Group Medical Trends Past-Present-Future
By Leon Rousso, CFP
April 2009
Americas health care system has come a long way since it’s beginnings in 1929 , when a group of teachers contracted with Baylor University for hospital and medical services in exchange for a monthly fee from each teacher.
The idea caught the attention of several life insurance companies that soon developed plans of their own and group insurance began taking root.
These early plans known as “Fee for service” continue to remain an option today. In those days due to the relatively low cost of care, premiums were not the issue they have become today.
This was truly the beginning of our current three party system. The individual, the medical provider and the insurance company. The system evolved and worked well until the early 80’s.
Many factors can be sighted for why costs suddenly accelerated. Rapidly improving technology, advanced medical treatments, patient needs, continuing medical breakthroughs, governmental mandates, patient and physician requests for new treatments, over utilization, new more powerful and expensive drugs, and of course Aid’s just to name a few.
For example , in 1980 an employer could buy a” Fee For Service” plan for an employee age 34, with a $500 deductible, 80/20 co-insurance and a stop-loss of $5000 all for about $50 per month in Los Angeles, Ca. Today, a similar plan, now however a PPO with a preferred provider network, would cost about $460 per month.
This equates to an average compounded inflation rate of 8.57%. This may not sound like a lot until you compare it to the CPI during the same period, which averaged just fewer than 4% annually.
The solution was simply for employers to diminish benefits, increase employees cost sharing or in some cases simply drop the insurance. Nothing new was coming out of Congress and the problem was becoming catastrophic.
During this period, there were little if any federal or state laws protecting employers and their employees from these increases. Other issues such as portability of insurance and guaranteed acceptance were also creating problems and loss of coverage for citizens.
Some carriers decided to pull out of the business all together leaving small employers nowhere to turn to. There were no guaranteed issue contracts anymore like there were in the early 80’s.
These increases, combined with little regulation, continued for years until finally many state and federal laws were passed equalizing the playing field by giving greater protection to employers and employees.
Federal laws such as COBRA, HIPAA and others were passed to protect employee’s rights even further. Unfortunately, these new laws added even more upward pressure on rates.
These continuing pressures forced employers to save money by introducing premium “cost sharing” with employees, which only shifted the cost burden but did not lighten the load.
The big difference now however, everyone was was feeling the pinch.
These increasing premiums began to affect the cost of manufacturing and services and in some cases like the auto industry created an advantage to foreign competition not strapped by these issues, which was one reason for the decline in market share. There were many more but this definitely was one of them. No one in 1980 could have predicted what would be happening to the American auto industry in 2008.
Congruently in the Mid-80’s the introduction of “Managed Care” plans by traditional “fee for Service” insurance companies began to take hold.
Up until then Kaiser was the only major player in managed care. The Blues jumped in during this period and developed their own style HMO plans and for a while premiums seemed to stabilize even if only artificially.
Unfortunately, this period lasted just a few years and then substantial increases began again.
In 2003, Congress introduced the concept of “Consumer Driven” health plans. The most popular example was the High Deductible Health Plan (HDHP) coupled with the Health Savings Accounts (HSA).
It has taken a couple of years for these plans to catch hold but in my opinion, 2008 was the breakthrough year. There is always a learning curve when any new concept is introduced and it takes confident, knowledgeable, pro-active brokers to muster the courage to introduce these concepts for them to get traction.
At this point, there are enough businesses offering HDHP coupled with HSA’s where the word is out and plans are spreading through the country. These plans will be commonplace by 2010.
The jury is still out as to whether these plans will work as they were intended, which was to empower and educate the consumer of the real cost of medical care. In addition, they would be taking more responsibility for their healthcare choices. Maybe they really didn’t need the “Time released” sleeping pill of the day. Maybe just a glass of milk will work and they can keep “Their” money in the H.S.A for a real healthcare need.
These plans should also slow down the extensive over utilization of medical services, which was encouraged for years by small co-pays and low deductibles.
Due to the substantial savings in premiums, brokers should strongly encourage employers to re-direct some if not all of this savings, pre-tax to their employees’ HSA plan.
Remember, the money that previously went to the insurance company would become profits if claims experience were good. Why not look at it as a Health Insurance IRA, which if never used for healthcare can be accessed at age 65 as an ordinary IRA.
This brings us from the beginning to today.
In my opinion, these consumer driven plans could be the answer. The consumer has always been at the center of driving competition. With these plans, citizens would now become an empowered third party, which could stabilize the system.
Up until now, we have had three separate and competing parties with the insured squeezed between the carriers’ premiums and medical care with no real options. That could change under this style of insurance.
I would also not call for a complete overhaul of the system. Just some minor tweaking from here.
The fee for service medical insurance model, although expensive, would remain an option for those who could afford it, although the modified HDHP combined with the HSA would prove to be a better value. There would be no other plans available except HDHP, a “Fee for Service “plan and an HMO model. States would be required to follow federal law and eliminate 50 sets of rules for one federal statute. All benefits would be universal across all states.
Carriers would have to compete in a new world where leverage would no longer be an advantage.
Employers should consider converting to HDHP’s and couple them with employer funded HSA’s with the employee encouraged to fund also.
Congress should act quickly to increase deductibles and the limits available for HSA’s.
Once the health plan deductible reached a pre-determined dollar maximum, over a phase in period, the number could then be tied to the CPI. (i.e.: 2015 a max deductible of $10,000 for an employee and $20,000 for a family).
During this time, Congress would phase in a tax credit to incent employees to fund their own HS.a to make up any shortfall un-funded by the employer. The employer would get a similar tax credit with as much as a two to one ratio in the first year to get these accounts funded early.
Any individual covered under a “Fee for Service” or HMO would be exempt from this credit.
Once the combination of employee and employer contributions reached the individual/family maximum, the credit would cease.
Insurance companies might still offer traditional plans if they found that there remained a demand for the more traditional plans.
I believe brokers understand more than any contingency what needs to be done. They have the unique advantage of seeing all sides of the problem.
We need to advance our ideas before the system collapses under it own weight.
Written By:
Leon Rousso, CFP
3585 Maple St #222
Ventura Ca 93003
805-676-1110
leon@leonrousso.com
www.leonrousso.com