Shift in Healthcare Costs Seen
By VITA REED
Orange County employers could be in for a surprise later this year when it comes time to renew healthcare plans. After six straight years of higher premiums, the rate of increases might slow down.
“We think so,” said Ron Mason, health and welfare practice leader at Stamford, Conn.-based management consultant Towers Perrin’s Irvine office. “In our own healthcare cost survey, the trends were lessening in 2004.”
That’s good news for employers and workers, who were just hit with another round of health plan cost hikes for 2004.
One reason the rate of increase may slow: Employers are balking. That was seen in the latest contract go-round and could intensify during talks for 2005.
“Employers are more willing to take carriers to the wall,” Mason said.
He relayed a story about a local employer that won out in talks with a managed healthcare plan provider. The business, which Mason declined to name, was big enough to cause worries because it spends around $6 million in healthcare benefits annually and was willing to move to another carrier over a price difference as small as 3%.
Then there’s the insurance cycle.
“I absolutely believe that health premiums run in a 10-year cycle,” said Steven Plochocki, chief executive of InSight Health Services Corp., a Lake Forest-based medical imaging company with 350 employees in Orange County and 2,100 nationwide. “Those of us who run companies are seeing all the same warning signs.”
From Plochocki’s perch, health premiums started going up after the effects of the federal Balanced Budget Act of 1997 started to wear off.
“From 1995 to 1997, going into the (Balanced Budget Act), there were very low single-digit increases,” Plochocki said.
If President Bush is re-elected, Plochocki said, a second balanced budget act could be down the pike, possibly triggering lower premium increases.
InSight’s healthcare premium costs increased in the mid-teens this year, Plochocki said. For the first time, he said, the company asked its workers to dig into their pockets and share some costs.
“We’ve been growing. We doubled our size and added 900 employees. We’ve been in a growth mode,” said Plochocki, who took InSight private about two years ago. “We use a national carrier because we operate in 31 states. We’re dealing with the big guys, and they’ve been playing hardball.”
Another factor auguring for change: heightened rivalry among health plan providers.
“I have a sense that we’re going to see far more competition,” Plochocki said.
Competition already seems to be at work for PacifiCare Health Systems Inc., the Cypress-based managed healthcare service provider.
“For 2004, we’ve been quoting (premium increases) in the mid-teens,” said Cheryl Randolph, a PacifiCare spokeswoman. “But it will vary,small groups will be higher, large groups lower.”
In 2003, PacifiCare on average was able to win employer premium increases of 17%.
PacifiCare attributes tempered rate hikes to several things, Randolph said, including some 20 new plans such as a tiered hospital plan, a preferred-provider organization and its contribution to the nascent “consumer-driven” healthcare movement, its self-directed health plan.
“We’ve put a number of new products out there,” Randolph said. “Creating new commercial products (for employers) helps to lower costs.”
Some on Wall Street have grown concerned after PacifiCare said it doesn’t foresee itself being able to win the premium increases it picked up last year.
Goldman Sachs & Co. analyst Matthew Borsch issued a report asserting that PacifiCare and its rivals aren’t likely to see the same beefy premium increases of the past few years in 2004.
Borsch, who lowered his ratings on PacifiCare and Humana Inc. of Louisville, Ky., to “underperform” from “in-line,” said those companies could face more “competitive pressure” this year.
But Towers Perrin’s Mason said he didn’t expect a return to the pricing wars of the late 1990s, when health plans often low-balled their rates in a bid to buy business.
Besides PacifiCare, other large health plans operating in OC include Aetna Inc., Cigna Corp., Blue Cross of California, Blue Shield of California and Health Net Inc.
Figures from Hewitt Associates Inc., a Lincolnshire, Ill.-based benefits consulting company, showed that healthcare costs in OC and all of Southern California are expected to be up 15% on average in the 2003-2004 period. That’s unchanged from 2002-2003 and up from 14.5% in 2001-2002.
“With the carriers, there’s been a moderation in their medical loss ratio,” said Jim Remick, president of Remick Associates, an Irvine employee benefits consultant. “The trends are still going up but not at the same clip.”
Medical loss ratio is how many cents on the dollar a health plan spends on medical care. PacifiCare spent 83 cents on the dollar on medical service in the third quarter, down from nearly 87 cents in the year-ago quarter.
“At the end of the day, the (insurance) carrier’s goal is to be a bit ahead of the trends,” Remick said, adding that means roughly between 10% and 13% premium increases.
“Also, there’s been some control over prescription drug costs,” Remick said.
Drug costs, fueled by aggressive product development and advertising by drug makers, are fingered as one of the culprits in the overall healthcare cost rise from the late 1990s to today. Other medical advances also have played a part.
As at InSight Health, employers are doing some degree of shifting costs to workers, Remick said.
“With HMOs, they’re charging higher co-pays, $15 or $20,” he said. “They’ve introduced three-tier prescription drug plans, smaller networks and consumer-driven healthcare.”
So far, there are no signs larger companies are dropping coverage, he said.
“Healthcare is an important benefit,” Remick said. “It gives a company a sense of legitimacy.”
