As employees participate in open enrollment for their company’s health insurance enrollment next year, it’s clear they should make a point of participating in their employer’s enrollment information meetings, not merely pick last year’s coverage. Partly because of the implementation of President Obama’s health care overhaul plan, U.S. workers are expected to pay average premiums of $2,200 in 2011 – an increase of 12.5 percent, the biggest in four years, according to human resources consulting firm Hewitt Associates.
Increases in health care premiums are certain to continue increasing in coming years at double-digit rates, with inflation further exacerbated by the entry of 32 million uninsured Americans into the healthcare system. This will speed the transformation of insurers from underwriters of medical risk to managers of medical risk, a process inevitably accompanied by higher prices.
Annual healthcare inflation — and hence baseline premiums — have been rising 8-12 percent annually for two decades, and there is no reason to expect this to change anytime soon. It could actually increase as provisions of healthcare reform – such as the mandated removal of pre-existing conditions – become law. Some of these provisions, such as the elimination of a dollar amount of health benefits in a given year and the fact that children can now stay on a parent’s health plan until age 26, help explain the likely spike in health insurance premiums next year.
Rate increases are already highly regulated in most states, which focus on preventing “excess” profiteering by insurance carriers. And there is still a competitive advantage in being a low-price leader in health care underwriting. Nonetheless, rates typically rise in response to medical claims experience and the increased cost of underwriting risk. Underwriters have no choice but to increase premiums to maintain margins.
Why is there on-going runaway healthcare inflation? Unfortunately, the U.S. healthcare system simply can’t seem to get its act together. One reason is that the U.S. essentially has a fee-for-service healthcare system, which means that doctors and other healthcare providers are compensated based on the number of procedures they do, not on the results of their treatment. This contributes to enormous inefficiencies and mistakes. For example, studies have shown that about one in five medications administered at hospital bedsides are done so in error.
Yet another problem is “moral hazard,” or the concept that people insulated from certain risk behave differently than they would if fully exposed to that risk. Have you ever noticed that people are very hesitant to make claims on their automobile and property insurance? Rarely do the costs of minor fender benders result in an insurance claim. Why? Because people fear that claims on their auto policies, for example, will result in either premium increases or the cancellation of their policies. So they pay the cost of minor accidents out of their own pockets.
This isn’t the case at all in the health insurance world. Americans could take much better care of themselves – they could watch what they eat, think twice about smoking or drinking heavily and make a commitment to exercise more. Too many do not, however, which is why a third of our population is obese. Unlike the case with auto insurance, a very high percentage of healthcare expenses become insurance claims because few people lose their health insurance because of high claims.
Theoretically, employer-based health insurance plans could tackle this problem by simply increasing out-of-pocket co-payments. But this opens the door to two conundrums. One is that higher co-payments would prod some people to forgo necessary treatment at the early stage of a disease, such as diabetes, which is much less expensive to treat in its early stages. The other problem is that higher out-of-pocket expenses tend to push the healthiest people out of the insurance pool, and these people are needed to help lower overall costs.
There is some good news. Even before healthcare reform became law, healthcare insurers started to make the transition from underwriters of medical risk to managers of medical risk. Simply underwriting risk means insurers manage patient utilization of healthcare, negotiate prices with healthcare purveyors and pay the claims. In managing healthcare risk, insurers or huge healthcare consumers take things a giant step forward and proactively work to lower healthcare expenses. Some big companies, including Safeway and Pitney Bowes, are taking matter into their own hands by building internal risk management programs.
Pitney Bowes, for instance, incentivizes employees to see their doctor at least once a year, believing this will ultimately result in lower employee healthcare expenses. In fact, a far higher percentage of Pitney Bowes employees do schedule annual doctor visits, and Pitney Bowe’s healthcare inflation rate is markedly lower than the overall U.S. average.
In addition, health care reform now requires that health insurers maintain a minimum medical loss ratio (MLR), or the ratio of medical expenses to total insurance premiums. Insurers that fail to achieve a minimum MLR – 85 percent for a large group and 80 percent for a small group – will soon have to provide a refund to policy holders reflecting the difference between what they actually spent and the mandated minimum.
The law has also expanded the definition of MLR to include money spent on health and wellness management programs, incentivizing insurers to proactively manage medical risk more effectively to better adhere to the newly mandated minimums.
The U.S. has a gigantic and long-standing healthcare problem, and a few rays of hope should not suggest that our nation will work its way out of the woods. These are a start, however, and it is crystal clear that the problem of how to manage risk in the healthcare system must be tackled immediately, and as wisely and aggressively as possible.
Stephen Krupa is one of the founders and a managing member of Psilos Group, a New York-based venture capital firm that invests in healthcare services, healthcare information technology and medical technology companies geared toward improving the quality and productivity of the healthcare economy. Psilos has more than $580 million under management in three funds.