One of the first things taught in Economics 101 is the diminishing effects that inflationary trend has on the value of a dollar. Nowhere can this be better illustrated than in the rising cost of healthcare in the US.
One of the first things taught in Economics 101 is the diminishing effects that inflationary trend has on the value of a dollar. Nowhere can this be better illustrated than in the rising cost of healthcare in the US. Few industry segments are as vulnerable to these diminishing effects as self-funded health plans, which happen to be the most effective and frequently used form of alternative risk transfer. Even with the widespread familiarity of self-funding, the leveraging effects that medical inflationary trend has on self-funded plans is often overlooked.
For the past decade, the cost of healthcare in the US has been increasing at an average annual rate of nearly 10 percent—a trend rate steeper than most other US economic segments. The rate of medical trend is expected to decrease in 2016 (to 6.5 percent), however, it will still significantly outpace general economic inflation. The estimated per capita cost of healthcare for 2015 is approximately $12,500 and is projected to increase to $13,750 in 2016. It is important to note that this is the average cost of healthcare and not the cost of healthcare insurance. The cost of insurance, which is what most employers are more concerned with, is a direct reflection of the expected costs charged for healthcare. The only way to make health insurance more affordable is to make healthcare itself more affordable.
Why it’s happening
There are a number of elements that drive inflationary trend relative to medical insurance. The root problems of healthcare pricing are much too complex to breakdown in this discussion and most of us, particularly those that self-fund their health plan, are already familiar with the more obvious cost drivers of healthcare. Now it’s time to introduce a new round of cost drivers that self-insures need to and prepare for, that being large claims are getting larger.
New specialty drugs and therapies
Specialty drug approvals have surpassed traditional drugs over the past five years and this trend is expected continue for some time as the Food and Drug Administration (FDA) approval pipeline is full with new therapies for cancer, rheumatic diseases, hematology and other conditions.
A new drug treatment for Hepatitis C is estimated to have added a half percentage point to total employer medical cost increases and one-fifth percentage point to total medical costs in 2014. A recent Express Scripts report concluded that total national prescription drug spending increased 13.1 percent in 2014.
Unlimited lifetime maximums
One of the by-products of healthcare reform (the Affordable Care Act, or ACA) is the mandate for unlimited individual benefits. Prior to 1 January 2014, health plans could limit a participant’s maximum lifetime benefit to $1 million. The ACA gradually increased that limit to $1 million annually and subsequently to an “unlimited” lifetime maximum. The new unlimited maximum has expanded the procedure coding and billing ability of healthcare providers and, for some, it has become an open chequebook. Many treatments, therapies, and procedures that used to cap out at well less than $1 million are now regularly exceeding that threshold.
Cyber security for private health information
The US Department of Health and Human Services reported that more than 90 healthcare providers experienced significant data breeches in 2014, and the large data breeches of Anthem and Humana earlier this year were well publicised.
Stolen health records are considered much more valuable than credit card information. Some of these breaches have resulted in multi-million dollar settlements and significant government fines.
The added cost of enhanced cyber security and liability insurance for providers as well as insurers will contribute significantly toward healthcare cost increases.
And why it affects self-funded plans more
Stop-loss carriers increase the risk charge for employers having lower specific deductibles. Since a lower specific deductible provides more insurance protection, the corresponding risk charge becomes a greater portion of the overall stop-loss premium in order to compensate for the increased coverage. Lower specific deductibles are also more exposed to the adverse effects of inflationary forces.
The Leveraged Trend is the effect of first-dollar medical inflation, which, as mentioned above, can average anywhere from 6 to?10 percent per year, on stop-loss reimbursements. A simple illustration: assume an employer with a self-insured health plan has stop-loss coverage with a $50,000 specific deductible. Incurring a $100,000 claim in 2014, the employer would receive a $50,000 reimbursement from the stop-loss carrier.
In 2015, assuming a 10-percent medical trend, that same medical claim would be valued at $110,000 and the employer would receive a $60,000 reimbursement from the stop-loss coverage. Even though the claim had only increased 10 percent from the previous year, the stop-loss reimbursement increased 20 percent.
This is sometimes referred to as deductible erosion and exemplifies the increased (leveraged) effects that inflationary trend has on self-insured plans. Assuming there are no significant changes or adjustments to the benefit plan or specific deductible from one year to the next, the stop-loss carrier should seek to increase premiums to compensate for what is actually an increase in covered exposure.
What can be done to bend the trend?
Because of their ability to preempt many ACA and individual state benefit mandates, self-funded plans maintain the greatest administrative control and latitude over plan design. The following are emerging plan design techniques being implemented to offset the effects of increasing medical trend.
Prudent cost sharing
Another provision of the ACA is the looming ‘Cadillac tax’, which, beginning in 2018, will impose a 40 percent non-deductible tax on the value of employer-paid benefits exceeding a maximum threshold. This will spur more cost shifting to employees as a way to reduce the value of benefits provided to employees. Most of the shifting will be in the form of higher out-of-pocket maximums and greater use of high-deductible plans.
Assuming a greater portion of the financial responsibility will help foster better consumerism on the part of the employee, as long as the out-of-pocket maximum is not set to a point that it discourages employees from seek-needed or timely treatment.
Implement referenced-based pricing schedules
Reference-based pricing (RBP) is a benefit design in which the health plan defines the maximum amount it will cover for a particular healthcare service. RBP plans provide a more defined fee structure as provider reimbursements are tied to a specific reference point for the procedure or service.
This can either be Medicare Plus, the Medicare reimbursement point as a base plus a defined margin (for example, Medicare plus 50 percent), or a defined benefit schedule. This scheduled approach specifically defines the maximum dollar amount assigned by the benefit plan for each treatment or procedure. This would allow the benefit plan to isolate and contain specific ‘cost drivers’ within a benefit plan.
Alternative treatment venues
Many progressive benefit plans are encouraging employees to seek lower-cost alternatives to traditional treatment and care. ‘Medical tourism’, in which the benefit plan will pay for employees and a spouse to travel to other, lower cost locations (including different countries) for qualitatively comparable treatment, is gaining in popularity.
For instance, the cost for an orthopaedic procedure, such as a hip replacement, in a top-tier facility in Mexico or Panama will be fraction of comparable cost in the US. The benefit plan can cover travel, accommodation and treatment and still pay much less than the US treatment cost.
Virtual care and telemedicine are also quickly gaining in popularity as a way to reduce plan costs. New technology has allowed hospitals and physicians to consult and remotely monitor patients, especially those having chronic conditions, in order to improve observation, and reduce timely, more expensive office visits. Congress recently added several Medicare payment codes for telemedicine and also designated $26 million in funding for telemedicine programmes for rural communities. In short, increased use of telemedicine is expected to save billions of dollars across the US healthcare system over the next two decades.
The list keeps growing; increased cost sharing to foster better consumerism, more efficient plan design, alternative treatment venues and greater use of technology and data can empower a self-insured health plan with substantial ability to shave costs and bend the trend of medical inflation in their favour.
