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From Health Affairs:

During and immediately after the recent recession, national health expenditures grew exceptionally slowly. During 2009–11 per capita national health spending grew about 3 percent annually, compared to an average of 5.9 percent annually during the previous ten years. Policy experts disagree about whether the slower health spending growth was temporary or represented a long-term shift. This study examined two factors that might account for the slowdown: job loss and benefit changes that shifted more costs to insured people. Based on an examination of data covering more than ten million enrollees with health care coverage from large firms in 2007–11, we found that these enrollees’ out-of-pocket costs increased as the benefit design of their employer-provided coverage became less generous in this period. We conclude that such benefit design changes accounted for about one-fifth of the observed decrease in the rate of growth. However, we also observed a slowdown in spending growth even when we held benefit generosity constant, which suggests that other factors, such as a reduction in the rate of introduction of new technology, were also at work. Our findings suggest cautious optimism that the slowdown in the growth of health spending may persist—a change that, if borne out, could have a major impact on US health spending projections and fiscal challenges facing the country.

I found this article by Peter Ubel, M.D., in The Atlantic on the potential unintended consequences of healthcare pricing transparency to be interesting.  Maybe it’s because I recently read Dan Ariely’s Predictably Irrational–a behavioral economist’s fascinating look at why we don’t make financially rational choices.

Ubel, who is also a behavioral scientist says, “Patients often don’t shop for health care in the kind of rationally defensible way that economic theory expects them to.”  One reason is that insurance pays the bill for a lot of us; so why pick the cheaper option?  Another is that people often assume that higher cost means better quality.  For example, Ubel notes, “studies show that expensive pain pills reduce pain better than the same pills listed at a lower price.”  Ubel adds:

Measuring health care quality is no simple task. But if we are going to push for greater price transparency, we should also increase our efforts to determine the quality of health care offered by competing providers. Without such efforts, consumers will not know when, or whether, higher prices are justified.

From a recent presentation by Brian Klepper, chief development officer of onsite clinic firm WeCare TLC (Atlantic Beach, FL)–based on data from The International Federation of Health Plans, OECD and The Commonwealth Fund.

Plus, some additional charts from IFHP’s recently released 2012 Comparative Price Report showing variation of medical and hospital prices across seven nations, including the U.S. (Hat Tip, WonkBlog).

Citing data from CDC, investment bank Leerink Swann notes that reported cases of flu continue to moderate, adding that “flu related hospitalizations have declined significantly in the past two weeks.”   Still, flu activity is up significantly from last year, which means higher HMO medical costs in the first-quarter of 2013, Leerink says. 

I’m not the first to note that health insurance is an easy business to understand. If rate increases keep pace with cost trends, it’s good news for profits. If not, it’s not. Deutsche Bank analyst Scott Fidel says that in 2013 “price increases are not expected to keep pace with medical cost trend,” based on the company’s annual survey of more than 200 employers.

It’s more or less a classic downturn in the underwriting cycle, with competition intensifying and keeping a lid on pricing. Company-specific downgrades include industry leaders UnitedHealth and WellPoint, which Deutsche Bank cut from Buy to Hold.

In other findings, the survey notes:

One of the most noteworthy thematic takeaways from our survey was the remarkable decline in interest among employers in shifting employees into the new public Exchanges beginning in 2014. Only 1% of employers expressed interest in the public Exchanges for 2014, down from 11% in last year’s survey.

The Cost Disease: Why Computers Get Cheaper and Heath Care Doesn’t
by William Baumol
Yale University Press, 2012

Reviewed by Carl Mercurio

Worried about rising healthcare costs?  Rest easy.

William Baumol argues in The Cost Disease: Why Computers Get Cheaper and Health Care Doesn’t that healthcare costs will always increase at a faster rate than the overall economy because like many services industries healthcare is labor intensive–i.e., it resists the type of productivity growth found in sectors like manufacturing and agriculture.

That’s the bad news.  The good news, Baumol says, is that we can afford to pay more for healthcare because we are paying less for everything else.  Baumol is a professor at NYU Stern School of Business.

It’s an interesting argument that reminds me of comments from Douglas Elmendorf, director of the Congressional Budget Office, at a 2010 healthcare conference in Washington, DC: “We simply don’t have the ability…to change the growth rate.”  Instead of using the phrase “bend the curve,” he said, CBO tends to talk about ways “to reduce spending without hurting health.”

