Health care costs, and consequently the rates you pay for your employees’ health plans, have been rising at a rate almost double the rate of inflation over the last several years. Most employers simply cannot avoid facing vastly increasing rates for medical plans, year after year.
Companies nationwide are facing these types of increases, but why are health care costs rising so high, so fast? According to Isaac Sapoznik, an agent with Sapoznik Insurance, there are several factors.
“To begin to understand why employee medical plan rates are rising so dramatically, you must first understand that the overall costs of health care are skyrocketing across the U.S. — the biggest surge in medical inflation since the early 1990s,” Sapoznik says.
Smart Business spoke to Sapoznik about the rising cost of health care and what companies can do about it.
How has the aging of America affected health care costs?
It is an indisputable fact: the U.S. population is aging. While the number of older Americans is increasing, the number of children and younger people is remaining stable and even decreasing for some age groups, according to the U.S. Census Bureau. As the population ages, there is a subsequent rise in the occurrence of chronic diseases, like asthma, heart disease and cancer, and a resultant need for more resources to fight these diseases. This leads to elevated utilization of prescription drugs and other medical services and an overall rise in health care spending.
Why has the cost of prescription drugs risen so high?
Pharmaceutical research is continually providing treatment breakthroughs that should not be impeded, but the costs associated with this progress is undoubtedly having an impact on insurance companies and managed care organizations, and consequently on employers who sponsor employee health plans. Prescription drug costs have become a major component of health plan costs, with managed care plans (HMOs) being hit especially hard because of the generous drug benefits those plans tend to offer. The reasons for the increase in spending on prescription drugs are many, and include the following:
- Introduction of new brand-name drugs to
the marketplace. These drugs are often more
effective than the ones they replace, but this
innovation bears a hefty price tag for insurance companies, employers and employees.
- A general increase in the number of prescription drugs being used. Basically, more
people are using more prescription drugs,
thereby driving overall spending upward.
- Those with insurance are more likely to
use prescription drugs than those without,
and the growing prevalence of managed care
plans that offer generous drug benefits has
fueled increased prescription drug use.
- With the general aging of the population,
there is a higher incidence of chronic disease
and an increase in the use of pharmaceuticals
to treat those conditions. Pharmaceuticals
play a primary role in increasingly aggressive
diagnoses and treatment methods.
- Direct-to-consumer advertising of prescription drugs — outlawed by the FDA until 1985 — has grown by leaps and bounds over the last decade. Critics of this practice feel that promotion of drugs directly to consumers, rather than to doctors, creates inappropriate consumer demand and utilization. In addition, many feel that drug prices could be lower if drug manufacturers did not spend huge sums of money on advertising.
Does the government regulate health care enough?
Health insurance, and more specifically managed care, is one of the most regulated insurance sectors on both the state and federal level and has become one of the most highly debated topics in the political arena. State and federal mandated benefits have increased 25-fold over the last three decades. Often these mandates duplicate or conflict with each other, and usually come with increased costs for the health care system. For example, the Health Care Portability and Accountability Act of 1996 (HIPAA) continues to influence the operations of many health plans seeking compliance. According to a study by PricewaterhouseCoopers, HIPAA is responsible for adding billions of dollars of new compliance costs to the health care system. Besides HIPAA, there are more than 1,500 mandated benefits at the state and federal level. Each of these has a cost associated with it, and together they have had a significant impact on health care costs.
How have new medical technologies affected health care?
Life expectancy and mortality rates in the U.S. are steadily improving. Developments in medical technology, including methods for early detection of disease and the introduction of new treatments and medications for acute illnesses have played a major role in enhancing these statistics. These new procedures come with hefty price tags and are influential in driving overall costs of health care — and the cost of benefits — upward.
You, like other employers, are undoubtedly trying to determine how to keep accelerating health plan rates from having a serious financial impact on your company. Contact a strong employee benefits agency or broker to help your company implement more consumer driven plans. The introduction of increased coinsurance and higher deductible health plans can help make employees more conscious consumers of their health care and allow employers to continue to offer valuable workplace benefits.
ISAAC SAPOZNIK is an agent with Sapoznik Insurance. Reach him at (305) 948-8887 or IsaacS@sapoznik.com.