As Congress gets ready to reconvene next week and take up healthcare reform, the reality of seemingly uncontrollable medical costs will be playing out once again. Despite near-zero inflation and recessionary conditions, health insurers in 2010 face another year of double-digit increases in the charges they pay for hospital services, physicians, drugs, and other healthcare costs. Premiums will rise and some health plans will raise co-pays for doctors visits, eliminate coverage of some expensive drugs and consider other ways to save money. Imagine if the auto industry decided to make its case for government support by jacking up the price of the vehicles that consumers already can't afford.
"2010 medical plan cost trends will be more than four times greater than the annual increase in average hourly earnings," the Segal Co. said in its authoritative annual review of cost trends at most of the nation's major health and drug-plan providers. For the year ended last July, it noted, wages rose by 2.5 percent.
The biggest percentage impact of the changes may be felt by the estimated 11 million older Americans with Medicare Advantage policies, according to Edward A. Kaplan, the senior vice president at Segal who oversees the cost survey. Medicare Advantage policies offer more benefits than regular Medicare. In addition to the basic premium for Medicare, consumers pay an extra premium to the private insurers who administer the Medicare Advantage plans. However, the Centers for Medicare & Medicaid Services (CMS) historically has paid the insurers extra money to offer the policies and the products have featured an attractive combination of affordable premiums and enhanced services. Now, that is changing. CMS decided earlier this year to raise the amount it pays to the Medicare Advantage plans by only 1 percent in 2010, Kaplan said. With the plans facing cost increases of nearly 10 percent, they either must reduce coverages, cut profit margins, or raise premiums.
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CMS payment rates vary by location but Kaplan said it would not be unusual to have an MA plan where the insurer is receiving $1,000 a month from CMS and charging retirees premiums of $100 a month. Even if the plan had a solid profit margin, raising its expenses by nearly 10 percent would force it to seek additional revenues, he said. Say, for example, the plan sought $60 in additional monthly revenues per insured person. Because CMS will only pay it $1,010 a month (an increase of 1 percent), the other $50 would come from retiree premiums. In this example, retiree premiums would rise 50 percent to $150 a month from $100. Social Security already has forecast no cost-of-living increases for benefits in 2010 and 2011, so retirees will be especially pressed to pay higher healthcare expenses.
Medicare Advantage insurers are looking for other ways to absorb the expected cost increases, Kaplan said, but he already is beginning to see "dramatic rate increases" of 20 to 35 percent. "These Medicare Advantage plans were a big bargain, and now that's going to go away."
Ironically, the dominant source of healthcare cost pressure is the federal government, Kaplan said. Charges for Medicare and Medicaid provide hospitals with half of all their revenues, he explained, and dominate fee structures for other segments of the industry. To keep costs down, CMS has been underpaying for these services, he maintained. So hospitals, doctors, and drug companies have been trying to compensate by raising the fees they charge to insurance plans. Historically, Kaplan said, the plans have felt forced to pay these charges in order to maintain insurance programs that are attractive to employers and consumers.
"Hospitals have had market power," he said, and health plans have not wanted to drop expensive hospitals from their network. But that's changing, he feels. "Plans will have to disrupt member choices, cut out some hospitals and other services," he said. "I think we're at that time right now."
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Other health insurers are also facing the same cost pressures, but consumers will not be expected to shoulder such big premium increases on their own. Employers, who pay most of the tab for healthcare coverage, will have some tough decisions to make. Expect to see health plans with more wellness incentives, preventive screenings, and reduced or even eliminated coverage for some brand-name types of drugs. Office co-payments may be lowered for visits with primary-care physicians but increased for appointments with specialists.
Here are the top-level expense trends faced by different types of insurance plans, according to the Segal survey:
- Fee for service, indemnity plans: up 13.3 percent, or 12.5 percent including prescription drug coverage.
- High deductible health plans: up 11.9 percent (11.3 percent including prescription drugs).
- Open access PPO (preferred provider organization) and PSO (point of service) plans: 10.8 percent (10.5 percent including prescription drugs).
- HMOs (health maintenance organizations): 10.2 percent (10 percent including prescription drugs).
- Medicare Advanatge fee for service plans: 9.8 percent (9.5 percent including prescription drugs).
- Medicare Advantage HMOs: 7.7 percent (8.2 percent including prescription drugs).
These expense trends generally are an improvement on last year, Segal notes. Prescription drug expenses, for example, are forecast to rise 9.1 percent, their second consecutive sub-10 percent year. Increased use of generic drugs plus a lack of new mass-market biotech drugs is helping drive claim trends downward, the company said. Still, it said, "inflation rates on brand name medications are projected to exceed those on generic medications by over 100 percent." For specialty biotech drugs, the annual trend rate for claims increases is expected to be 17.8 percent, down slightly from 18.1 percent in 2009.
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