No Simple Remedies

Economist Stuart Altman warns that without government or market constraints, there are no cures for rising health-care costs.

Here we go again. After nearly a decade of relatively moderate price increases, health-care costs and insurance premiums are set to skyrocket. And this time, the situation could be worse for employers than it was in the 1980s, says Stuart Altman, professor of health-care economics at Brandeis University and a senior health-care adviser to Presidents Nixon and Clinton.

In the 1980s, there was at least the prospect of a new managed-care model that might slow the growth in health-care expenditures. The model even worked for a while. Between 1995 and 1997, the annual growth in health-care spending was a tolerable 3.5 percent, though since then it has steadily climbed: it reached an estimated 9.3 percent last year.

In the process, however, the managed-care industry has become public- enemy number one–demonized as bureaucrats who compromise public health for the sake of corporate profits. The health-maintenance organizations and the insurance industry are now despised by medical practitioners and consumer groups alike.

That animosity is about to wreak havoc with corporate health- insurance premiums. With no government or marketplace constraints, health-care providers are in a position to raise rates as much as they see fit. And rather than fight it, insurers are simply passing the costs along to employers. In fact, in many regions, private insurance premiums are rising faster than the underlying costs, as insurers play catch-up for lagging costs in the mid-1990s. The California Public Employees’ Retirement System (CalPERS), for example, one of the most powerful insurance buyers in the country, had to fight the California HMOs tooth and nail to limit its increase in premiums to 13 percent this year. Small businesses are facing hikes of up to 30 percent.

What’s to be done? With no intermediary willing to battle with the health-care providers, employers will have to fend for themselves. CalPERS has decided to double out-of-pocket fees for visits to the doctor to $10, and it is also increasing co-payments for prescription drugs. Other employers will undoubtedly have to consider more drastic measures. And while few companies have yet to take the radical step of switching to defined contribution plans, in which employees are responsible for any increases over an agreed-upon amount, that could soon change. Altman calls defined contributions “the only new nirvana out there today” for employers facing runaway health-care costs.

CFO senior editor Andrew Osterland recently spoke with Altman about the current economics in health care, and about how employers are dealing with an increasingly difficult situation.

Health-care costs are expected to increase, on average, about 10 percent this year. Some small businesses are facing 30 percent hikes in insurance premiums. This comes after almost a decade of relatively modest health-care inflation. What happened?
We went through a period of rapid increases in health-care costs through the 1980s until about 1992. The percentage of our gross domestic product spent on health care, in fact, went from about 9 percent in 1980 up to almost 14 by 1992. Experts, including myself, were predicting that based on then- current trends, we would hit 16 to 18 percent by the year 2000. But beginning around 1993, because of the pressure of managed care, combined with limitations on government spending, health-care spending as a whole began to flatten out. How did those pressures translate into lower costs?

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