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After 15 Years, Not Much Has Really Changed (Except My Age)

I recently was cleaning out some very old files and came across a document that I wrote 15 years ago. Before tossing it, I decided to read it just one last time.

In 2003, I authored a ‘Commentary’ for the ‘Iowa Commerce’ magazine, an Iowa Association of Business and Industry publication that is no longer in existence. The article was simply titled, “Rising Health Insurance Rates in Iowa.” Little did I know that this title would continue to reflect on the state of our healthcare 15 years later.

In fact, the circumstances then should seem rather archaic compared to today’s challenges, right? See what you think:

Health insurance rates have been increasing dramatically for the last several years in this country. More specifically, employers in Iowa are experiencing higher increases in health insurance costs than employers have been receiving nationwide. With such increases, what are the economic tradeoffs confronting Iowa employers each year?

Our firm, David P. Lind & Associates (DPL&A), recently completed the fifth “Iowa Employer Benefits Study©.” For the last three years, we have noticed a disturbing trend that is plaguing businesses in Iowa – health insurance rates are increasing faster in Iowa than in the rest of the country. For example, our 2001 study showed that health costs increased 17.4 percent in Iowa compared to the Kaiser Foundation Study, which showed an average increase nationally of 11 percent. In 2002, the DPL&A study found that health insurance rates increased by 18.7 percent in Iowa versus 12.7 percent nationally (Kaiser). Finally, in 2003, health insurance rates in Iowa increased by another 18.2 percent. The Kaiser study for 2003 has not been released as of this writing, but other national studies are again proving that Iowa is experiencing higher than average rate increases for health insurance. In fact, over the last five years, our study shows an average increase in health insurance rates of 55 percent in Iowa! Such staggering increases have a profound economic effect on Iowa employers and their ability to make capital improvements.

There are a few key reasons why health insurance rates increase faster in Iowa than nationally. According to Iowa Cares About Medicare, an advocacy group, the state of Iowa has the largest percentage of its population over the age of 85 in this country. In addition, Iowa currently has the fifth highest percentage of people over age 65. People over the age of 65 are eligible for Medicare, the federal health insurance program for the elderly. A report from the Center for Studying Health System Change finds that per person spending on health care increases an average of $40 a year for each year a person ages from 18 to 50. At age 50, spending begins to accelerate rapidly, rising an average of $152 a year for each additional year in age between 50 and 64.

Also, Iowa ranks among the highest states nationally in the percentage of individuals who are overweight, according to a study funded by the U.S. Centers for Disease Control and Prevention. That same study found that people who weigh too much are at an increased risk of heart disease, diabetes, most types of cancer, and other illnesses. It also showed that an obese Medicare recipient costs $1,486 more annually than a Medicare patient at a healthy weight. Unfortunately, Iowa ranks 50th in the country for the rate of Medicare reimbursement that Iowa providers receive when giving care to the elderly. Consequently, Iowa medical providers (hospitals and physicians) must shift costs to the private-payer side to make up for the shortfalls received from the Medicare program.

According to the Iowa Insurance Division, Iowa employers with fully-insured medical plans (self-insured employers excluded), have paid approximately $2.46 billion for medical insurance in the year 2002. With rate increases averaging over 18 percent during the past two years, Iowa employers could possibly pay $2.9 billion in medical insurance premiums for 2003, approximately $443 million more than paid in 2002. Again, this does not include self-insured employers (State of Iowa and many large employers) and self-employed individuals who have private health insurance. In our 2003 study, Iowa employers were asked the hypothetical question: “If your medical insurance premiums remain stable (do not increase) over the next 12 months, how might your organization apply these ‘savings’ elsewhere with the organization?”

Overall, 10.4 percent of employers responded that they would make capital improvements and/or equipment purchases. Smaller employers (less than 250 employees) were more likely than larger employers to make this “investment.” Confronted by this huge economic trade-off of lost capital, it becomes more difficult for employers (both nationally and in Iowa) to reinvest this money to grow their business.

Clearly this trend must abate. We should not spend our time blaming various industries or organizations for this problem, but rather, offer constructive solutions that address healthcare affordability without sacrificing quality of care. A meaningful and ongoing dialogue must develop between all the major “players” within the delivery (and payment) of our healthcare system that would create a new vision and leadership agenda for the future. Why not begin this dialogue in Iowa?

Again, this was written in 2003. Thankfully, the average annual rate increase reported this year by Iowa employers (8.4 percent) is less than half of what was reported 15 years ago (18.2 percent). However, the discussion of affordability continues to plague us today. Since I wrote this piece, the combined rate increase reported by Iowa employers (2004 – 2018) exceeds 140 percent – with no real end in sight.

Except for my age, not much has really changed regarding the escalation of healthcare costs.

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Why Do Our Health Insurance Rates Continue the Upward Climb?

