Rising costs, rising concerns Featured

9:57am EDT July 22, 2002
While many businesses have had fairly low operating cost increases thanks to a low inflation rate, the same cannot be said of health care costs.

A recent survey showed employer-provided health care benefit costs may rise as much as 13 percent this year, while prescription drug card benefits may rise up to 15 percent.

The results are from a nationwide survey of HMOs, third party administrators and health insurers conducted by Buck Consultants, a human resources consulting firm.

“We found that the companies surveyed are all reporting you will see single- to double-digit increases,” says Harvey Sobel, principal and consulting actuary for Buck Consultants. “Also, if they undershot in ’98, they’ll add in some additional increases to catch up. The bottom line is, you will see some increases, and depending on how your carrier did its pricing last year, some may be far worse than others.”

Health care prices have been relatively flat in recent years, with cutthroat competition keeping them down. But many insurers have squeezed the easy savings out and are now looking at price increases as the means to profitability.

“I think there’s still more fat in the system, but the nature of health care is such that you don’t see the same technology gains like you do in the manufacturing sector,” says Sobel.

In manufacturing, a new machine might be expensive when it first hits the market, but the price drops as manufacturers learn to make it better and cheaper. With health care, there’s always a demand for newer, better machines, and a great deal of the costs are “people” costs. A one-hour office visit 10 years ago is still a one-hour office visit.

Drug costs are also on the rise, even in generic form. Some manufacturers have begun “shadow pricing” generic drugs, pushing them closer to the cost of the name brand product. For example, a name brand prescription might have been $150 with a generic alternative available for $50. The generic price might be pushed up to $100 — still less than name brand, but a significant increase. There has also been increased utilization rates, higher R&D costs and drug manufacturers are keeping their healthy profit margins.

Consolidation in the health care market has also led to fewer players, so there is less pressure on price. Regulators are also more likely to approve larger rate increases to prevent lesser providers from becoming insolvent.

“Carriers have less to fear from a market share standpoint,” says Sobel. “They are being a little more conservative in setting their rates.”

According to the survey, health insurers are projecting average medical care cost increases ranging from 5.6 percent for HMOs to 12.6 percent for comprehensive major medical plans. Increases for Preferred Provider Organizations average 9.8 percent, while increases for Point-Of-Service plans average 7.3 percent. These percentages are weighted by each insurer’s number of covered lives.

At a glance

Health care prices are going up.

  • Average increases are 5.6 percent for HMOs and 9.8 percent for PPOs.

  • Stand alone prescription drug programs are expected to increase 15 percent.

  • Increased utilization, less competition, government mandates and less cost-cutting are helping drive prices up.

  • Insurance regulators are less likely to deny rate increases because of potential solvency problems with some insurers.