Americans were reminded once again last week that there appears to be no obvious fix for nonstop health care inflation, notwithstanding the recent passage of national health care reform.
The latest health insurance premium increases, announced by
and a number of
, partly reflect pieces of the implementation of President Barack Obama's health care overhaul plan.
The announced increases were expected to be between 1% and 9%. Aetna, for example, said coming changes brought on by the overhaul forced it to seek rate hikes for new individual plans in California of 5.4% to 7.4% -- although it had sought increases of 19% for 65,000 policyholders there before acknowledging math errors and withdrawing the request. (Similar errors scuttled Anthem Blue Cross' proposed 39% rate increase request in April for 800,000 policyholders in California.)
But some increases were inevitable and virtually certain to continue in coming years at a minimum of low double-digit rates. Annual health care inflation -- and hence baseline premiums -- have already been rising 8% to 12% annually for two decades as insurers maintain profits and respond to medical claims experience and increased costs.
The insurance reform bill will modestly increase, not decrease, overall health care costs over the next decade with the mandated removal of pre-existing conditions and entry of 32 million uninsured Americans, the Office of the Medicare Actuary said last week.
This time around, most of the announced increases are affecting primarily individual and small-business policies, which don't enjoy the advantage of the law of large numbers to help mitigate health insurance risk. Over time, however, everyone pays for medical inflation, so corporate health insurance plans will also head upward.
Why is there ongoing runaway health care inflation? Unfortunately, the U.S. health care system simply can't seem to get its act together. One reason is that the U.S. essentially has a fee-for-service system, which means doctors and other health care providers are compensated based on the number of procedures they do, not on the results of their treatment. This contributes to enormous inefficiencies and mistakes. For example, studies have shown that about one in five medications administered at hospital bedsides are done so in error.
Yet another problem is "moral hazard," or the concept that people insulated from risk behave differently than if fully exposed to it. Have you ever noticed that people are hesitant to make claims on automobile and property insurance? Rarely do the costs of minor fender-benders result in an insurance claim. Why? Because people fear claims on their auto policies will result in either premium increases or the cancellation of their policies. So they pay the cost of minor accidents out of their own pockets.
This isn't the case in health insurance. Americans could take much better care of themselves -- watch what they eat, think twice about smoking or drinking heavily and make a commitment to exercise more. Too many do not, however, which is why a third of our population is obese. Unlike the case with auto insurance, a very high percentage of health care expenses become insurance claims because few people lose their insurance because of high claims.
Theoretically, employer-based health insurance plans could tackle this problem by simply increasing out-of-pocket co-payments. But higher co-payments would prod some people to forgo necessary treatment at the early stage of a disease, such as diabetes, which is much less expensive to treat in its early stages. And higher out-of-pocket expenses tend to push the healthiest people out of the insurance pool, and these people are needed to help lower overall costs.
There is some good news. Even before the reform law, insurers started to make the transition from underwriters of medical risk to managers of medical risk. Simply underwriting risk means insurers manage patient utilization of health care, negotiate prices with providers and pay claims. In managing risk, insurers or huge care consumers take things a giant step forward and work to lower expenses. Some big companies, including
, are taking matter into their own hands by building internal risk management programs.
Pitney Bowes, for instance, incentivizes employees to see their doctor at least once a year, believing this will result in lower employee expenses. In fact, a far higher percentage of Pitney Bowes employees do schedule annual doctor visits, and Pitney Bowe's health care inflation rate is markedly lower than the overall U.S. average.
In addition, reform plans requires that health insurers maintain a minimum medical loss ratio, or the ratio of medical expenses to total insurance premiums. Insurers that fail to achieve this minimum MLR -- 85% for a large group and 80% for a small group -- will soon have to provide refunds to policyholders reflecting the difference between what they actually spent and the mandated minimum.
The law has also expanded the definition of MLR to include money spent on health and wellness management programs, incentivizing insurers to manage medical risk more effectively.
The U.S. has a gigantic and long-standing health care problem, but these steps are a start. It is clear that the problem of how to manage risk in the health care system must be tackled immediately, and as wisely and aggressively as possible.
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Stephen Krupa is one of the founders and a managing member of Psilos Group, a New York-based venture capital firm that invests in health care services, health care information technology and medical technology companies geared toward improving the quality and productivity of the health care economy. Psilos has more than $580 million under management in three funds.