Let’s state the obvious at the very beginning: The health insurance premiums we pay are a derivative of the healthcare (and administrative) costs we incur. As healthcare costs increase, so too, will our health insurance premiums.

One datapoint from the Iowa Employer Benefits Study© that has proven to be THE fixation each year is the rate health insurance premiums have increased. The results in 2018 are no exception. Iowa employers, regardless of employee size and industry, reported they experienced a size-weighted increase of 8.4 percent.

What this metric fails to tell us, however, is WHY this continues to happen every year – a phenomenon somewhat akin to what Bill Murray’s character experienced each day in the movie, ‘Groundhog Day.’ Like Murray, we continue to relive our past.

Healthcare spending in our country is quickly approaching 20 percent of our economy, about double what is found in other high-income countries. In 2019, this ‘crisis’ will be 50 years strong, with no signs of abatement. Worth noting, national health expenditures in 1969-70 was just 6.9 percent of GDP.

Unfortunately, finding comparable data that can easily provide insight on WHY healthcare consumes about one-fifth of our economy is difficult. If we can understand the fundamental reasons for higher costs, we can then make the necessary corrections to address the core problems that continue to plague our economy and adversely impact the personal purchasing power of most Americans.

We all have our own theories, credible or not, about this WHY question. Some of these theories typically include:

  • Americans are higher utilizers of care (compared to other industrialized countries) and that is WHY we pay more – because healthcare consumption is really a volume problem.
  • Tied closely to the theory above, is the belief that the U.S. lacks enough primary care physicians but has too many specialists who charge more for their services.
  • High usage of prescription drugs, in addition to our inability to negotiate favorable price concessions with drug manufacturers.
  • A fee-for-service reimbursement system that incentivizes healthcare providers to give us excess (and usually unnecessary) care.
  • A broken malpractice system that drives excessive defensive spending.
  • The U.S. under-invests in beneficial spending of social programs compared to other advanced countries. By not investing in the ‘social determinants of health,’ we pay the eventual price of having a sicker population that uses more healthcare and that drives high healthcare spending.
  • A national culture that refuses to face death, and instead, spends excessively at the end of life.

On the surface, any of the above theories have merit, perhaps merit that can even be substantiated. However, when taking a deeper dive, some theories may shake out as myths.

Unmasking Some Popular Myths

Recently, a report in JAMA indicated that healthcare utilization in the U.S. is not what we have historically believed. It turns out that, “When it comes to utilization, there is no compelling case that the U.S. rates are substantially higher than comparator countries.” Admittedly, we do have more CT scans, knee replacements and higher cardiac procedures than other countries. But we have fewer hip replacements, and overall hospital days, and physician visits per population. The authors of this work make the point that “we certainly do not overuse services at such a rate to meaningfully explain spending that’s twice as much as comparator countries.”

It is important to note, however, according to a 2017 article published in Health Affairs, there is excess utilization of many low-value services in the U.S. Because these low-value services are also low cost, this does not appear to impact the spending differences between the U.S. and other countries.

The fee-for-service (FFS) payment structure is widely believed by many to push health costs upward, but FFS does not have the impact on costs as popularly perceived. Rather, FFS adversely impacts accountability in how healthcare is delivered and undervalues the quality we expect to have. Eliminating FFS to keep costs down may provide some relief, but its demise is more about initiating better practices of care.

A 2016 article in JAMA basically found the spending for end-of-life utilization in the U.S. to be in line with other countries, meaning that it is also high everywhere. End-of-life spending occurs due to uncertainty about when a person is going to die – we spend a great amount of money on people who are really sick, but they die anyway. Because most other countries are similar to our perceived “unique culture” in the U.S., this narrative does not hold true on why costs are higher in the U.S. than elsewhere.

Two (Primary) Reasons for Grossly High Health Costs

I’ve just spent some time debunking commonly-held beliefs on why healthcare costs are high in the U.S. (and Iowa). Harvard professor and physician, Ashish Jha, one of the authors to the JAMA article that refutes high healthcare utilization in the U.S., provided a fascinating discussion about understanding healthcare costs to the Senate Committee on Health, Education, Labor, and Pensions this past June.

Jha argues that two major culprits are responsible for gobbling up the U.S. GDP:

  1. Administrative Complexity
  2. High Medical Prices
Administrative Complexity: 

As consumers of goods and services, Americans love to have many choices available to them – and healthcare is no different.  We desire choices in the providers who perform the care we seek and in the various health plans we purchase – either individually or through our employers. But with choices come complexity and additional costs. In healthcare, how many choices become too many?

Fragmentation of our healthcare system centers around the number of health insurers – we have about 858 insurers in the U.S. With each insurer, there are various protocol requirements by physicians and hospitals when confronting billing and insurance-related activities. There is a myriad of different claim forms, hoops to jump through to ensure a claim will be paid, zillions of different benefit plans that require unique compliance procedures and varying challenges of claim denials.

