Insurance ills put squeeze on consumers; Sliding benefits, soaring costs swell insurers’ profits

The San Diego Union-Tribune

Anyone who was paying for health insurance in 1988 will remember the last great American health insurance crisis, the one so severe it sparked a national debate on the cost of private insurance and even led to an ill-fated attempt at a national health plan.

It was the year premiums shot up 12 percent, and it was followed a year later by an even steeper, still-unmatched increase of 18 percent.

Also, 1988 was the year when an average insurance policy for a family of four cost $179 a month, or $286 in today’s inflation-adjusted dollars, according to the Chicago-based Health Research and Educational Trust.

This is roughly a third of the $829 a month it took to insure the same family last year. And for that higher price, today’s policy typically comes with higher office-visit co-payments, additional hospital deductibles, extra fees for brand-name prescription drugs and other out-of-pocket expenses.

Americans, facing a fourth consecutive year of double-digit premium increases during this latest insurance crisis, are paying bigger health care bills than ever, and not just in premiums.

Employers, to ease the financial strain of premiums that shot up about 14 percent last year, have resorted to passing along more costs to employees, a practice known as cost-sharing.

Many workers are forking out more every month not just for steeper premium contributions but also for each visit to the doctor’s office or pharmacy. Consumers are paying higher deductibles and co-payments while facing tiered drug benefits that force them to pay more for brand-name medicines.

People who buy their own health plans and pay the entire cost of their coverage are often opting for even sparser plans that hardly seem like insurance.

“People are tired of a pace that doesn’t seem to end,” said Vincent Mudd, a small-business owner in Kearny Mesa who pays for the health premiums of 40 employees and has had to switch to cheaper insurance with fewer doctor and hospital choices to keep expenses down. “Where is that money going?”

Shifting the costs

Out of the almost $550 billion in premium dollars spent by insurers nationwide in 2002 — the most recent year for which such statistics are available — nearly three-fourths went toward the three major drivers of health care costs: hospital services, physician and clinical services, and prescription drugs, according to a recent report from the California HealthCare Foundation in Oakland.

Experts say all of these services cost more today than they did 15 years ago, even accounting for inflation, as technological innovation has changed the way medicine is practiced in hospital operating rooms, doctors’ offices and pharmaceutical labs.

Magnetic resonance imaging, or MRI, is now used to diagnose illness and injury in many cases where the cheaper X-ray was once the norm. Improved anesthesia with fewer side effects allows for more complicated, and thus costlier, surgeries. Medicated heart stents, which cost three times as much as nonmedicated ones, have become standard for opening clogged arteries. Costly statin drugs are now widely used to lower blood cholesterol levels.

“I don’t want to say that all this new stuff is not worth the extra cost,” said Gary Claxton, vice president of the Kaiser Family Foundation, a research organization in Menlo Park that studies health care issues and is not affiliated with the Kaiser HMO. “But it tends to cost more.”

There are other factors driving up the cost of health insurance that have little to do with medical advances.

Underlying administrative costs, which are part of all hospital, physician and pharmaceutical spending, are also to blame. In 2002, 13 percent of premium dollars went toward insurance companies’ administrative costs, including salaries, advertising and profits.

Hospitals, which have faced recent labor shortages, are competing for nurses and other hard-to-find professionals by offering higher salaries and bonuses. Pharmaceutical companies are spending money not just on research and development, but on TV ads urging consumers to “ask your doctor” about new medications. Physicians are paying billing companies to handle complicated insurance paperwork.

When these costs go up for health care providers, so do insurance premiums.

“It’s called cost-shifting,” said Jan Emerson, a spokeswoman for the California Healthcare Association in Sacramento, which represents the hospital industry. “We are cost-shifting to cover the uninsured, . . . to cover shortfalls from Medicare and Medi-Cal, . . . to pay for unfunded mandates. There is a lot of cost-shifting going on, and the private health insurance companies are paying for that. Why should the hospitals be left holding the bag?”

But insurers aren’t holding the bag, either.

These increasing costs are passed along to employers and consumers in the form of higher premiums, which the insurance industry contends are necessary because of rising medical costs.

Yet as consumers pick up more of the cost of care through higher co-payments and deductibles, insurers are earning record profits.

Net income for the nation’s health insurers was $10.2 billion last year, according to Weiss Ratings Inc., which rates the strength of financial institutions. That’s almost twice the profits earned in 2002, and almost 14 times the $736 million earned in 1999.

