Current combined medical and drug observed claim cost trends are generally in the 18%-20% range as of January 2003 in the Pacific NW. The following is an approximate summary of the components influencing total trend.[1]
Medical Price Inflation (approx. 35% to 45% of total trend): Medical price represents the increase in the price of medical services, treatments, and supplies. After years of controlling costs via striking hard bargaining with Doctors and Hospitals with virtually zero to very low payment increases (Ô976, Õ98, and Õ99), medical providers have subsequently gained a more powerful bargaining position by way of consolidation. Now they are demanding and successfully winning higher payments for services. Physician Fees represent approximately 50 to 60% of total medical costs.
Technological Changes/Advancements (approximately 15% to 25% of total trend): Technological changes include the introduction of new medical equipment, medical procedures, treatment therapies and medications. Increases in the intensity of care are often the direction result of enhancements to technology. Costs are often compounded when new procedures enhance, but do not replace, previous diagnostic processes or treatment modes. Physician supply (especially Specialists) is a good proxy for the pervasiveness of technology within a region.
In general, new technology is creating new and more widely used forms of sophisticated diagnostic and treatment equipment. The results being:
1) An increase in the cost per treatment
2) An increase in the number of treatments per patient
3) An expansion of the treatable population
Drugs (approx. 15% to 25% of total trend): With an ever increasing myriad of new drugs being introduced combined with unrelenting marketing campaigns, consumers are demanding the newest, best, and most fashionable drugs available. The following is a rough breakout of areas of increase:
1) Increase in the number of prescriptions per user Ð approx. 35% of increase
2) Increase in the duration of prescriptions Ð approx. 20% of increase
3) Substitution (newer, more expensive drugs for existing) Ð approx. 15% of increase
4) New users (expansion of treatable population) Ð approx. 15% of increase
5) Increase in price Ð approx. 15% of increase
Countering the demand, many insurers (including RBS), have begun to implement 3-tier drug plans passing along more of the cost for non-preferred and symptomatic relief (nonÑlife saving such as Claritin/Allegra) drugs on to the consumer.
Mandated Benefits, Other Legislative Changes, and Social Shifts (approx. 5% to 10% of total trend): When legislative and regulatory changes require plans to cover services that were not covered previously, or to establish new procedures, those changes add to the future claim cost of employee health plans. Legislative compliance and it associated administrative costs also add to the financial burden of the plan sponsor. Examples of requirements of recent legislation that may affect future plan increases include: every category of provider, contraception coverage for women, guaranteed portability, limited pre-existing conditions exclusions, mental health parity, minimum inpatient days for maternity, coverage of reconstructive surgery for mastectomies.
Cost-Shifting (approx. 2.5% to 7.5% of total trend): Cost-shifting occurs when one party absorbs the expense previously incurred by another. For example, when government programs, such as Medicare, reduce their reimbursement, providers generally compensate for the loss of revenue by raising their prices, shifting the cost to the private sector. Other examples of cost shifting include the increased cost of medical care for the insured population to compensate for the loss or revenue from the uninsured and the increase in physician fees to patients to accommodate the significant increase in medical malpractice insurance.
Litigation and Risk Management (approx. 2.5% to 7.5% of total trend): Class action lawsuits, outsized awards, legal costs, and Reinsurance/Risk Management. Litigation in the healthcare system has grown dramatically in recent years. Class action lawsuits have targeted major players in the healthcare industry (including TRG plans) for high-dollar awards, and the legal costs of defending even the most frivolous claims have spiraled out of control. Over the last few years, health plans have been faced with a growing number of lawsuits brought by physicians and individuals under ERISA, RICO, and state law. Some of these cases represent massive class actions, which claim to represent all physicians and all health plan subscribers in the United States.
Leveraging (approx. 0.0% to 5.0% of total trend): Leveraging accounts for the eroding impact that fixed deductibles and co-payments have on increasing plan cost. To illustrate the impact that leveraging has on trend; assume that a claim of $1,000 is submitted to a plan with a $400 deductible. For simplicity, assume that if plan co-insurance were 100%, the plan would pay $600 ($1,000 less $400). If, in the next year, the cost of the same service increased 10% to $1,100, and the plan deductibles remained the same, the plan would pay $700 ($1,100 less $400). The claim increased 10%; however, the cost to the plan sponsor increased 17% ($700-$600)/$600), as a result of the leveraged effect.
Utilization (manifested in the above factors as outlined below): Utilization represents the frequency of claims incurred by a medical plan. Factors that contribute to growing utilization include:
1) Increased availability of benefits
¥Mandated benefits
¥Richer plan offerings to attract and retain employees in tight labor market of past
¥Greater entitlement mentality of patients after a decade of $10 office visits and low out-of-pocket costs
2) Improved access to providers: many of the restraints on access to care are being dropped or loosened due to backlash against managed care.
3) Patient insulated from real cost of medical services via 3rd party payer system and low out-of-pocket costs.
¥Health care service fees negotiated fees negotiated by 3rd parties: Employer and Insurer.
¥Out-of-pocket costs that have not kept up with the rate of medical inflation (related to tight labor market of the past).
4) Increased medical need for services with an aging population.
5) Increased health awareness for preventative services.
6) Technology Changes/Advancements