Employers’ Health Cost Growth Continues to Moderate: Ain’t It Awful?! by Jeff Goldsmith

THCB welcomes first time contributor Jeff Goldsmith of Health Futures. Jeff will be blogging for us on a periodic basis, so expect more insightful commentary from him in the near future. Among those in the know, Jeff has long been considered a leading futurist. From 1982 to 1994, Jeff served as National Advisor for Healthcare at Ernst & Young. From 1980 to 1990 he was a lecturer at the Graduate School of Business at the University of Chicago. He currently serves on the editorial board of Health Affairs.

Last week, the Kaiser Family
Foundation released its annual Employer Health Benefits Survey, which
revealed that premiums for employer sponsored health insurance rose
only 6.1% for 2007, compared with almost a 14% increase in 2003. 
One would not have known that this is actually good news from KFF President
Drew Altman’s comments, however: “No-one in the real world is celebrating
because it doesn’t feel like moderation”.  He went on to say
that “we’ve seen these periods of moderation before, and they never
last.”  The Report also showed that the percentage of employers
offering coverage remained stable for the third year in a row, as did
the percentage contribution workers had to make for individual and family

Altman is certainly right that
health cost growth will eventually resume- he’s the author of a famous
Grand Teton-like exhibit which shows the cyclical flare-ups in employer
costs over the last 45 years.  But it is not clear what “real
world” Dr. Altman  is thinking about. For people who actually
meet payrolls every week (my definition of the “real world”), a
56% reduction in the growth rate of one of their most explosive costs
of doing business in four years time is nothing short of phenomenal
good news.   

The difference between the
2003 and 2007 premium increase on a roughly $800 billion health premium
base is $62 billion in new corporate cash flow, money that can
be used to increase wages, invest in R+D or new plant, or  hire
additional workers.  (And sure enough, in Kaiser Foundation’s
own data, wage increases grew from about 2% on 2004 to almost 4% in

What has produced this cost
moderation is still not clear.   My theory is that increased
cost sharing has, over a number of years, compelled families to be more
careful about their use of health services.  That is not inherently
a bad thing. Despite these increases, out-of-pocket share of health
costs  continued to fall through 2005, according to CMS’ Office
of the Actuary.   

We bear only about 12.5% of
total US health costs directly; the remainder is paid for by business
and government.  Even if you add to out-of- pocket spending the
amount taken out of our paychecks for health insurance premiums, we
spend about the same amount on Christmas presents every year. 
The difference is that we don’t expect other people to pay for our
Christmas presents.   

But cost sharing increases
would not account for the soggy admissions growth for hospitals, the
plummeting demand for expensive heart care (and the reduction in heart
attack admissions to hospitals), or record low rates of prescription
drug cost growth, which stem from the explosion in generic drug options.
All these changes have made a contribution to the subsiding premium
trend.  Some other notable trends, like falling nursing home census,
have affected public, rather than private, expenditures.   

None of these “real world”
phenomena, which have hammered down the market capitalizations of some
of health care’s great companies- Amgen, Johnson and Johnson, Pfizer,
Merck, Medtronic, Boston Scientific, etc. – are more than tangentially
related to cost sharing. Dr. Altman’s comment that it “doesn’t
feel like moderation” would no doubt amuse the investment analysts
who follow our nation’s drug and medical device companies, because
their top lines are behaving a lot like they are in recession, resulting
in tens of thousands in layoffs.   

In 1964, popular psychoanalyst
Eric Berne published a best selling book on transactional psychotherapy
called “Games People Play”.   Some of these famous and
repetitive patterns of interaction between people entered the popular
lexicon, including “If It Weren’t For You”, “Let’s You and
Him Fight”, “Now I’ve Got You, You Son of a Bitch”, etc. 
Of all of these however, my personal favorite was “Ain’t It Awful”,
in which everyone sits around and reflects on what a mess the world
is, and contributes fresh examples. “Ain’t it Awful” is about
the  morbid search for the bad in daily life, and generates a lot
of what an analyst might term “secondary gain”.   

