This is a continuation of last week’s blog entry. I’ll go into more details here.
UNDERLYING DRIVERS OF PREMIUM GROWTH
As stated last week, 87% of all money taken in is paid out in benefits. Administrative costs were 13% and grew at a lower level (5.3%) than the cost of care (which was 6.1% in 2007).
While this doesn’t sound so bad, remember that this far outstrips the wage growth of the United States earner.
The 6.1% increase can be broken down into the following categories:
General Inflation – This accounted for about 46 percent of the increase.
Health care Price Increases in Excess of Inflation – This made up about 30 percent of the increase. Some of the causes were decreased provider competition, cost shifting from Medicaid and uninsured to private payers, and higher-priced technologies.
Increased Utilization of Services – The remaining increase (about 25 percent) was due to more people using more services. Breaking this down further, this increase was driven by new treatments, people getting older, changes in lifestyle, and more intensive diagnostic testing/defensive medicine (e.g. going in for a head ache and your doctor prescribes an MRI. Not because you need one, but because if they don’t prescribe it and it turns out to be a tumor, you can’t come back and sue them).
BREAKDOWN OF BENEFIT COST GROWTH BY SEGMENT
Note: this does not equal 100%. These are just the largest segments listed.
Physician & Clinic – Accounted for 33 percent of the increase in private insurance premiums.
Hospital Inpatient Spending – Accounted for 25 percent of the increase.
Hospital Outpatient Spending – Accounted for 15 percent of the increase.
Prescription Drugs – Recently this had been the fastest growing segment, but it has slowed down in recent years (due to wider prescribing of generic drugs). It accounted for just 13 percent of the increase.
Other Medical Services – Accounted for just 3 percent of the increase.
SUMMARY OF RISING COSTS
In looking at these segments and the trend in the growth of health insurance costs over the last 40 years, the overall trend has been downward, from an average of a 7% increase forty years ago to about a 5% increase today. This is still significantly higher than the growth in real incomes and real output per capita.
The role of administrative costs (comprising 13% of total health insurance premiums) has remained remarkably steady over the past 40 years with a slight downward trend. Administrative cost growth started around 5.3% in 1966 to its current 4.9%. This is interesting because the way claims are processed now is very different from the way they were back in 1966.
PRIVATE ADMINISTRATIVE COSTS VERSUS MEDICARE COSTS
Private administrative costs are sometimes compared to Medicare’s administrative costs without reference to the significant differences in the two programs and their target populations. Medicare’s costs are approximately 5% versus 13% for private insurers. Medicare’s monthly costs are about $750/month versus $350/month for private insurers. (If you adjust for the cost per enrollee, it would be about 10.5% for Medicare).
Also remember that private insurers develop a wide range of products, sell them, develop and maintain provider networks, offer consumer support services both via phone and online, have to comply with state and federal agencies, and pay state and local taxes. Factor these items in and it is clear that private insurers are just as, if not more efficient than Medicare.
WASTE AND HEALTH CARE COSTS
The definition of waste is spending that does not add value or improve health (and if eliminated, would not have a negative impact on quality). It is estimated that 35% – 50% of all spending is considered waste.
Waste is categorized into three main categories: Clinical, Operational, and Behavioral.
Clinical – Defensive medicine, uneven adoption of evidence based medical practices, and generally, the portion of medical care that contributes to overuse, misuse/underuse of interventions, missed opportunities for early intervention, and errors. Approximately 18% of all spending falls into this category.
Operational – The impact of administrative processes including lack of process coordination across health systems and underuse of information technology. Approximately 14% of spending falls into this category.
Behavioral – This has gotten a lot of press lately and involves individual behaviors that contribute to sickness/disease such as smoking, obesity, not following prescription drug regimens, and alcohol abuse. Approximately 10% of spending falls into this category.
CONCLUSION
Health care cost increases have been going down over the last forty years, but still outstrip real wage increases. Some factors that contribute to the costs are difficult to influence while others, such as wellness and defensive medicine are more easily influenced.
To view the full article where this was taken, please go to http://tr.im/ahip2008.
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