Since that year, net profit margins for the health insurance industry have risen to 3.78 percent from 0.38 percent, nearly a tenfold increase.

Weiss analyst Donna O’Rourke said the industry is thriving for two main reasons: ongoing premium increases and “expense reduction,” which includes reconfiguring health plans to shift more of the cost of services to consumers.

Charting premiums

Employer-based health benefits date to just after World War II when employers began using health insurance, then in its infancy, to attract workers during an era of wage controls.

For many years, the most common form of insurance was the indemnity plan, in which physicians billed insurers a share of the cost of services performed, then billed patients for the rest. This type of insurance prevailed throughout most of the country until the late 1980s, when escalating premiums and health care costs triggered a massive shift toward managed care, in which people pay set monthly payments in return for care provided by designated physicians and hospitals.

The concept led to the widespread adoption of health maintenance organizations, or HMOs, a form of managed care that strictly controls payments to hospitals and physicians, who contract with them for access to patients.

Insurers and enrollees initially saved money as overall spending on medical services slowed, and insurance companies began competing on price. The rate at which premiums increased dipped from a high of 18 percent in 1989 to 0.8 percent in 1996.

But consumers grew tired of preauthorizations, minimal hospital stays and other frugal policies of HMOs. During the economic boom of the mid-1990s, employers trying to attract workers demanded less-restrictive benefits, and insurers obliged with a growing selection of plans with looser restrictions.

This, insurance experts say, led to a surge in the use of medical services, which once again drove up health care costs.

The growth was exacerbated by increased use of prescription drugs. Costly new “blockbuster” therapies, such as Prozac for depression, and lifestyle drugs, such as Viagra for sexual dysfunction, became available.

Some experts also believe that consumer demand was driven up by direct-to-consumer TV advertising, which became commonplace after regulations were relaxed in 1997.

With premium growth at a standstill, insurers found themselves spending more than they planned.

“1997 and 1998 were losing years,” said O’Rourke, the Weiss Ratings analyst.

During those years, she said, the premiums charged by insurance companies were insufficient to keep up with spending.

And as the economy slowed, companies that had invested surplus funds in the stock market found their returns dwindling.

It was time to raise premiums again.

Premiums increased 5.3 percent in 1999. Overall health spending continued to rise, with growth peaking in 2001. But by then, annual premium growth was back in the double digits.

“This is sometimes referred to as catch-up pricing,” said Bradley Strunk, a researcher with the Center for Studying Health System Change in Washington, D.C., which monitors health care trends. “They underestimate their underlying costs, end up losing a lot of money and, in the following years, have to raise premiums more than they really need to make up for what they lost in previous years. They had some tough years, and they have since been raising premiums.”

No relief in costs

The question now is what happens next.

According to a recent report by the center, the cost of providing health care to people with private insurance is not increasing as fast as it was a few years ago, growing only 7.4 percent last year compared with 10 percent in 2001.

The report tracks how much insurers spend in premium dollars as well as what enrollees pay out of pocket in co-payments and other costs.

The report says overall spending has slowed since 2001 for two reasons: The surge in demand that followed the loosening of managed care has ebbed, and the new wave of cost restrictions in the form of higher deductibles and co-payments is reducing usage.

In this era of cost-sharing, it appears, consumers are rationing their care on their own. Alwyn Cassil, a spokeswoman for the center, said that passing on more of the costs to consumers has probably helped slow the growth in health spending.

“It is encouraging people to use less services, and shifting some of the cost to the people who actually use them,” she said.

With spending slowing and plenty of money in insurers’ reserves, this would logically be the point at which the growth in premiums starts to slow.

In a pattern known as the underwriting cycle, whenever private health spending declines, insurance companies typically lower premiums to gain a bigger share of the market. When spending increases, insurers raise premiums to maintain their reserves and, if they are publicly traded, to maintain their returns to investors.

Towers Perrin, an international human resource and benefits consulting company, anticipates that premium growth will be slightly lower this year, 12 percent versus last year’s 14 percent.

But experts say spending on health care by insurers and the insured is still too high — and the resulting decline in premium increases still too small — for there to be any true relief for employers and consumers.

High hospital costs

Although spending has slowed, the problem is it has not slowed enough. According to the Center for Studying Health System Change, the cost of providing health care to people with private insurance still grew twice as fast as the overall U.S. economy last year.

This is an improvement over two years ago, but “spending is still increasing at a very fast rate,” Cassil said.

Some services continue to drive spending more than others.

