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The Cost of Having Healthcare Choices

Throughout our lives, each of us must make choices between unpleasant options. For example, our backyard deck is due for a major overhaul since many boards have rotted.  Should we hire a reputable carpenter to replace our deck, which can be very expensive? Or, should I perform the work myself, which may take longer and not look as great? Given my lack of carpentry experience, neither choice is desirable, yet a new deck must be built.

In healthcare, given the paucity of price and outcomes information, we frequently face unpleasant options between the providers (physicians and hospitals) we use and the health plan coverages available for purchase.  Both provide uneasy choices that test our abilities to become full-fledged ‘consumers.’

To become knowledgeable consumers, Americans want to have numerous options available before making a purchase. This is the nature of a market-based economy that allows transparency to keep vendors honest and accountable for their products and services. In a functional marketplace that allows for cost and quality transparency information, sellers are nudged to provide the best possible ‘product’ at the most competitive cost – a winning recipe for delivering ‘high value.’

Cost of Healthcare

According to a recent article, “Healthcare Costs are Bankrupting Us,” by H. Gilbert Welch and Elliott Fisher, among the 54 prescription drugs commonly-used by Americans age 65+, Medicare pays “nearly twice as much per dose as do the government systems in Canada, England and Norway.” Open heart surgery costs 70 percent more than the next highest country, while an appendectomy is over two times more. We pay five times as much in our hospitals than other developed countries. Why? According to the authors, we have a complicated insurance system that requires “an army of billing clerks – employed by hospitals and physicians on one side and private insurance companies on the other.” Because of this, U.S. employer-sponsored health costs continue to outpace other developed countries.

Similarly, another article written by Elisabeth Rosenthal, MD, “Those Indecipherable Medical Bills? They’re One Reason Health Care Costs So Much,” paints the picture of a costly “coding war” between healthcare providers who hire legions of consultants to find ways to “upcode” procedures in medical bills. Not to be outdone, insurers hire their own coding consultants to protect their interests. Meanwhile, the patient gets lost in the complicated claims process – another reason why prices are not transparent to the public.

Cost of Health Insurance

As we all know, rising health insurance premiums have eaten into take-home pay over the years. In Iowa, the 2016 premium for family health coverage was $15,743, which is 186 percent higher than the family premium in 1999 ($5,508). This family premium is 28 percent of the Iowa household income (adjusted for inflation). In the next 10 years, using the average five-year premium growth rate in Iowa (7.7 percent), the family premium would climb to $33,056 – growing to 52 percent of the household income (assuming a 1.5 percent annual increase).

About two-thirds of the Iowa family premium is paid by the employer. Because of high-premium growth over the past decades, incomes of workers are suppressed. After paying for health premiums, take-home money is then used to pay for escalating health-plan deductibles, copayments and coinsurance. This financial tension contributes to personal bankruptcy and emotional stress – not to mention impairing the overall health and well-being of the workforce – a primary purpose for employers offering health coverage.

The Premium Dollar

In March, America’s Health Insurance Plans (AHIP), a national association of health insurers, released a simple chart showing where the premium dollar has been spent during 2014. This chart is based on national data for insured patients under age 65 for commercial and nonprofit health insurance companies. The breakdown of the premium dollar is as follows:

  • Prescription Drugs – 22.1 cents
  • Physician Services – 22.0 cents
  • Outpatient Services – 19.8 cents
  • Inpatient Services – 15.8 cents
  • Operating Costs – 17.8 cents
  • Net Margin – 2.7 cents

Aside from Medicare and Medicaid, which have lower operating costs compared to private (commercial) insurance, almost 80 cents of the premium dollar for private plans is used for medical expenses, while the remaining 20 cents flows to operating costs and net margin. The operating costs for private plans in the U.S. are about twice as high as the overhead costs in other less-complex healthcare systems around the world.

Medical Loss Ratio Status?

Prior to the passage of the Affordable Care Act (ACA) in 2010, many insurers who sold individual health policies admitted that between 55 – 65 cents of the premium dollar was spent on medical expenses, and the remaining amount was retained by the carrier. The ACA established the “medical loss ratio (MLR),” so that at least 85 percent was spent for medical services by large insurers and at least 80 percent was spent by smaller insurers. Of note, should the ACA be repealed, replaced or repaired, whether the MLR remains intact or not is yet another issue to be addressed.

When it comes to health insurance, Americans ‘appear’ to be willing to pay for the privilege of having choices among health insurance carriers and the multitude of plans offered by each carrier. But will having these choices really provide the added ‘value’ in the care we seek? In some cases, thanks largely to limited provider networks, we may (unknowingly) give up the freedom to choose among healthcare providers, such as physicians, hospitals and others. Will this undermine the competition we wish to have among our market providers?

As I ponder the unpleasant choices we have in healthcare, I must also focus on the backyard deck that awaits my attention.

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A BIG ‘Thank You!’

