee greater information to make decisions about their health care and also a greater burden for the cost, spending decreases.

Successful companies in the future will start managing health-care costs like any other aspect of their business. They will engage employees in a solution that best suits them and promotes efficient use of health care.

Q: Who visits the doctor when they don't need to? And would people really choose less health care for themselves or their children if it meant more out-of-pocket expenses?


There are many times when health care is unavoidable. But I think many of life's aches and pains don't necessarily need professional medical care.

I recently saw an ad for 2-for-1 specials on full body scans, which some insurers cover. Then there are massages, which even some HMOs cover. People are treated for chronic fatigue, a headache, or a cold, or they might pay for a prescription drug such as the painkiller Vioxx when generic ibuprofen works fine.

Q: Doctors don't have much incentive to refuse to offer medical treatment that's paid for by a patient's insurance company. So, why are insurance companies paying historically high costs for hospital care and physician practice care? Why isn't there more HMO resistance?


When HMOs started out, their business model was, "We'll manage your health care as efficiently as possible." But HMOs also began pre-authorization on all sorts of tests and procedures and prescriptions, as well as "concurrent review" of such decisions as to whether a patient should remain in the hospital or be sent home after receiving care.

Hospital caregivers and doctors became incensed. Patients were outraged. And in the late 1990s, the economy was great, and we had a tight labor market. Companies had more money to spend on employee health care and workers had more disposable income. Many people opted for more expensive PPOs (preferred provider organizations) and point-of-service plans, which allowed more flexibility at a higher cost. Plus, HMOs relaxed their rules to a certain extent and simply passed on the higher costs they incurred to employers. Hence the reason we now see HMO costs increasing 16% to 22%.

Q: Are there any good results from the legacy of strict HMO cost containment in the 1990s?


Managed care pushed practice guidelines on the medical community. These are [now] clinical guidelines for a physician to follow. This was a great idea. There are not 10 best ways to treat something. There's one best way. Managed care also helped to consolidate physician practices, which lowered costs for everyone.

Q: What about the effect of generic drugs, such as knockoffs of the antidepressant Prozac and the ulcer medication Prilosec? Haven't the new generics lowered health-care spending?


The rate at which prescription drug costs increased last year was 12.7%, below the overall growth rate for the first time since we began tracking drug spending in 1996.

When generic [alternatives are available,] roughly 80% of prescriptions are filled generically. But we've found that about 50% of prescription drugs are single-source branded medicines, meaning that they have no commercial or generic alternative yet. So there's no opportunity to switch to a lower-cost medicine.

Q: Flexible spending accounts are pretax accounts set up through employers but funded by employees to meet health costs not covered by insurance. How helpful are such accounts to employees?


FSAs are a pretty old concept, and we've found that only about 30% to 35% of employees use them at the companies that offer them. The drawback is that these funds are a use-it-or-lose-it deal. If you don't use the money by the end of the year, the employer can keep it.

Plus, it's cumbersome for employees to guess how much their marginal health-care costs will be in the coming year and then save all the receipts to seek reimbursement from the fund.

Q: Is the government weighing any alternatives?


The so-called health-care reimbursement arrangements. These are plans where employers can set aside money for employees in accounts that don't have to be depleted each year.

For employers, these accounts wind up being unfunded liabilities -- an employer promise that may or may not be exercised by the employee during his or her employment, depending on the employee's medical needs.

If the employees don't use the funds for extra medical needs or if they leave the company, they never receive the funds. The employer keeps them. However, the funds roll over into the next year for the employee if the money isn't used and he or she remains with the company. Under a recent IRS ruling, [it was decided] that these accounts weren't taxable, so they're bound to become more popular.

Edited by Patricia O'Connell

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