Medical Cost Drivers: What Are They, and What Can Employers do to Combat

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• Medical Cost Drivers What Are They, and What Can
  Employers do to Combat?

Patrick J. Haraden CEBS, REBC, RHU, CLU, ChFC,
MBA, LIA Senior Vice President Longfellow
Benefits April 29, 2008
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Questions for Discussion

• What are the cost drivers behind premium
  increases?
• How do I identify specific cost drivers in my
  health plan?
• How can employers help control costs and the rate
  of premium increase?
• Does the old 80/20 health care cost rule still
  apply?

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Questions for Discussion

• How does Massachusetts (or other states) health
  care reform affect health care costs?
• Do high deductible health plans (HDHPs),health
  savings accounts (HSAs) and health reimbursement
  arrangements (HRAs) work to control costs?

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Agenda

• Current Healthcare Benefit Landscape
• Historical Market Reactions
• Cost Containment/Reduction Strategies
• Are CDHPs Working
• Health Savings Accounts (HSAs)
• Health Reimbursement Arrangements (HRAs)
• Planning and Strategy Considerations

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Current Health Care Benefits Landscape

• Health Care Cost Drivers
• Aging population
• Plan utilization (where and how often)
• Intensity of services
• Technology
• Inflation
• Prescription drugs
• Direct marketing
• Legal/regulatory issues
• Mandates
• Lack of consumerism

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Current Health Care Benefits Landscape

• Health Care Cost Drivers
• Medical malpractice insurance premiums
• Litigation
• Loosening of managed care requirements
• Referrals
• Pre-authorizations
• Provider credentialing and network expansion
• Uncertain economy/job status
• Cost of outpatient procedures (vs. inpatient)

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Current Health Care Benefits Landscape

• Health Care Cost Drivers
• Medical errors
• Hospital and provider office infections
• Readmission rates
• Shortage of healthcare workers
• Increase in health plan profits and reserves

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Current Health Care Benefits Landscape

• Health Care Cost Trend
• Component of cost (premium) increase
• Medical inflation cost of providing service
• Decreased value of copays, deductibles and out of
  pocket costs (leveraging effect)
• Government cost shifting
• Increased medical technology
• Utilization

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Current Health Care Benefits Landscape

• Employer healthcare costs
• Rate of increase has slowed but still 8-12
  annual trends for the near future
• Prescription drugs - decreasing percentage of
  total medical cost - Is this good or bad?
• PricewaterhouseCoopers Trend Survey 2008
• 9.9 - PPO
• 9.9 - HMO/POS/EPO
• 7.4 - CDHP

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Current Health Care Benefits Landscape

• PWC Survey Reasons for Lower Trends
• Slower growth in prescription drugs
• Increased transparency and cost sharing with
  employees
• Total health management approach to benefits
• Increased use of technology in healthcare delivery

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Current Health Care Benefits Landscape

• Consumer directed/driven, etc.
• Cost savings or cost shifting?
• No real Consumer yet employer still in the mix
• Cost savings due to price competition or
  decreased utilization (i.e., chance to roll over
  money)?
• Do members have enough cost/quality information?
• Can they make rational decisions
• Employer liability medical errors, etc.

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Historical Market Reaction to Higher Costs

• Employer response
• Increasing co-pays, deductibles, out-of-pockets
• Decreasing employer subsidy level
• Decreasing benefit levels (e.g., maximums and
  visit limits on covered services)
• Changing vendors
• Plan consolidations elimination of options
• BOA will do this on 1/1/09!

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Historical Market Reaction to Higher Costs

• Vendor response
• Disease management programs (e.g., wellness
  programs, chronic, disease specific)
• Increased medical review (e.g., MRIs, scans ER
  visits)
• Utilization review and large case management
• Three and four tier prescription drug co-pay
  plans
• Higher deductible plans Rx Deductibles

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Identifying Cost Drivers

• Ask!
• Detailed claims reports
• Claim report by dollar range
• Claim report by age range
• Claim report by type of member
• Employee
• Spouse
• Other dependent

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Sample Dollar Range Claim Report
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Sample Age Band Claim Report
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Sample Claim Distribution Report
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Identifying Cost Drivers

