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Medical cost trend fairly stagnant, but consumers shouldering bigger load of healthcare costs

The total 2009 medical cost for a typical American family of four in an employer-sponsored PPO will increase more than 7% this year. These same families are paying an additional $500 more for healthcare than they did in 2005, according to the fifth annual Milliman Medical Index (MMI).

Although employees are spending more in 2009, the increase is actually the lowest trend rate since the MMI started following trends five years ago and is the third consecutive rate decrease. (See Figures 4 and 5.)

Despite that bit of good news, employees will still pay nearly another 15% in employee payroll deductions for healthcare compared to 2008. Meanwhile, employee out-of-pocket cost sharing will increase by 5.4%. Employers will see the same increase, which is the lowest medical cost increase over the past five years.

Employers are increasingly transferring healthcare costs to employees through higher premiums and out-of-pocket costs.

As businesses have struggled in the current economy, they have transferred more health costs onto employees. With another 7% added to employee health costs, have we reached a tipping point? Ron Cornwell, principal and consulting actuary at Milliman in Omaha, NE, says no.

“Is there still room where employers are saying we can go farther? Yes. Is there a case where the majority of employees can say we can absorb more? Yes. But at the same time, for some employers it has reached a tipping point,” says Cornwell. “For some employees, it has reached a crisis stage. There are stories out there, but in the aggregate we still see there is still some room in the system to take on some of the burden of these costs right now.”

Employers still pay the majority of healthcare costs, contributing 59%, compared to 24% for employee contributions and 17% from employee out-of-pocket costs, according to Milliman. That said, this is the first year Milliman has seen employee costs outpace employer contributions by such a large margin. (See Figure 6 on p. 4 and Figure 7 below.)

“This statistic reiterates the struggle that employers are experiencing right now with this tight economy and rising healthcare costs,” says Cornwell.

Although employers are shifting benefit plans toward greater employee responsibility, businesses are also laying off employees and cutting salaries as a way to achieve immediate cost savings. Milliman wrote:

Because benefit plans are typically changed only annually, and because employees can choose to change plans only once each year, cost sharing is slower and more variable in its impact than other cost-saving strategies. In light of this, we find many employers are choosing to implement salary reductions or layoffs now in order to ensure their viability and will consider additional, perhaps more dramatic, changes to their benefit plans in future annual benefit cycles. In other words, we expect benefit plan changes to continue even after the recession subsides.

Macroeconomic effects on healthcare costs

The combination of sagging private business revenues, rising unemployment rates, decreasing government tax revenue, and lower healthcare provider gross revenues are affecting total healthcare expenditures.

Milliman found that every category (i.e., outpatient, inpatient, physician, pharmacy, and other) had lower cost trends than inpatient and outpatient costs. (See Figure 8 at right.)

Over the past five years, outpatient and pharmacy have increased the most of the five areas. During that same time span, physician cost trends were one of the lowest components, although they still comprise the highest component of spending, according to the MMI.

The reason for medical cost increases are higher prices for services and not utilization of inpatient and outpatient hospital services. In fact, the utilization trend will be flat this year, according to Milliman. This is because insured people are delaying care due to higher out-of-pocket costs and economic instability, along with there being more uninsured Americans because of layoffs and employers cutting benefits.

Patients delaying care could lead to long-term health problems, which could cost the healthcare system more in the long run. This could also force providers to increase costs in the short term, says Lorraine Mayne, principal and consulting actuary at Milliman in Salt Lake City.

“These utilization changes may temporarily keep the trend lower, but ultimately may put an upward pressure on the cost for service because healthcare providers will need to continue covering their costs and maintaining their incomes,” says Mayne.

Although costs are on the rise, the Milliman researchers found positive initiatives in regard to improving quality and efficiency. Some healthcare players are reversing cost trends through inpatient efficiency and quality, commercial payers are focusing on inpatient utilization review, and Medicare is focusing on reducing readmissions and not paying for never events.

“On the employer front, we’re continuing to see a focus on prevention, wellness, and disease management services, but the purchasers are becoming more savvy,” says Kate Fitch, principal and healthcare consultant at Milliman in New York City, adding that employers are now demanding better reporting and vendors risk their fees by achieving specific outcomes.

Healthcare professionals are also promoting the medical home concept as a way to improve care and lower costs. The medical home has been touted as an alternative to disease management and an enhancement of the programs, although questions remain about the concept.

“The verdict is still out whether the medical home delivery of care will reduce medical cost trend,” says Fitch.

Miami tops costs

Of the 14 major metropolitan areas Milliman reviewed for MMI, Miami topped the list for 2009 with an MMI of $20,282, which is 120.9% of the national percentage. New York City finished a close second with $19,684 MMI or 117.4% of the national percentage. Phoenix and Seattle, meanwhile, were the lowest MMI, with $14,857 (88.6% national percentage) and $15,564 (92.8% national percentage) respectively. (See Figure 9 below.)

The costs of services varied by area, Fitch says. For example, although Seattle enjoys the lowest inpatient costs, it ranks worse for outpatient costs. Phoenix, which has the lowest outpatient and physician costs, is in the middle range for inpatient costs.

The costs are related to many factors, Fitch says. Most important are the variations in provider practice patterns and consumer purchasing patterns. To a lesser extent, regional variation in costs dealing with doing business in those areas, differing labor costs, and local regulations are a factor.

The cost differences between the highest and lowest MMI could have been greater if Milliman had included rural areas.