The American health policy
community has a particular fondness for this neurotic pastime, and they
are playing it now. (“Just wait a little.  Costs are sure to
go back up!!”)   Sometimes it seems like it’s the only
game in town.    If you want to see moderating health
costs as a problem, and are creative enough, you can think of reasons
why this is bad.  And how helpful is that? 

Sure, health care is very expensive,
and lots of people don’t have appropriate access to it.  So let’s
fix those things.  The good news is that we are a resource-rich
and inventive society that is perfectly capable of finding the answers.   
But, while we’re at it,  it is worth considering that one reason
why health cost growth is moderating is that we are doing a bunch of
things right.  It might even be that the lower rates of increase
in cost reflect slow but measurable progress in our battle against intractable
human illnesses such as heart disease and cancer.   
I guess it’s all in how you look at it, and which “real world”
you live in.         

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3 replies »

  1. Dr. Goldsmith says “I am an optimist because I believe that universal healthcare is coming and either government or large, regulated payer oligopolies will exercise their power to control the cost of medicine.”
    Frankly, I see neither coming. Government and businesses continue to shift responsibility to the individual for both premiums and increased cost sharing. While that may give people the incentive to avoid care or choose the cheaper alternative, I don’t see the right or left making any serious moves toward universal coverage.
    Ex-Triad CEO Denny Shelton recently called America’s employer sponsored health insurance unsustainable in a world economy. SEIU President Andy Stern said “employer sponsored health insurance is dead.” How will the government pick up the slack when they can’t even agree how to cover more kids?
    President Bush’s repeated lies over the $83,000 CHIP eligibilty cutoff reflects his preference for “private insurance.” It’s not a surprise that economic advisor Al Hubbard used to serve on the board of giant insurer WellPoint and the President’s uncle still warms a chair in that very room. According to SEC filings Uncle Bucky gets $400,000 a year in pay and stock. His holdings represent a roughly $4.4 million capital gain. His nephew’s capital gains cut would save Bucky some $220,000 in federal taxes should he sell his stock and flip his options. How many kids could that cover for a year?
    As Dr. Goldsmith noted there’s more than enough money in the economy to cover more people. No one wants to step up and do their part. Across the board table from Uncle Bucky sits Susan Bayh, wife of Democratic Senator Evan Bayh. She regularly fipped her options for a $1.2 million gain the last few years. Funny how Evan’s position on health care isn’t to give all people access to health care, but affordable health insurance coverage. Yes, it’s all beginning to make sense. The American citizen is more and more on their own for healthcare and retirement. It’s like the pioneering days. Now if I can find a doctor that accepts chickens…

  2. “Even if you add to out-of- pocket spending the amount taken out of our paychecks for health insurance premiums, we spend about the same amount on Christmas presents every year.”
    Hmm. A self-employed person pays roughly $1000 a month for family coverage.
    How do I get into that family? $12,000 a year for presents?
    With all due respect, this is a fatuous comparison and unworthy of what’s at stake.
    Let’s compare. That’s roughly what a lousy apartment costs in any city. That’s about what a family of 4 eating very cheaply would spend on groceries. That’s about what an unfortunate commuter pays in gas.
    That’s not a small amount. That’s, in fact, ruinous.

  3. While I appreciate that glass-half-full attitude, mocking those who are more pessimistic as irrational and neurotic seems wholly unjustified.
    It is not enough to point to factors that may be causing moderation of cost increases when every time this has happened in the past they have re-accelerated within a few years. Nothing fundamental has changed in the cost drivers of American medicine, and the system has always gone through cycles. The move to generics, for example, has a limit. At some point soon, all those who could be on generics will be, and then Rx costs will start their re-acceleration. Actually, even before that point we can expect cost trends to rise due to new biologics and gene-specific drugs that cost thousands per year or even per month.
    In the end, I am also an optimist, but not because I think the fragmented elements of the current system have finally coalesced to form a coherent, efficient, well-functioning market. I am an optimist because I believe that universal healthcare is coming and either government or large, regulated payer oligopolies will exercise their power to control the cost of medicine.