Baumol lists all the usual suspects for outsized healthcare costs in the U.S., including waste, medical errors, unnecessary or inefficient treatments, fee-for-service payments, the emphasis on medical specialists, and medical liability.  A variety of innovations, technologies and management initiatives can address these issues and reduce overall healthcare costs, he suggests, but it still won’t necessarily slow the rate of increase.

Now here’s a counter argument from Austin Frakt of The Incidental Economist: systematically addressing the use of inefficient treatments (i.e., interventions and technologies that are inappropriately applied or aren’t as effective as cheaper ones) will reduce the rate of growth in healthcare spending.  Frakt also argues that Baumol too readily dismisses other potential cost drivers, like provider market concentration.

I don’t know who’s correct.  (I struggle when the economic models come out).  But even Frakt agrees that Baumol “has illustrated that it is at least possible that rapid growth in healthcare costs need not be viewed as the central problem or even a problem at all.”

If current trends continue, Baumol projects that by 2105 healthcare will account for 62% of gross domestic product per capita, compared to 15% in 2005.  It sounds scary, but Baumol argues, “The only thing that will change, in terms of the cost to us, is how we will have to divide our money among these items.”

That said, Baumol offers a variety of caveats and hints at the type of profound policy implications the cost disease will pose.  For starters, the cost disease disproportionately affects the poor, Baumol says.  Furthermore, as government spending on services like healthcare rises, so does the threat of ill-advised calls for budget cuts and lower taxes–an approach Baumol says will needlessly cause society to suffer from self-inflicted wounds.

“Improvements to healthcare and education are hindered by the illusion that we cannot afford them,” Baumol writes.  Or as he quotes from a Washington Post editorial: “The country has a lot of money.  It’s only a question of how we choose to spend it.”

Individuals in New York will  pay $439 more per year in health insurance premiums from 2014 to 2023 because of the ObamaCare tax on health plans, according to research commissioned by America’s Health Insurance Plans as part of the association’s efforts to have the tax repealed.  That’s the most of any state.  Individuals in Arkansas would pay $167 more, the least of any state. 

The analysis, by Oliver Wyman, assumes the tax is entirely passed along to consumers–raising premiums not just in the individual market, but in large group, small group, Medicare and Medicaid as well.  In a prior analysis, Oliver Wyman said the tax would increase overall premiums at least 1.9% in 2014 and 2.8% in 2023. 

Of course, if it’s not passed along, then it will hurt health plan profit margins instead. 

Scott Fidel of Deutsche Bank assumes a little bit of pass-along and a little bit of negative impact to net margins among commercial and Medicare plans.  For Medicaid plans, he expects the tax will be fully built into state capitation rates since margins are already razor-thin in the Medicaid market and plans can’t charge supplemental premiums or reduce benefits on their own.

As previously discussed on this blog, a variety of offsets are expected to temper premium hikes.  And CBO has been projecting for some time higher premiums in the individual market (sticker shock for some, subsidies for others, better benefits for most), but essentially no increases in the rest of the commercial market.

So what does the AHIP/Oliver Wyman analysis add to what hasn’t already been said?  The data on health plan premiums and taxes by state and segment are interesting.  So is the chart showing share of fully funded vs. self-insured membership by state (national average: 46.5% fully funded vs. 53.5% self-insured).  Best of all, the report uses the word seriatim, which inspires my inner nerd.

The good news is healthcare costs for employers rose just 4.1% in 2012, the lowest rate of increase in 15 years, according to an annual Mercer study.  The rate of increase is projected to be just 5% in 2013. 

The bad news is that without changes to benefits and other cost containment efforts, the rate of increase would be 7.4% in each year.  For example, employers continue to shift costs to employees through higher PPO deductibles, and enrollment in consumer-directed high-deductible health plans and even defined contribution plans continues to rise.  Notes Sharon Cunninghis, U.S. business leader for health and benefits at Mercer:

Over the past decade, employers have figured out how to stabilize health benefit cost increases through cost-shifting and other cost management techniques. Now we’re seeing a move toward even greater control through defined contribution strategies.

That’s slower than prior years, but still way faster than the overall economy.  From the annual Milliman Medical Index:

The annual Milliman Medical Index measures the total cost of healthcare for a typical family of four covered by a preferred provider plan.  The 2012 MMI cost is $20,728, an increase of $1,335, or 6.9% over 2011.  The rate of increase is not as high as in the past, but the total dollar increase was still a record.  This is the first year the average cost of healthcare for the typical American family of four has surpassed $20,000.

