Increasing Health Care Costs and Your Employee Health Plan

Presented by: GDI Insurance Agency, Inc. 10/12/2010

Where Are We?

A Snapshot of the Health Care Cost Situation

• Health care costs have been increasing at an alarming rate for nearly a decade • Upward trend in health care costs are slowing, yet cost increases are outpacing the rate of inflation. • Costs increased in 2008 and are expected to increase slightly in 2009.

National Trends

Average Annual Health Care Cost Increases
Annual Health Care Cost Increases, National Averages 2001-2009
16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

15.2%

14.7% 12.3% 9.2% 7.9% 5.3% 6.0% 6.4%

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 (proj.)
Source: Hewitt Health Value Initiative, 2008

National Trends

Health Benefit Costs
2008 Health Care Cost Increases, Major Metropolitan Areas
Atlanta Boston Chicago Dallas/Ft. Worth Denver Detroit Houston Los Angeles Minneapolis New York City Orlando Philadelphia San Francisco Tampa Bay Area Washington, D.C.

7.2% 4.5% 3.7% 8.1% 5.3% 7.5% 2.6% 7.5% 9.1% 8.7% 9.2% 8.1% 6.7% 7.1% 6.7%
2.0% 4.0% 6.0% 8.0% 10.0%

0.0%
Source: Hewitt Health Value Initiative, 2008

National Trends

Health Benefit Costs
Annual Health Care Costs Per Employee, National Averages 2002-2009
$10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0

$4,914

$5,639

$6,334

$6,915

$7,464

$7,857

$8,331

$8,863

2002

2003

2004

2005

2006

2007

2008

2009 (proj.)

Source: Hewitt Health Value Initiative, 2008

National Trends

Health Benefit Costs
2008 Health Care Costs Per Employee, Major Metropolitan Areas
Atlanta Boston Chicago Dallas/Ft. Worth Denver Detroit Houston Los Angeles Minneapolis New York City Orlando Philadelphia San Francisco Tampa Bay Area Washington, D.C.
$0

$7,677 $9,477 $8,147 $9,277 $8,062 $8,374 $8,740 $7,296 $8,766 $8,540 $7,573 $8,634 $8,696 $8,331 $7,552
$1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 $10,000

Source: Hewitt Health Value Initiative, 2008

National Trends

Shift to Consumerism Yields CDHP Growth
• Percentage of all employers offering a consumerdirected health plan (CDHP) based on either a health reimbursement account (HRA) or a health savings account (HSA) continues to rise (increase in 2008 from 7 to 9 percent, as small employers adopted these new types of plans). • Growth in CDHPs was strongest among larger employers. Offerings rose from 14 to 20 percent among employers with 500 or more employees, and from 41 to 45 percent among jumbo employers (20,000 or more employees). • Nationally, enrollment in CDHPs rose from 5 to 7 percent of all covered employees.

National Trends

Shift to Consumerism Yields CDHP Growth

• CDHPs delivered substantially lower costs per employee than PPOs or HMOs in 2008. They cost an average of $6,207 per employee, compared to $7,768 for HMOs and $7,815 for PPOs. • Employer account contributions are a standard feature of HRAs but not HSAs – over one-third of all large HSA sponsors do not contribute. • If an HSA sponsor contributes, it is approximately $694.

National Trends

Factors Leading to Increased Health Care Costs • Several market conditions working in tandem have led to a decade of unrelated health care cost increases. • Understanding annual health plan renewal rate increases is essential in formulating alternatives and solutions to plan challenges. It is also pertinent for educating employees about the rationale behind any plan or contribution changes being introduced.

How Did We Get Here?

Factors Leading to Increased Health Care Costs

• Demographics o There is a subsequent rise in the occurrence of chronic diseases – asthma, heart disease and cancer – and a reluctant need for more resources to fight these diseases. o Leads to elevated utilization of prescription drugs and other medical services, and an overall rise in dollar expenditures on health care.

How Did We Get Here?

Factors Leading to Increased Health Care Costs • Demographics • Dramatic Rise of Prescription Drug Costs

How Did We Get Here?