Jill Webb, Director of Human Resources, Dental Prosthetic Services

Jill Webb, Director of Human Resources, Dental Prosthetic Services

Since 1999, we have completed 18 annual employer benefits studies, surveying well over 13,000 employers. During that time, Data Point Research, Inc. has served as the backroom ‘engine’ for undertaking this survey process. I am grateful for the work they do and the professionalism they consistently demonstrate on behalf of my organization

Alex Glenn, Director of Human Resources, Generation Next

Alex Glenn, Director of Human Resources, Generation Next

As in the past three years, we offered a special incentive to employers who took part in this year’s survey. This year, participants were automatically entered into a random drawing for one of two Amazon Echos. This year’s winners are Jill Webb of Dental Prosthetics Services (Cedar Rapids) and Alex Glenn from Generation Next (Ankeny). Both recently received their Echos and were gracious to allow me to use their names and photos within this blog. Thank you, Jill and Alex. Again, congratulations, and we hope you enjoy your Echos!

A BIG thanks to the other 1,023 organizations who participated in this year’s survey! If your organization was one of this year’s participants, an email was sent to you on October 5th, with a unique link to download your FREE copy ($300 value). If you missed this email, please check your Spam or Junk email folders. Otherwise, please contact us.

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Ten-Year Projection of Employer Health Insurance Costs in Iowa

Projecting into the FutureI just can’t help it.

Give me some historical data and I want to run projections into the future. If it is good enough for Congress to rely on the Congressional Budget Office (CBO) to make budget projections based on assumptions that impact legislative proposals, why not do the same for Iowa employers on the health insurance they pay?

Many assumptions we make usually begin with a very short, yet powerful, word – ‘if.’ This word provides a fallback position for anyone who is willing to venture guesses on what the future may hold on any given subject matter. The Merriam-Webster dictionary explains how the word ‘if’ is used:

  • to talk about the result or effect of something that may happen or be true
  • to discuss the imaginary result or effect of something that did not happen or that is or was not true
  • to say that something must happen before another thing can happen

So, I want to make a few projections (not necessarily predictions) of what family health premiums ($15,743 in 2016) will be for Iowa employer-sponsored plans over the next 10 years (2017-2026). To do so, I will first need to make a few assumptions using the word, “if.” So here we go…

IF we assume over each of the next 10 years:

  1. Employers continue to offer health insurance coverage; and
  2. Employer-sponsored medical premiums increase by 7.7 percent (using the average annual growth in premiums between 2012 and 2016 received by Iowa employers PRIOR to making benefit plan changes); and
  3. Iowa employers make NO changes to their plans and accept this average increase; and
  4. Medical inflation is similar to 2016 rates and continues unchanged; and
  5. No deep recession (depression) has occurred; and
  6. ‘Pay-for-value’ reimbursement systems remain ‘experimental,’ meaning that there is no clear consensus on controlling costs and appreciably enhancing value of care delivered; and
  7. The average employer share of paying for family premiums remains at 68 percent of the total premium (employees pay the other 32 percent); and
  8. The median household income in Iowa during 2014, $53,816, increases annually by 1.5% to 2026; and
  9. Lack of political decisiveness continues without passing any new major health reform measures beyond what we currently have in 2016; and FINALLY
  10. Life continues as we currently know it today.

THEN we may see:

By the year 2026, total family medical premiums will have exceeded $33,000, which would be 51 percent of the projected 2026 median household income in Iowa ($64,344).

Ten-Year Projection of Family Premium at 7.7 Percent

IF we make the same assumptions above, but tweak #2 and#3 to make the likely assumption that employers WILL make changes to their medical plans to keep them more competitively priced, and that the average annual growth of premiums will increase by only 3.5 percent annually, the average family premium by 2026 will grow to $22,207, or 35 percent of the projected 2026 median Iowa household income. The power of compound rates can make a huge difference. In this case, the 2026 family premium would be $10,849 less using 3.5 percent compared to 7.7 percent.

Ten-Year Projection of Family Premium at 3.5 Percent

Before we become somewhat giddy about ‘saving’ this type of premium by using a lower percentage, it is important to understand what is NOT shown on this particular graph – how health plans will change by 2026 AFTER the employers make annual alterations to keep their plans affordable. Deductibles and out-of-pocket maximums would continue to increase, offsetting any potential ‘savings’ made by not having higher premiums. However, employees would assuredly bear the undeniable burden of paying more out-of-pocket expenses when seeking more expensive medical care.

In 2014, according to the Health Care Cost Institute, total annual spending was $660 less per person with those employees who had high deductible health plans, or about 13 percent less than spending in conventional health plans. But what is not known is if this ‘savings’ came from avoiding needless tests and procedures or employees skimping important (and necessary) treatment, which can be detrimental to long-term health.

Something tells me that the use of the word “giddy” will not be part of the 2026 health insurance vocabulary.

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