When compared to other high-income countries, the costs of administrative inefficiencies in the U.S. are enormous. One aggressive 2014 report puts this cost at 30 percent of total healthcare spending. Another more cautious report from the OECD uses a narrower definition of administrative costs and estimates the U.S. to be at eight percent, which is over twice the average of other advanced countries.

High Medical Prices:

Reinhardt et al. (2003) argued in a Health Affairs article, “It’s the prices, stupid.” Again, compared to other industrialized countries, the U.S. has the highest prices for medical goods, services and labor – and nearly all brand-name drugs. A recent Wall Street Journal article, “Why Americans Spend So Much on Health Care,” states that “Among the reasons (for high medical prices) is the troubling fact that few people in health care, from consumers to doctors to hospitals to insurers, know the true cost of what they are buying and selling.”

Primary care doctors are paid, on average, $218,000 in the U.S. – about $85,000 more than similar physicians in advanced countries. Computed tomography (CT) scans, MRIs, colonoscopies and many other procedures are about double the cost compared to other countries. As an example, I recently had a CT scan performed at a Des Moines hospital, taking no more than five minutes. I learned a month later through my insurance company’s Explanation of Benefits, that the charge was a whopping $8,323.01, while the network ‘savings’ was $7,608. I would love to learn how that charge (and write-off) was determined!

Jha points out in his comments to the Senate committee that Prince Louis, the “royal baby” born to Kate Middleton and Prince William earlier this year, was delivered in a “luxurious private maternity ward in expensive London.” The Economist article cited by Jha indicated the cost was $8,900 for this delivery, while the ‘average’ delivery cost in many U.S. communities is around $10,800 – but can be much higher depending on the location. Even the cost of the best and most luxurious delivery care in London pales to what us common folk have in this country. Put another way, the delivery cost of the ‘royal baby’ was comparable to the exaggerated charge of my five minute CT scan!

Of course, it might be somewhat of an equalizer if the care we received in the U.S. outperformed care in these other countries. It does not. In 2017, The Commonwealth Fund ranked the U.S. as the lowest performing country when compared to 10 other countries. Healthcare outcomes, in addition to access, administrative efficiency and equity placed a dismal 10 or 11 in these categories.

Administrative inefficiencies and high medical prices are two simple evils found in the healthcare cost crisis. Sounds as though the solutions should also be simple – tackle the factors that determine prices and simplify administrative services. We must combat a dysfunctional healthcare ‘system’ that desperately needs infusion of common sense and the embracement of the right incentives to perform efficiently. Doing so would drive competitive battles to reduce costs to a more reasonable level.

Until then, the premium increases experienced by employer-sponsored plans will continue into the foreseeable future.

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New 2018 Lindex® Scores Revealed!

New 2018 Lindex® Scores Revealed!We’ve just released the new Lindex®scores based on our 2018 Iowa Employer Benefits Study©. Introduced in 2013, the Lindex is an innovative tool that allows Iowa employers to distill voluminous and complicated benefits data into one relevant number.

An organization’s Lindex score will help Iowa employers:

  • Determine the competitiveness of their benefits package.
  • Attract and retain a high-quality workforce.
  • Decide whether benefit changes are required to keep your employee benefits competitive.

The Lindex is a composite score used as a reference when determining the quality of benefits offered by Iowa organizations. This index is the result of a sophisticated calculation based on the benefits data submitted by 1,001 Iowa organizations from the latest 2018 Iowa Employer Benefits Study©.

Calculated once a year, the Lindex ranges from 0 to 100, with low scores reflecting fewer benefits offered at a higher cost to employees, while higher scores indicate more benefits being offered at a competitive cost.

In 2018, the overall Lindex score for Iowa employers (regardless of employer size and industry) is 76. The overall Lindex score from two years ago was 74. A primary reason for the overall score jumping up two points from 2016 is a result of more small employers offering health and dental coverage.

The Lindex score will vary based on the employer size and industry, which are two determining factors that affect employee benefits. For example, employers with fewer than 10 employees have a Lindex score of 65 (64 in 2016), while employers with 1,000+ employees averaged 86 (89 in 2016).

Below is a summary of the Lindex scores based on organization size:

2018 Lindex by Organization Size

Employers in the retail industry averaged 70 (64 in 2016), while healthcare/social services employers averaged 73 (70 in 2016). Below is a summary of the Lindex scores based on industry:

2018 Lindex by Industry

It’s important to note that an organization with a Lindex score of 62 might appear to be somewhat low when compared to the overall statewide score of 74, but if this score is above the average Lindex score for similar organizations based on size and industry, then it could be considered a competitive score for that organization.

Our 2018 Iowa Employer Benefits Study© and/or benchmarking tool is now available for purchase.

Should you wish to learn more about the Lindex, and how your organization can obtain your own Lindex score, please visit the Frequently Asked Questions (FAQ) section of our website.

To stay abreast of employee benefits and healthcare issues, we invite you to subscribe to our blog.