Dramatic Rise in Prescription Drug Costs • According to Centers for Medicare & Medicaid Services (CMS):
o Spending in the U.S. for prescription drugs was $216.7 billion in 2006 – more than five times the $40.3 spent in 1990. o Prescription drug spending has been a fairly small proportion of national health care spending compared to hospital and physician services (10 percent in 2006, compared to 31 percent and 21 percent respectively) it is one of the fastest-growing components, until recently growing at double-digit rates compared to single-digit rates for hospital and physician services.

National Trends

Average Annual Health Care Cost Increases
Average Annual Percentage Change in Selected National Health Expenditures, 1996-2006

Figure 1: Average Annual Percentage Change in Selected National Health Expenditures, 1996-2006
20 18 16 14 12 10 8 6 4 2 0
18 13 13 14 15 15 14 11 6 3 6 7 8 9 8 8 8 9 7 7 8 9 7 7 6 7 6

3

4

4

5

5 5

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Hospital Care

Physician & Clinical Services

Prescription Drugs

Source: Kaiser Family Foundation calculations using National Health Expenditure historical data from Centers for Medicare & Medicaid Services.

National Trends

Average Annual Health Care Cost Increases
Percent of Total National Prescription Drug Expenditures by Type of Payer, 1990-2006

Figure 2: Percent of Total National Prescription Drug Expenditures by Type of Payer, 1990-2006
60 50 40 30 20 10 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 Source: Kaiser Family Foundation calculations using National Health Expenditure historical data from Centers for Medicare & Medicaid Services. 26 18 31 20 56 49 43 36 22 43 35 21 48 31 22 49 50 48 44 34 28 25 22

Consumer Out-ofPocket Private Health Insurance Public Funds

28 23

26 25

National Trends

Average Annual Health Care Cost Increases
Distribution of Total Public Prescription Drug Expenditures by Type of Payer, 2005 and 2006
Figure 3: Distribution of Total Public Prescription Drug Expenditures by Type of Payer, 2005 & 2006
25%

2005
7% 21%

68%

2006

26% 53%
0% 10% 20% 30% 40% 50% 60% 70% 80%

Other Public

Medicaid

Medicare

Source: Kaiser Family Foundation calculations using National Health Expenditures historical data from Centers for Medicare & Medicaid Services.

How Did We Get Here?

Dramatic Rise in Prescription Drug Costs • Primary reasons for increased drug costs o Increased utilization
• More people are using more prescription drugs, which drives up spending. From 1997 to 2007, the number of prescriptions purchased increased 72 percent (2.2 billion to 3.8 billion). U.S. population growth was only 11 percent. • Average number of retail prescriptions per capita increased from 8.9 percent in 1997 to 12.6 in 2007. • Percentage of the population with a prescription drug expense in 2005 was 59 percent (under 65) and 91 percent (over 65). (Stat has remained fairly consistent since 1997.)

How Did We Get Here?

Dramatic Rise in Prescription Drug Costs

• Primary reasons for increased drug costs o Increased Prices
• Retail prescription prices increased an average of 6.9 percent a year from 1997 to 2007 (from an average price of $35.72 to $69.91). This is more than 2.5 times the average annual rate of inflation (2.6 percent) over that decade. • In 2007, the average brand name prescription was over three times that of the generic ($119.51 versus $34.34).

How Did We Get Here?

Dramatic Rise in Prescription Drug Costs • Primary reasons for increased drug costs o Changes in Types of Drugs Used
• As new drugs enter the market and existing ones lost patent protection, spending is affected. If new drugs are used in place of less expensive, older ones, spending increases overall. • If new drugs supplement rather than replace old drug treatments, or if they treat a condition not previously treated, spending can increase. • New drugs can reduce spending if they enter the market at a lower price point than existing drugs, or when existing brand drugs lose patent protection and face competition from lower priced generics.

How Did We Get Here?

Dramatic Rise in Prescription Drug Costs • Primary reasons for increased drug costs o Advertising
• Spending for consumer advertising in 2007 was more than four times the amount spent in 1996 ($3.7 billion versus $0.8 billion), while 2007 physician advertising was almost two times the 1996 amount ($6.7 billion versus $3.5 billion). • Congress and the FDA are currently considering prescription advertising rules.