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From the Altarum Institute.  Year-over-year growth in national healthcare expenditures by month.

But we don’t have a “generalized problem of runaway spending…that requires cuts across the board” to fix the federal deficit, according to former Fed vice chairman Alan Blinder, writing in today’s Wall Street Journal. 

He cites long-term CBO projections that the primacy deficit (which excludes interest payments) will bottom out at 2.6% of GDP in 2018 and then rise to 7.4% by 2040.  The entire increase will come from rising healthcare costs. Notes Blinder:

We have a huge problem of exploding health-care costs, part of which show up in Medicare and Medicaid spending.

Other “deficit myths,” Binder argues, include the notions that Americans are demanding deficit reduction like never before (they’re not, he says) and that the deficit problem is so acute it requires immediate spending cute despite the bad economy (it isn’t, he says).

From CMS:

1. 2.7 million Medicare recipients saved more than $1.5 billion on prescriptions because of discounts mandated by ObamaCare in the donut hole.

2. Through November, 24 million people Medicare recipients have received free preventive care, which is mandated by ObamaCare.

At the company’s annual investor conference, UnitedHealth Group released data on expenditures in the U.S. healthcare market for 2011 as follows:

Commercial
Members 171 million
Expenditures: $850 billion

Medicaid and Related Programs
Members: 60 million
Expenditures: $440 billion

Medicare:
Members: 48 Million
Expenditures: $575 billion

Notes Christine Arnold of Cowen, “Key leading indicators metrics suggest medical cost trends may no longer be decelerating, although a dramatic uptick seems unlikely at this point.”  She points to an uptick in physician visit volume and a trough in the S&P non-Medicare healthcare cost index.

The latest from The Commonwealth Fund, citing 2011 OECD data.

From Costs of War, a study prepared by The Watson Institute at Brown University:

Approximately 8.3 jobs are created by every $1 million in military spending….A million dollars of spending would create 15.5 jobs in public education, 14.3 jobs in healthcare, 12 jobs in home weatherization, or about the same number of jobs in various renewable energy technologies.   A million dollars spent on construction (residential and non-residential structures) creates 11.1 direct and indirect jobs….

The (at least) $1.3 trillion of Department of Defense war spending in the past decade averages out to $130 billion per year.  While these funds did indeed create jobs in the military and in related sectors….$130 billion per year could have created a net increase of jobs in other sectors:  for example, more than 300,000 jobs in construction, or 900,000 jobs in education or about 780,000 jobs in healthcare.

Premiums for federal employee health benefits will rise just 3.8% in 2012, according the U.S. Office of Personnel Management, which notes that negotiations with insurers “kept premium increases as low as possible without increasing the out of pocket costs, such as for deductibles, co-pays, and coinsurance.”  In 2011, premiums rose 7.3%. 

Some 8 million federal employees are covered by OPM under the Federal Employees Health Benefits Program at a cost of $43 billion, and the good news here is that rate hikes in the federal program tend to be an indicator of price increases in the commercial market.  As previously reported, a recent Mercer employer survey suggests premiums for 2012 will rise about 5.4%.  However, Mercer notes, without benefit buydowns and cost shifting, the increase would be more like 7% in 2012.

Health insurance premiums rose about 8% for single and 9% for family coverage in 2011, according to the Kaiser Family Foundation’s annual survey of employers.  The data encompass both self-insured and fully funded plans.  The rate of increase is considerably higher than last year, when single premiums rose nearly 5% and family premiums just 3%. 

The question is why the big spike?  KFF gave no clear answer.  However, KFF chief executive Drew Altman was clear healthcare reform wasn’t the culprit: “Regardless of how you feel about the Affordable Care Act, its effect on premiums this year is modest.  Most of the law’s provisions don’t go into effect until 2014.”  The two biggest mandates taking effect in 2011 — allowing children up to age 26 to stay on their parents’ policies and coverage of certain preventive procedures — account for about 100 to 200 basis points of the 2011 increase, Alman says.

Others aren’t so sure.  Deutsche Bank’s January employer survey found the exact same 9% increase for 2011; however, employers said that healthcare reform accounted for up to 700 basis points of the increase.  “Insurer and employer concerns around the incremental costs of new mandates and taxes….was by far the primary driver of the spike in premium increases for 2011,” says Deutsche Bank analysts Scott Fidel. 

