•••Why Premiums Change!

Warnings of rising medical insurance cost has been a topic of many a published article in the last six months. William M. Mercer's New York Office (one of the nations largest benefits consulting firms) predicted in 2001, higher than normal, double-digit inflation, for the next three years. With the average employee monthly premium exceeding $245, many of our clients are asking why. The reasons are dynamic:

  • Claims losses over the last two years have had a negative impact on insurance carriers and their re-insurance markets. Medical inflation was suppressed in 1994, during the Clinton Health Care debates. Insurance companies, posting lower premiums to combat possible legislation, under priced product, which increased losses.
     
  • The pre 09-11-01 economic boom in America caused increased discretionary income and hence spending. The desire for better lifestyle increased consumer medical spending,  which increased  demand for medical goods and services. When demand goes up, so to does price of goods and services demanded. The fact that we are able to treat conditions in the past that would have previously resulted in death, is a testament to the success of our healthcare system. The demand for our high standards of care will continuously increases the price for these products and services
     
  • Increased aging of the population as "Baby Boomers" reach old age. As this segment of the increases at a rate of 15% relative to other age groups, their need for medications and medical care increases. This, in and of itself, causes an increase in demand. Cost increases for treating post age 65 retirees is up from a rate of 9.6% in 2000 to 15.1% in 2002.
     
  • The supply and demand issue was compounded negatively on two fronts: providers of health care and third party payors (insurance carriers). As demand for services increased, larger numbers of physicians no longer found a need to provide discounted services to the vast number of managed care networks. Inversely, the mergers of insurance carriers and networks, combined with the exit of some carriers from the market place, reduced the availability of insurance market alternatives. The combination of increased demand, fewer claims dollars being discounted through diminishing managed care providers (doctors) and less competition between available insurance carriers yielded the inevitable: increased cost!
     
  • The number of additional federal and state benefit mandates added by public sector health care reformers has increased the cost of medical coverage. We all witnessed the effects of de-regulation on transportation and communications industries in the last decade...costs went down. Yet, our governments insist on mandating benefits, with the good intentions of providing needed coverage and reducing the uninsured population. To the contrary, the opposite has and, according to basic economic principals, will always happen (costs go up).
     
  • New drugs being advertised on television with no generic equivalent are exponentially higher due to advertising cost and increased demand. Cost shifting occurs in the drug market with lower cost demands from overseas markets and domestic cutbacks in Medicare reimbursements. The recent discovery by Senate investigation committee of collusion in the drug industry to suppress production of generic alternatives is affecting employer drug cost and brand name drug utilization.
     
  • The Federal governments Y2K cut backs of $220 billion dollars in Medicare reimbursements to physicians and hospitals caused considerable cost shifting to private sector, third party payors. Physicians and hospitals, in an attempt to recover lost revenue from Medicare patients, increased the cost of non-Medicare patient services.
     
  • Pending legislation on Capital Hill in the form of the Patient Bill of Rights, or the Patient Protection Act, could further inhibit your ability to provide cost effective benefits to your employees. These bills provide provisions that promote lawsuits and legal action against medical providers, insurance companies, and representative agents. The bills also permit insured's to sue plan sponsors (employers) for providing managed care coverage. Numerous independent studies indicate that, if these bills pass, more than 30% of employers now providing employee welfare benefits, will no longer provide coverage to employees if their liability and cost are increased by said bills.
     
  • As of March 1, 2002, the stock market has been in a fourteen-month slump. For the first time in many years the insurance industry has had to rely on profits from premiums more that from investment income. This pressure on premium income to compensate for loss in investment revenue is just another factor in the dynamic of cost drivers.
     
  • The post 09-11-01 terrorist attack and the subsequent Enron debacle, added to the losses in the insurance industry. By November of 2001, AIG, alone had $800,000,000 in claims associated with the Twin Tower collapse. That sum is expected to grow as time goes on. AIG predicts it's losses from law suits against the Board of Directors coverage with Enron, to be as catastrophic as the Twin Tower disaster. AIG is just one of many insurance carriers negatively effected by the events of 09-11-01 and the Enron collapse. Suite for rail road, slave, labor, reparations was recently filed against Aetna for $500 billion dollars
     
  • Malpractice law suites in many parts of our country, specifically southern Texas counties, have caused physician malpractice insurance premiums to increase as much as 300%. Even though practitioners have won 80% of the cases, the legal expense and time expended in legal actions has taken it toll on physicians. This recent phenomena is causing many physicians to re-consider the business location. For some, consideration in early retirement or change of profession to limit liability. Any of the three noted actions will cause a decrease regional supply of physicians' services, which will cause an increase in cost. This supply side increase will be added to the additional cost of doing business with increased malpractice insurance premiums.

The dilemma you face, as an employer with rising employee benefit costs, is: to reduce employee benefits, require increase premium contribution from employees, or absorb the increased cost. These are only short-term responses to a grown problem.

Real solutions to the above are not simple, but are certain attainable. They are not beyond our control, but require our time and vigilance. ERISA (Employee Retirement and Income Security Act) exempt, self-funded plans have traditionally a lower cost per capita, due to the absence of State mandates and greater plan flexibility. Providing low cost coverage through fully insured plans can also be done by small employers if:

  • State and Federal governments repeal all employee benefit mandates.
  • Eliminate the "Raiding" of Social Security and Medicare Trusts for other governmental spending.
  • Federal government provide Health Care Tax Credits, similar to those proposed by the National Association of Health Underwriters, National Center for Policy Analysis, and the Bush administration. This will reduce the number un-insureds and the demand public sector dollars to pay for "Welfare healthcare".
  • Cap punitive damage awards and propose penalty fees for nuisance lawsuits.
  • Foster and promote managed care environments within your employee population.

The above efforts will not benefit you or your employees in the short term. They will, however, play an important roll in your ability to access and afford benefit plans for your employee in the future. Taking advantage of Medical Spending Accounts (MSA), Defined Contribution Plans, Consumer Directed Health Plans, alternative-funding methods, are but a few ways to respond to rising costs. I am confident we will find something in today's market place to accomplish your long-term health and welfare objectives.