How Did We Get Here?

Prescription Drugs and Insurance Coverage

• Uninsured adults ages 18 to 64 are more than twice as likely as those who are insured to avoid filling a prescription, cutting up pills or skipping doses of medication because of costs. o Drug coverage comes from the following sources:
• Employer coverage • Medicare • Medicaid

How Did We Get Here?

Prescription Drugs and Insurance Coverage

• Employer Insurance Coverage: o Provides 177 million Americans with coverage in 2007 (59 percent). o 60 percent of employers offered health insurance to employees in 2007, and 65 percent of employees are covered under those plans. Most covered employees have a prescription drug benefit (98 percent).

How Did We Get Here?

Prescription Drugs and Insurance Coverage

• Medicare: o The Medicare Prescription Drug, Improvement and Modernization Act of 2003 put into effect a voluntary Medicare outpatient drug benefit (Part D) under which 44 million Medicare beneficiaries can enroll in private drug plans.

How Did We Get Here?

Prescription Drugs and Insurance Coverage

• Medicaid: o Joint federal-state program that pays for medical assistance to 60 million low-income individuals and is the main source of outpatient pharmacy services to the low-income population. o There are differences in state policies with regard to copayments, preferred drugs and the amount at which prescriptions can be filled.

How Did We Get Here?

Curbing High Prescription Drug Costs

A variety of public and private strategies have been employed to try and contain rising prescription drug costs, including: o Utilizing management strategies o Discounts and rebates o Medicaid o Medicare o Purchasing Pools o Consumer Action o Importation

How Did We Get Here?

Prescription Drugs and Insurance Coverage • Utilization Management Strategies: o Health plans have excluded certain drugs from coverage, used quantity dispensing limits and increased enrollee cost-sharing amounts.
• In 2007, 75 percent of workers with employersponsored coverage had a cost-sharing arrangement with three or four tiers, almost three times the proportion in 2000 (27 percent). • Copays for non-preferred drugs climbed from an average of $29 in 2000 to $43 in 2007. Copays for preferred drugs increased from $15 to $25 in 2007 (see next slide).

National Trends

Prescription Drugs and Insurance Coverage
Among Covered Workers with Three- or Four-Tier Prescription Drug Cost Sharing, Average Copays, 2000-2007
Figure 4: Among Covered Workers with Three- or Four-Tier Prescription Drug Cost Sharing, Average Copayments, 2000-2007
80 70 60 50 40 30 20 10 0
71 59 59 38 43 43

Dollars

8 9 10 11 11

15 18

22 25 25

29 32

Generic

Preferred

Nonpreferred Fourth-Tier*

2000

2002

2004

2006

2007

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2000-2007, Exhibit 9.4

How Did We Get Here?

Prescription Drugs and Insurance Coverage

• Discounts and Rebates: o Drug programs (public and private) negotiate with pharmaceutical manufacturers to receive discounts and rebates applied based on volume, prompt payment and market share. o Manufacturers who want drugs covered by Medicaid must provide rebates to state Medicaid programs for drugs purchased. o Some states have negotiated additional rebates or supplemental rebates.

How Did We Get Here?

Prescription Drugs and Insurance Coverage

• Medicaid: o The Deficit Reduction Act of 2005 gave states more authority to control Medicaid drug spending through the following:
• Increased cost sharing for non-preferred drugs • Changes in the way that Medicaid pays pharmacists • Allowing pharmacists to refuse prescriptions for beneficiaries who do not pay their cost sharing • Inclusion of authorized generic drugs in the calculation of “best price” for drugs

How Did We Get Here?

Prescription Drugs and Insurance Coverage

• Medicare o The Medicare Part D drug benefit moved spending from the private sector and Medicaid to Medicare, making Medicare the nation’s largest public payer of prescription drugs in 2006 of total U.S. prescription spending.
• Medicare is prohibited from directly negotiating drug prices or rebates with manufacturers under the Medicare Part D legislation (relies on the private Part D drug plans to negotiate these discounts and rebates).

How Did We Get Here?