The slowest-growing has been physician services, on which spending has been fairly static for years as insurers control the reimbursement for physicians.

Overall prescription drug spending is still high, as are pharmaceutical industry profits. But such spending has slowed dramatically in recent years, with the rate dropping from a peak of 18 percent in 1999 to 9 percent last year, the center’s report said. Part of this slowdown comes from cost-sharing, experts believe, as plans with tiered drug benefits encourage use of cheaper generics.

“Nine percent is not inconsequential growth,” Cassil said. “It is still three times the growth of the economy.”

But far and away the biggest cost driver today is hospital spending, experts say. Hospital outpatient services in particular are in high demand, as improved technology reduces the need for admissions. Spending on outpatient services grew 11 percent last year.

Hospital prices are on the rise as well, growing twice as fast last year as they did a decade ago. The prices in question are not what hospitals charge patients, but what hospitals charge insurers.

In California, the hospital industry complains bitterly about state laws that cost money. One recent law requiring nurse-to-patient staffing ratios is expected to cost $422 million this year. Another law that requires hospitals to make buildings earthquake-safe by 2008 could cost $14 billion or more.

There is also uncompensated care for the uninsured and underinsured, which cost the state’s hospitals $4.8 billion last year.

How to best make up that cost? Pass it along, the thinking goes.

“What is driving (insurance) costs right now is a big increase in hospital costs,” said Claxton, the Kaiser Family Foundation vice president. “Hospitals are bargaining harder with managed-care plans, and getting bigger increases than they were before.”

The loosening of managed care in the late 1990s allowed the hospital industry to slip free of tight HMO cost controls. This, combined with a series of mergers, has given hospitals more leverage in contract negotiations.

Insurers’ margins

But even if insurers were better able to bargain down hospital costs, would consumers benefit from the savings? Consumer advocates are skeptical.

“What the HMOs tell us is that because hospital costs are going up and prescription drugs are going up, that is why we have to raise premiums,” said Jerry Flanagan, a consumer advocate with the Santa Monica-based Foundation for Taxpayer and Consumer Rights. “True, but premiums are going up exponentially faster, and profits are increasing.”

Since 1999, insurance premiums have risen faster than insurance spending. Last year, the increase in premiums was nearly double that of insurance spending, about 14 percent versus 7.4 percent.

In defense, insurers are quick to invoke the lean years of the late 1990s, when some insurers dropped out of the market or merged with others.

“We hit a floor. . . . Pricing structures did not make sense to ensure that a lot of organizations had the right profit margins to stay in business over the long haul,” said Steven Tough, president of the California Association of Health Plans in Sacramento. “When you’re a company that is managing portfolios of risk for individuals, it is not healthy to go out of business.”

Awaiting cyclical change

For the moment, cost-sharing continues to be the principal tool employers use to diffuse high premium costs. But experts say this is a short-term solution that will soon wear out its effectiveness.

Because the demand for health care is “fairly inelastic,” said Cassil of the Center for Studying Health System Change, shifting costs onto consumers can have only limited success in getting them to cut back on their use of their medical benefits.

“People are price-sensitive to a point,” she said. “We may have gotten as much bang for cost-sharing as we are going to get.”

Recent legislative attempts to control insurance costs have been unsuccessful, with critics from the insurance, hospital and pharmaceutical lobbies arguing that proposals have not addressed their own underlying costs.

“I think that anything that can control costs will be politically unpopular,” said Jon Gabel, vice president of health systems studies for the Chicago-based Health Research and Educational Trust, which researches health care issues.

He said the same goes for any sort of national health plan, which stands little chance of being enacted or accepted.

Experts say the best relief employers and consumers can expect to see, if any, will likely result from the underwriting cycle taking its course.

A few large insurers, including some Blue Shield and Blue Cross subsidiaries, have already announced smaller premium increases this year, and this could lead to a downturn in the underwriting cycle as rival companies drop rates to compete, said Paul B. Ginsburg, president of the Center for Studying Health System Change.

But Ginsburg and other experts don’t believe that a simple downturn in the underwriting cycle is enough to turn back the clock to the days of near-zero premium growth in the mid-1990s.

“It may be possible to have a few years where premium increases are smaller than spending increases,” he said, but only a “sustained and substantial” decline in health care spending will keep insurance costs from rising further.

Which means that next year, employers and consumers alike can expect to have to dig a little bit deeper into their pockets for health insurance.
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Contact the author Leslie Berestein at (619) 293-1542 or [email protected]