Price jitters Featured

10:03am EDT July 22, 2002

The miracle of managed care was supposed to be over. There were no more areas to trim waste and prices were sure to rise. In fact, many experts argued that the cost savings had come from moving people into a managed-care environment, and once everyone was in, prices would resume their skyward climb.

But it didn't happen. At least not for now.

"This is the second year in a row this phenomenon has happened," says Paul Ginsburg, president of Health System Change and co-author of a study looking at health-care cost trends. "The cost increases were expected to be steep, but when the data came out, it hadn't occurred."

The study, also co-authored by Jon Gabel, director of KPMG Peat Marwick's Center for Survey Research, is based on data from KPMG Peat Marwick, Milliman and Robertson and the U.S. Department of Labor. It incorporates the most recent information on cost trends, including 1998 private insurance premiums, 1997 provider revenues and 1997-98 health-service payroll figures. The study examines private-sector spending only and covers 1997-1998.

The analysis shows that employer-based health insurance premiums has grown only 3.3 percent in 1998, well below the 5 to 7 percent rates analysts projected just months ago. They found that premium increases were relatively uniform among health plans, ranging from 2.9 percent for HMOs and point-of-service plans, to 3.8 percent for PPOs. KPMG survey data showed that deductibles for conventional and in-network PPO and POS services are lower today than in 1994.

"The health plans had hoped premiums would rise rapidly," says Ginsburg. "Purchasers were much more vigilant and resistant to large rate increases than expected. The health-care market has changed in the last few years. It's much more competitive than it used to be. Ten years ago, the market might have been led to higher premiums."

Who's paying?

Two significant trends identified by the study are the fact that employee premium contributions are now declining and out-of-pocket spending is decreasing.

"That's a change from a few years ago, when employers were asking employees to contribute more of their share of the premium," says Gabel, director of KPMG Peat Marwick's Center for Survey Research.

That trend reversed or at least leveled off in 1995 and 1996. Since then, employee contributions to coverage have grown more slowly than premiums. Contrary to most assumptions, this study shows employee contributions have been declining during the past three years.

So why are employers picking up a greater share of the health-care tab?

The authors speculate that tightening labor markets may make businesses reluctant to pass on any more healthcare costs, or that many businesses may be slow in reacting to market changes in premiums.

The study credits the shift to managed care as partly responsible for a decrease in out-of-pocket spending. According to an analysis of data from the U.S. Department of Labor, out-of-pocket spending for medical care was 9 percent lower in 1995 than 1990.

"These low trends in out-of-pocket spending may be attributable to rapid shifts from conventional coverage to managed care," says Ginsburg.

But how long can these trends continue? Continued low-profit margins for insurers could accelerate a rise in premiums in 1999, but the dominant driver of higher premiums will be the underlying costs.

An acceleration of health costs could be triggered by a rapid introduction of new drugs or other costly technologies. Health costs also could rise more quickly if health insurers have increased difficulty reaping the deep discounts from providers that they have been able to elicit in past years. [TO<\p>HERE]

The highly competitive marketplace which has kept costs down, may also be eroding to some extent.

"I do see [less competition] in the short term," says Ginsburg. "There have been so many news stories over the past several months of insurers pulling out of certain markets, or merging with other companies. They are leaving markets where they weren't doing well."

Some of the low prices can be attributed to stiff competition. As insurers looked to expand market share, they moved into new markets and used price to take customers away from established companies. The insurers expected prices to rise after the initial cuts, but that hasn't been the case. Now faced with poor results, many companies are exiting the markets, and aren't looking to enter new ones.

"Some will set prices higher, even risking market share," says Ginsburg. "They can't continue with some of the losses they've been taking. Because of this aspect, you are more likely in '99 to see higher increases than in '98."

But once again, any increases will probably be held down by other factors, including wider use by providers of information about what constitutes best practices, growing application of secondary prevention measures, continuing excess capacity in the market and continuing demands by purchasers for low-cost health care.

"I envision something in the 6 to 8 percent range for next year," says Ginsburg. "But there is still plenty of competition, and I don't see much acceleration in the growth of underlying costs. Premium increases could stay moderate again."