• Kaiser Family Foundation Survey
• Annual Health Care Spending Per Person
• lt5 1,245
• 5-17 1,108
• 18-24 1,282
• 25-44 2,277
• 45-64 4,647
• gt64 8,647
• Male - 2,836 Female - 3,715

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Identifying Cost Drivers

• Kaiser Family Foundation Survey
• Data from 1988 2006
• Real inflation ranged from 1-5
• Worker wages ranged from 2-5
• Health insurance premiums ranged from
• 18 in 1989
• 0.8 in 1996
• Premium increase has been higher than inflation
  since 1999

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Identifying Cost Drivers

• Kaiser Family Foundation Survey
• Cumulative change in premiums 1996 2004
• Single - 86 Family - 102

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Identifying Cost Drivers

• 80/20 Rule
• Historically, 20 of the population accounted for
  80 of the costs
• Health plans focus has been on this 20 of the
  population
• Utilization increasing for remaining 80
• Closer to 90/10 for some employer groups
• Increased need for interaction with non
  catastrophic patients

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Identifying Cost Drivers
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Cost Containment/Reduction Strategies

• Top Three Cost Containment/Reduction Strategies
• Employee Education
• Spouse Education
• Dependent Education

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Cost Containment/Reduction Strategies

• Topics for member education
• Health plan operation
• Estimated cost of services
• Value of benefit program
• Impact to employer budget
• Wages
• Other benefit programs
• Wellness and disease management programs
• Historical costs

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Cost Containment/Reduction Strategies

• Sample Cost Data from HPHC Website
• Office Visit (Established) 56 - 102
• Office Visit (New) 73 - 153
• Chest X-Ray 121 - 189
• Ultrasound 127 - 281
• MRI (Leg) 884 - 1,218

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Cost Containment/Reduction Strategies

• Sample Cost Data from HPHC Website
• Arthroscopy Knee 3,089 - 5,839
• Colonoscopy Diagnostic 825 - 1,458
• Endoscopy Upper 1,092 - 2,071
• Emergency Room 191 - 802
• P/T Visit 36 - 126

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Cost Containment/Reduction Strategies

• Ultimately lower costs and trends will only be
  achieved by a healthier population (for
  experience rated groups)
• Contracting leverage no longer exists
• Costs can only be shifted so far
• Employee contributions
• Plan design
• In Massachusetts, MCC regulations set the lowest
  creditable design

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Cost Containment/Reduction Strategies

• Implement an Employee Assistance Program (EAP)
• Carve out Prescription Drugs
• Rebate sharing
• Self-Insure (with reinsurance)
• Offer Disease Management/Wellness Programs
• Health Coaching or Advocate Services

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Cost Containment/Reduction Strategies

• Change Employer Contribution Strategy
• Spousal surcharge
• Opt out credits
• Credits for completion of Health Risk Assessments
• Smoker/Non-smoker rates
• Change Eligibility Definition
• Fewer employees eligible
• Must take other coverage if eligible elsewhere
• Dependent audits

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Cost Containment/Reduction Strategies

• Consider Consumer Driven/Directed Plans
• Health Reimbursement Arrangement
• Health Savings Account
• Offer a Flexible Spending Account (FSA)
• Only 20 of eligible employees utilize
• Change Plan Design or Plan Elements
• Undervalued or underused
• Quality of Care/Outcomes Based Design

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Keys to Success

• Employer Support (at the highest levels)
• Employee Engagement
• Health Plan and Broker/Consultant Partnership
• Consistent Strategy
• Ongoing Education

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Consumer Driven Health Plans (CDHP)

• Health Savings Accounts (HSAs) and Health
  Reimbursement Arrangements (HRAs)

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Health Savings Accounts (HSAs)

• Individuals (not Medicare eligible) can establish
  to fund health care expenses on a tax favored
  basis - must also have a high deductible health
  plan (HDHP)
• Can be established through an employer or by an
  individual
• Funded (unlike HRAs)
• Portable self-directed investments

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Health Savings Accounts (HSAs)

• HSA Eligibility
• Covered only by a High Deductible Health Plan
  (HDHP)
• First day of the month rule applies
• Not covered by any other insurance plan (with
  limited exceptions)
• Not eligible for Medicare
• Not eligible to be claimed as a dependent on
  someone elses income tax return (whether claimed
  or not)

