How can employers afford to offer employee benefits when the cost of health insurance has increased x50 over the past 50 years? How did an employer tax shelter turn into an expensive employee benefit? How do we gain control of increasing health insurance premiums? These are no golden answers. What we have learned is that in order to change our future, we have to understand our past. Bates & Associates has dedicated this fourth quarter newsletter to this topic and we encourage you to pass a copy along to your employees so they too can understand what we all face.
In 1912 we see the emergence of federal health insurance during the Theodore Roosevelt campaign. In 1935 we see the beginning of Social Security and in 1965 we see the beginnings of Medicare/Medicaid. In fact, over the past ninety years, “we have seen congress consider but not adopt, national health four times.” We have also seen the emergence of private health insurance since the end of World War II. Throughout that time, an employee’s proportionate share of healthcare spending has dropped steadily. This means that every year the average employee spends more on their healthcare but pay less in relationship to the total cost. In 1960, a consumer’s share in healthcare spending was 49%, versus only 17% in 1999.
So what is causing this increase in cost? You can find a lot of it in new technology, increasing life span/survivability, increased prevalence of chronic disease, more options in medications, unhealthy lifestyles, waste, misuse and fraud.
Technology is the largest driving factor involved in the increase in premium. In fact, it drives 50% to 60% of cost increase above inflation. This can be broken down further as radiology costs are increasing 18-20% every years, prescription drug cost are increasing at a 12% rate and the number of prescriptions filled since 1998 has increased 50%. The US heart surgery industry is growing at almost 3 times that of Microsoft, boasting $100 billion in annual revenue. To achieve such numbers the heart surgery is performing annually, 1 million angioplasties, inserting 700,000 heart stents, and 400,000 bypass surgeries. Note that it costs roughly $70,000 to create a stent and $30,000 per year to maintain it after implantation.
Lumped in with technology, we have included the power of the physician’s pen. Physicians have more resources available to them to help diagnose patients, but guess who is paying for these “state of the art” tools that can be abused. Who is paying for the cat scans that are now being used for preventive measures? Further, we all should ask ourselves, why is a doctor’s office or hospital one of the only services in the country that we pay for without knowing our cost up front? How do you know that your doctor is not charging a great deal more that his competition? With the concern that we Americans put on spending, how do we allow ourselves to pay for anything without knowing the approximate cost upfront and what alternatives there might be to that cost. You certainly would not let a mechanic fix your vehicle without knowing what it will cost. The point is, up until now, we have never questioned cost in relation to medical services, because our insurance company has paid for most of it. As employees we are accustomed to receiving the medical care, paying our portion and going on about our business. What we oftentimes do not see, or pay attention to, is the total bill being passed along to our insurance company.
Chronic disease should also be one of this country’s greatest concerns. In the United States , we are projected to increase from 133 million individuals suffering from chronic diseases to 171 million in 2030. Chronic disease is not growing by leaps and bounds; rather it is steadily increasing. The rule of thumb use in health insurance is that 20% of all insured people account for 80% of the claims. These 20% are afflicted with diabetes, cancer, heart disease, arthritis, and respiratory illness. Diabetes, for example, represents $132 billion in direct costs, billions in lost work days, 54 billion premature deaths and disability, and is 25% of all Medicare dollars. From 1987 to 2001 we saw increases in heart disease by 69%, hypertension 60%, and cancer by 42%. To make this more alarming, Americans are more overweight than at any other time in our history.
Of every 100 Americans, 10 are heavy drinkers, 24 have high blood pressure, 26 smoke, 26 are overweight by 20% or more, 27 have cardiovascular disease, 44 deals with high stress, 50 have high cholesterol, and 59 do not get enough exercise. Additionally, our country spends $117 billion on obesity related claims, $157 billion on smoking, $37 billion on hypertension, $98 billion on diabetes, $150 billion on stress and $77 billion on inactivity. Many of these costs are due to lifestyle choices that put ourselves at an increased health risk.
As a society, once we have dealt with some of these more major items, we have to look at the dynamics of our society, such as the increasing age of baby boomers. There is no question that age affects healthcare costs. For example, on average, men’s healthcare doubles from 35 to 45 and a woman’s spending triples from 35 to 75. We also see this example in action as the average healthcare spending per capita jumps from $2,144 at ages 35 to 44 to $6,108 at age 75 and over.
What is the answer? At least part of the answer is “Consumer Engagement”. It is when those buying the services begin seeking alternatives due to their exposure to personal financial loss. Increasing your employee’s exposure to healthcare costs to a degree that they are willing to participate in the spending process, is one alternative. This means for them, spending time seeking choices for better spending alternatives, and considering lifestyle changes. It may mean utilizing guidelines and information about providers, shared by the healthcare industry. We have insurance products available for employers today that begin this process. We have written in past articles about HSAs (health savings accounts). These are high deductible plans with a built-in tax shelter for the employee. If this seems too drastic of a change, perhaps adding a deductible to your hospital services is more advisable. If you are going to just increase the employee’s portion of the premium as a stimulus, make sure you maintain a certain percentage of the total cost of the coverage.
We are always available to assist you in further investigation of these alternative products and concepts. We know rising benefit costs are a challenge and we will help you construct the best program for your needs.