Prescription Drugs and Insurance Coverage • Purchasing Pools o Some public and private organizations have banded together to form prescription drug purchasing pools to increase their purchasing power through higher volume and shared expertise. Some of these purchasing pools include:
• Department of Defense and the VA • Multi-state bulk buying pools through which states purchase drugs for their Medicaid • State employees • Senior, low-income and uninsured pharmacy assistance programs or other public programs • Individual state purchasing pools

How Did We Get Here?

Prescription Drugs and Insurance Coverage • Consumer Action
o Consumers are doing the following to reduce their prescription drug costs:
• Requesting cheaper drugs or generics from their physicians and pharmacies • Using the Internet and other sources to make price comparisons • Using the Internet to purchase drugs • Buying at discount stores • Buying over-the-counter (OTC) instead of prescription drugs • Buying drugs in bulk and pill-splitting • Using mail-order pharmacies • Using pharmaceutical company or state drug-assistance programs

How Did We Get Here?

Prescription Drugs and Insurance Coverage • Importation o High drug costs have led some individuals to purchase prescription products from distributors in Canada and other countries (known as “importation” or “reimportation” when the drug is manufactured in the U.S.). o It is illegal for pharmacies or wholesalers to purchase drugs from other countries, yet the government does not always stop consumers from purchasing drug products across the border.
• Legislation enacted in 2006 allows U.S. residents to transport up to a 90-day supply of qualified drugs from Canada to the U.S.

How Did We Get Here?

Factors Leading to Increased Health Care Costs • Demographics • Dramatic Rise of Prescription Drug Costs • Expansion of Providers

How Did We Get Here?
Expansion of Providers

• Providers offer many benefits to the communities that they serve, but require a great deal of capital to fuel their growth. • Capital expenditures by hospital systems and other providers place upward pressure on the costs of many medical services.

How Did We Get Here?

Factors Leading to Increased Health Care Costs • • • • Demographics Dramatic Rise of Prescription Drug Costs Expansion of Providers Consolidation of Managed Care Companies

How Did We Get Here?

Consolidation of Managed Care Companies

• Under-pricing, weak underwriting and the costly process of assimilating acquisitions has lead to serious dips in profitability and stock prices for a large number of carriers. • Many carriers have sold off their managed care operations to “bigger fish” or have completely gone out of business. Companies still in the market are now faced with much less competition and a renewed commitment to achieving healthy returns, which has resulted in increased rates.

How Did We Get Here?

Factors Leading to Increased Health Care Costs • • • • Demographics Dramatic Rise of Prescription Drug Costs Expansion of Providers Consolidation of Managed Care Companies/Insurers • Political Environment and Government Regulation

How Did We Get Here?

Political Environment and Government Regulation
• State/federal mandates have increased twenty-five-fold over last three decades. Mandates tend to conflict with or duplicate one another, and usually come with an increased cost for the health care system. • Issues such as prescription drugs for seniors, Medicare reform and coverage for the uninsured will also continue to play a big role on political and legislative agendas and will put pressure on costs.

How Did We Get Here?

Factors Leading to Increased Health Care Costs • • • • Demographics Dramatic Rise of Prescription Drug Costs Expansion of Providers Consolidation of Managed Care Companies/Insurers • Political Environment and Government Regulation • Increased Utilization and Consumer Demand

How Did We Get Here?

Increased Utilization and Consumer Demand • Utilization of health care services has increased due to the following: o Improvements in medical procedures and technology o Influence of managed care o Elevated consumer awareness and demand o Boost in the number of practicing physicians (caused the number of surgical procedures and prescription drug use to rise significantly). Preventive services (breast cancer screenings, immunizations for children and diagnostic procedures) have also increased in utilization.

How Did We Get Here?

Factors Leading to Increased Health Care Costs • • • • Demographics Dramatic Rise of Prescription Drug Costs Expansion of Providers Consolidation of Managed Care Companies/Insurers • Political Environment and Government Regulation • Increased Utilization and Consumer Demand • New Medical Technology

How Did We Get Here?
New Medical Technology

• Life expectancy and diseasespecific mortality are improving as old technologies are being replaced with new ones. They are often more expensive, use new medical devices, diagnostic products, drugs and surgical procedures. • New procedures come with large price tags, which drives up the overall cost of health care – and subsequently, health benefit costs.

