Group Health Rates Still Rocketing Skyward

But the only big new idea for fighting the cost increases seems to be the rise of the "defined-contribution" or "consumer-driven" health plan, which is supposed to encourage consumers to bargain with doctors and hospitals for lower prices.

Defined-contribution programs usually combine catastrophic health insurance with employer-funded health reimbursement accounts. Program members use the HRAs to pay for routine medical expenses.

For now, few experts interviewed are willing to predict the defined-contribution plan or any other innovation will have much of an effect on overall prices in the next five years.

Consumers have a hard time getting basic price information from doctors and hospitals, let alone bargaining, said Richard Stover, a consulting actuary in the Secaucus, N.J., office of Buck Consultants.

Economists have been worrying about the modern U.S. health insurance industry since 1943, when the federal government exempted group health benefits from the federal income tax. Even in the 1940s, forecasters said poorly structured indemnity insurance plans would eliminate the market forces holding health care costs in check.

The predictions came true with a vengeance in the 1970s, and employers soon responded by flocking to PPOs and HMOs.

Then, in the mid-1990s, HMOs ran into trouble with provider price negotiations because of the financial problems of the weak providers and the improved bargaining skills of the strong providers. The surviving HMOs have coped by emphasizing "disciplined pricing."

The result: big, 1980s-style rate increases are back.

Hewitt Associates L.L.C. in Lincolnshire, Ill., estimates that employers are now paying an average of 13 percent more for comparable PPO coverage and 18 percent more for comparable HMO coverage than they were paying a year ago.

When Barry Barnett, a principal in the New York office of PricewaterhouseCoopers L.L.P., met human resources executives at a recent employee benefits conference, "all they talked about was getting rid of HMOs."

PPOs and self-funded plans of all types are more popular right now, but rates for those plans are also going up far faster than the general inflation rate.

Health care experts blame the increases on several factors, including: the usual ups and downs in health insurance rates; burdensome government laws and regulations; advances in medical technology; the aging of the U.S. population; and the fundamental difficulty of managing an industry that has been all but cut off from ordinary market forces.

Some employers say they want to make radical changes.

When the Los Angeles office of Deloitte & Touche L.L.P. surveyed human resources executives in late 2001, 32 percent of the respondents at employers with fewer than 1,000 employees said their employers were considering "dramatic changes" in health benefits, compared with only 12 percent of the respondents at employers with more than 10,000 employees.

But 52 percent of the Deloitte survey respondents admitted their companies current strategy was simply to increase deductibles, co-payments and coinsurance levels.

Corporate human resources executives still dream of curbing costs with disease management programs.

"Two-thirds of our costs are driven by chronic diseases, such as asthma, diabetes, heart disease and arthritis," said CalPERS spokesperson Clark McKinley.

"We hope to develop better ways of managing care for the treatment of members with those diseases early on."

This year, defined-contribution programs are also getting a real test.

Managed care companies are spending heavily to develop the programs, according to Brad Kimler, a health care consultant in Hewitt Associates Boston office.

The Internal Revenue Service recently helped by declaring that employees can keep unused HRA cash in HRA accounts at the end of the year without recording the cash as taxable income.

The new IRS guidelines "remove a lot of the questions" that once worried employers, said Tom Billet, a senior consultant with Watson Wyatt Worldwide, Washington.

Hundreds of employers are testing the defined-contribution approach this year by offering programs from organizers such as Definity Health in Minneapolis, MyHealthBank in Portland, Ore., and HealthMarket Inc., Norwalk, Conn.

Large managed care companies such as Principal Financial Services Inc. of Des Moines, Iowa, and Aetna Inc. in Hartford are also introducing defined-contribution programs.

Aetna rolled out a defined-contribution program for large, self-insured employers in January, then added a similar, insured program for smaller employers a few weeks ago. The company can now set up insured defined-contribution programs for employers with 50 to 3,000 covered employees.

Principal introduced a defined-contribution program in May that offers employers the option of including 100 percent coverage for some preventive and routine care as well as catastrophic health insurance and employer-funded HRAs.

So far, most employers testing the defined-contribution concept are offering the program as an extra option. About 6 percent to 10 percent of the eligible employees are joining, PWCs Mr. Barnett estimated.

None of the program organizers say they have enough data to know much about how the programs are actually working.

Although the defined-contribution programs are getting most of the attention, a few experts wonder whether HMOs could stage a comeback.

"HMOs are down, but they arent out," said Erin Holve, a senior policy analyst in the Washington office of the Kaiser Family Foundation. Eventually, if cost pressures continue to mount, both employers and employees might trade some flexibility for lower rates, Ms. Holve said.

Mr. Billet at Watson Wyatt expects HMOs to keep a significant share of the market they already have.

Tim Brown, Aetnas senior vice president for select and key accounts, sees HMOs continuing to hold their own in California, the Northeast, and states such as Florida, Texas and Georgia.

Rich Hamer, director of InterStudy, St. Paul, Minn., a managed-care market research firm, contends that the death of the HMO has been greatly exaggerated.

Although about half of HMOs shrank in 2001, "about half of the HMOs grew," Mr. Hamer said.

Most of the shrinkage in commercial HMO enrollment is the result of efforts by Aetna to revamp the large HMO operations it has acquired from other carriers, Mr. Hamer added.

Besides, this year, HMOs "have had a lot of activity in their request-for-proposal departments," he said.

Nevertheless, despite the efforts HMOs have made to improve quality and consumer satisfaction in recent years, CalPERS finds that only 54 percent of working-age participants report overall satisfaction with CalPERS HMOs, while 70 percent of the working-age participants report overall satisfaction with CalPERS PPOs.

The American Association of Preferred Provider Organization in Jeffersonville, Ind., reported that the HMO share of the employer-sponsored health market had grown to 32 percent in 2000, from 27 percent five years earlier.

But PPOs share increased to 44 percent from 29 percent over the same period.

In theory, if disease-management programs, defined-contribution programs and HMOs all fail to help, the federal government could step in.

But "I dont hear any employer saying, We give up. Lets get the government to help with health care," Hewitts Mr. Kimler said.

"I dont have any employers saying, Lets get out of the health business," Mr. Barnett agreed. "They want to own it themselves."

The experts were warmer to the idea of insurers, employers and providers increasing health care "price transparency" through private negotiations.

HealthMarket, for example, has tried to set itself apart from other defined-contribution start ups by using its Web site to give members some information about the prices that its network doctors have agreed to charge HealthMarket plan members.

Allison Bell is an assistant editor for NU's Life & Health/Financial Services edition

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, August 26, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.