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Health Savings Accounts (HSAs)

• HSA contributions must be deposited into a trust
  with a custodian
• No documentation required for 213(d) medical
  expense withdrawals (but required for IRS)
• Only the balance contributed is available for
  withdrawal

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Health Savings Accounts (HSAs)

• Exceptions to Section 213(d) expenses
• COBRA premiums
• LTC insurance
• Health plan premiums while unemployed
• Health plan premiums for Medicare eligibles (but
  not a supplement policy)

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Health Savings Accounts (HSAs)

• Contributions pre-tax
• Non Section 213(d) distributions subject to 10
  excise tax
• Exceptions
• Participants death
• Medicare eligibility
• Rollovers

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Health Savings Accounts (HSAs)

• Rollovers into an HSA from an IRA, HRA, or FSA
  are not permitted (HSA to HSA ok)
• One time exception

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Health Savings Accounts (HSAs)

• High Deductible Health Plan (HDHP)
• Required for HSA participation (for
  contributions)
• Must be the only plan that covers the individual
• For 2008, 1,100 individual and 2,200 family
  deductibles qualify (5,600/11,200 maximums)
• Distributions tax-free if for spouse or
  dependents, even if not covered by the HDHP
• Meets MCC requirements under MAHCR

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Health Savings Accounts (HSAs)

• Other insurance allowed
• Workers compensation
• Tort, liability, property
• Critical disease or illness
• Disability, dental, vision
• Not an FSA (for health care) or HRA

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Health Savings Accounts (HSAs)

• Tax treatment of contributions
• Individual above the line deduction
• Similar to IRA
• Employer deductible excludable from EE income
• Must be comparable
• Others can contribute on behalf of individual,
  and be deducted by the individual who receives
  the contribution

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Health Savings Accounts (HSAs)

• Tax treatment of contributions
• Contributions capped at 2,900/5,800 for 2008
• Catch-up contributions allowed for age 55 and
  older participants (until Medicare eligibility)
  900 for 2008

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Health Savings Accounts (HSAs)

• Discrimination Issues
• Employer contributions must be comparable for
  all employees participating in the HSA ( or 35
  excise tax)
• Comparable
• Same amount or
• Same percentage of the annual deductible

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Health Savings Accounts (HSAs)

• If offered through a Cafeteria Plan (Section 125)
• Standard non-discrimination testing

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Planning and Strategy Considerations

• Plan Designs - HSAs
• Preventative care (as defined) can be covered
  prior to the deductible being satisfied
• Carve out plans such as prescription drug
  coverage are not allowed (with some exceptions
  and transition provisions)

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Planning and Strategy Considerations

• HSAs as a retirement savings plan
• No requirement that money be spent
• Deductibles and other medical expenses can be
  paid from post tax dollars
• Provides additional tax free accumulation beyond
  401(k) and other limits
• Provides additional tax benefits for
  self-employed individuals

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Health Reimbursement Arrangements (HRAs)

• Health Reimbursement Arrangements
• Funded by employer only
• No specific plan design requirements
• Account balance does not roll over
  automatically
• Can be called special or limited purpose HRAs
• Employer has total flexibility in design and
  administration
• Administrator may limit options

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HRA Case Study

• Medical renewal included the following increases
• HMO 11 PPO 16
• Company replaces first dollar coverage HMO and
  PPO plans with 1,000 deductible HMO and PPO
  plans HMO premiums are reduced by 23.3 and
  PPO premiums are reduced by 25.9

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HRA Case Study

• HRA provides an opportunity to maintain
  identical coverage and only adjust premiums by 5
  versus the 11 and 16 increases associated with
  a standard renewal

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HRA Case Study

• The company customized a program that
  incorporates a Health Reimbursement Arrangement
  (HRA)
• Company provided employees an HRA equal to the
  value of the Medical and Rx deductible
• Employer costs are expected to increase by 2

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Questions Answers
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Resources Quality and Cost

• Health Care Quality and Cost Information
• www.mass.gov/healthcareqc
• Massachusetts Division of Health Care Finance and
  Policy
• www.mass.gov/dhcfp
• The Leapfrog Group
• www.leapfroggroup.org/cp
• Health Plan Websites

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Thank You