How Did We Get Here?

Factors Leading to Increased Health Care Costs • • • • • • • • Demographics Dramatic Rise of Prescription Drug Costs Expansion of Providers Consolidation of Managed Care Companies/Insurers Political Environment and Government Regulation Increased Utilization and Consumer Demand New Medical Technology Weakening/Dissolution of Managed Care System

How Did We Get Here?

Weakening/Dissolution of Managed Care System • The economy in the late 1990s, consumer demand and the regulatory environment described in this presentation have led to a general weakening of the managed care system. • Provider contracting has strained the managed care system. • Hospitals have lost money due to the Balanced Budget Act of 1997 (cut billions from Medicare managed care payments) and due to other financial issues. They are now willing to walk away from health plans that offer insufficient reimbursement rates and prohibitive payment practices.

How Did We Get Here?

Factors Leading to Increased Health Care Costs • • • • • • • • • Demographics Dramatic Rise of Prescription Drug Costs Expansion of Providers Consolidation of Managed Care Companies/Insurers Political Environment and Government Regulation Increased Utilization and Consumer Demand New Medical Technology Weakening/Dissolution of Managed Care System Health Care Spending and Medical Cost Inflation

How Did We Get Here?

Health Care Spending and Medical Cost Inflation

• Health care spending and medical cost inflation are ascending due to the previous factors discussed in this presentation.

Employers React: What Can You Do?
Stopping the Runaway Train

After years of trying to absorb most of the costs of attraction and retention issues, many companies are trying to attack the root of the causes of rising costs with sustained, systematic changes. Employers aim to make significant investments in longer term solutions aimed to improve the health and productivity of their workers, including:
Introducing more consumer-driven health plans (CDHPs) Value-based design Improving employee education Influencing positive employee behavior changes through condition management and wellness programs • Improving the amount and quality of data available on health care costs and quality. • • • •

Employers React: What Can You Do?
Introduce or Expand Consumerism

• Consumer-oriented solutions balance costs and employee relations within health plans.

Employers React: What Can You Do?
Value-Based Plan Design

• Incentivizes employees to use appropriate care and services to manage their health.

Employers React: What Can You Do?

Improve Employee Education and Communication

• Consumer-driven strategies will not work without the right resources for employees to drive smarter behavior. • Employers must invest heavily in communication, education and decision support tools to help employees make better health care decisions. • Consider requiring active enrollment. • Offer decision support tools that can help employees evaluate their options.

Employers React: What Can You Do?

Increase Disease Management and Wellness Programs

• According to the 2008 Kaiser/HRET Employer Health Benefit Survey: o 54 percent of firms offering health benefits offer at least some type of wellness program. o Among firms offering health benefits and wellness programs, 33 percent of employers report their primary reason for offering wellness programs is to improve the health of employees and reduce absenteeism.

Employers React: What Can You Do?
Other Strategies for Reducing Costs • Contribution strategies
o Employers evaluate how they differentiate contributions for employees and their dependents. Pay-based contribution models are also used.

• Dependent coverage strategies
o Change the rules for dependent coverage including:
• Implementing higher cost sharing for dependents • Providing flexible credits for opting out of coverage • Requiring additional contribution if an employee’s working spouse does not accept coverage from his/her own employer • Requiring an employee’s working spouse to accept coverage from his/her own employer

Employers React: What Can You Do?
Other Strategies for Reducing Costs

• Change prescription drug coverage o Make changes to prescription drug benefits including:
• • • • • • Using a three-tiered design Increasing coinsurance Requiring step therapy Requiring the use of generics Requiring mail order of certain drugs Using a therapeutic MAC/reverse copay design

Employers React: What Can You Do?

Determining the Right Strategy for Your Company
• Is our program structure, plan design and pricing appropriate? • Do we have all the right vendors, services, contracting and funding in place? • Are our employee communication efforts appropriate and effective? • Do we have all the right disease and case management programs for our employees? • Do our pricing and plan design features encourage cost conscious behavior on the part of our employees? • Do our employee communication efforts and resources motivate our employees to become educated and effective health care consumers?

QUESTIONS?
THANKS FOR YOUR TIME!

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