Still other analysts put the cost of reform at around 300 to 400 bps — which I’m guessing is probably closer to the truth given that underlying cost trends seem to be hovering the in 5% to 6% range.  

The cost of health benefits to employers is expected to rise about 5.4% in 2012, the slowest rate of increase since 1997, according to preliminary annual survey data from benefit consultant Mercer.  There are two reasons why:

1. Employers continue to shift costs to employees or reduce benefits.  Excluding these types of plan changes, costs would rise about 7.1% in 2012.  In other words, employers expect to shift about two percentage points of underlying cost increases to employees next year.  In the past few years, the cost shift had been more like three percentage points — largely because underlying costs had been rising at a faster pace (9% annually over the past five years).   “If the underlying trend is lower to begin with, employers will be likely to shift less cost,” Mercer says.

2. Use of healthcare services is slowing, which may be a result of a bad economy combined with higher deductibles and other forms of cost sharing, Mercer says.  In other words, people can’t afford to spend as much on care so they go without.  Another possibility, Mercer says, is health improvement programs are keeping people out of the emergency room and consumers “are more aware that overuse and misuse of health care services will directly impact their wallets as well as their employer’s budget.” 

This is the kind of selective reporting that drives me crazy.  Sally Pipes of the Pacific Research Institute trashes ObamaCare in an opinion piece in Forbes — implying that recent government projections show healthcare costs will increase dramatically because of reform.  Here’s what the government analysis actually says:

Average annual growth in national health spending is expected to be 0.1 percentage point higher (5.8 percent) under current law compared to projected average growth prior to the passage of the Affordable Care Act (5.7 percent) for 2010 through 2020. Simultaneously, by 2020, nearly thirty million Americans are expected to gain health insurance coverage as a result of the Affordable Care Act.

Consider the Evidence on trends in U.S. healthcare spending versus other nations (hat tip Infectious Greed):

Our gain in life expectancy per additional health spending is much smaller than in other countries, particularly after the early 1980s when we reached expenditures of about $2,500 per person (in 2005 dollars) and life expectancy of around 74-75 years.

A Deloitte study estimates that the hidden cost of healthcare in the U.S. in 2009 was $363 billion — most of which is the imputed value of “supervisory care,” i.e., taking care of a sick or disabled spouse, family member or friend.  The rest is for products and services not counted in the annual government tally of healthcare expenditures, like spending on nutritional supplements, mental health and substance abuse facilities, alternative medicine, certain ambulatory and ambulance services and weight-loss centers.

Source: Deloitte.  Based on $363 billion in estimated hidden U.S. healthcare costs in 2009.

More warning signs that healthcare utilization is about to increase.  Notes Google Flu Trends:

We have found a close relationship between how many people search for flu-related topics and how many people actually have flu symptoms. Of course, not every person who searches for ‘flu’ is actually sick, but a pattern emerges when all the flu-related search queries are added together. We compared our query counts with traditional flu surveillance systems and found that many search queries tend to be popular exactly when flu season is happening.

Google results are published in the journal Nature.  (Hat tip: Citi Investment Research)

Here’s a chart from a new HHS study highlighting projections that without healthcare reform, premiums for individual and family health insurance would be 14% to 20% higher than with reform.  The savings are expected to come from an expanded risk pool, reduced administrative overhead through the advent of health insurance exchanges, and increased competition and choice.  Reform also provides families earning up to 400% of the federal poverty level subsidies or tax credits, further reducing their premium costs.  Families paying the entire premium could save as much as $2300 annually on an $11,400 policy, the study notes.  For families who receive subsidies the savings are much higher.

Trade group America’s Health Insurance Plans disputes the findings, noting that premiums tend to rise along with medical costs — and reform does very little to address cost trends.  AHIP says the HHS report “overstates the cost savings associated with certain provisions of the new law and ignores major provisions that will raise premiums, including the new premium tax, age rating restrictions that impact younger workers, and benefit mandates.”  Here’s a chart from AHIP illustrating the point:

Who’s correct?  Maybe both HHS and AHIP.  Costs do tend to drive premium increases — and costs are still rising.  But as previously reported, there’s also the chance that the minimum medical cost ratio provisions of reform will cause plans to temper rate hikes rather than pay out big member rebates.

WellPoint chief financial officer Wayne DeVeydt during the company’s fourth-quarter 2011 earnings call.

We continue to believe that underlying medical trend will increase in 2011, and we are reflecting this assumption in our pricing.