Increasing Health Care Costs and Your Employee Health Plan

Transcription

1 Exhibit 1 PERSPECTIVES PROVIDING INSIGHT INTO TODAY'S EMPLOYEE BENEFITS ISSUES Increasing Health Care Costs and Your Employee Health Plan Eleventh Edition A Annual Health Care Cost Increases, National Averages 0-11 A HEALTH CARE costs, and consequently employee health benefits costs, have been increasing at an alarming rate for nearly a decade. Though cost increases had seemed to be leveling out based on 09 data, cost increases actually jumped in 10 and are expected to rise further in 11. Avoiding rising health care costs is nearly impossible, but you can learn about why they continue to rise and what you can do to manage costs for your organization and your employees. The next few pages will discuss the latest health care cost figures, the factors leading to nearly a decade of unprecedented rate hikes, and some strategies that firms around the United States are implementing to help manage costs. Also included is a prescription drug report released each year by Kaiser Family Foundation. National Health Care Cost and Renewal Rate Projections Overall national health care costs have been skyrocketing for over a decade. Exhibit 1A, right, depicts the percent change in average annual health care cost increases from 0 to 11. Cost increases leveled off between 07 and 09, and last year s Hewitt Health Value Initiatives had projected 10 s increase to remain at percent. However, cost increases in 10 actually jumped to.9 percent, and Hewitt expects an even larger spike in 11. The overall cost of health care has a direct impact on the rates employers pay for employee health benefits. However, health benefits costs have varied widely across the country for the last several years, hitting some metropolitan areas much harder than others. Exhibit 1B, right, illustrates health care cost increases in major metropolitan areas in 10. Source: Hewitt Health Value Initiative, 10 B 10 Health Care Cost Increases, Major Metropolitan Areas Source: Hewitt Health Value Initiative, 10 1 B

2 Exhibit 2 Experts expect significant annual increases in health care costs to continue. According to the 10 Hewitt Health Value Initiative, the average cost of health care benefits for active employees rose to $9,028 per year in 10 and is expected to grow to $9,821 in 11. Employers are also passing more of these costs onto employees, as the percentage that employees are asked to pay is also increasing. In 10 employees paid an annual average of $1,9 (21.8 percent of the total cost of their coverage); this figure is projected to grow to $2,9 in 11 (22.5 percent of the total cost). Exhibit 2A, below, shows the average total health benefit costs for active employees for the years 0 to 11. Exhibit 2B below depicts the 10 health care costs per employee in U.S. major metropolitan areas. Factors Leading to Increased Health Care Costs Why are U.S. health care costs skyrocketing? Several market conditions working in tandem have lead to a decade of unrelenting increases. Understanding why your annual health plan renewal rates may be significantly higher than the previous year is the key to formulating alternatives and solutions to your particular plan s challenges. It is also important for educating your employees about the reasons behind any plan or contribution changes you may decide to introduce. Several factors that have contributed to climbing health care costs over the past decade include: Demographics Expansion of health care providers Consolidation of managed care companies Political environment/government regulation Increased utilization and consumer demand New medical technology Weakening of managed care system Health care spending and medical cost inflation Increased prescription drug costs In addition, Hewitt has identified a couple specific factors that are contributing to current 10 health care costs and projected 11 figures that are the highest we ve seen in five years: An Aging Population Not only is the American population aging, but workforces are as well. This is partially due to slower hiring levels recently, which has resulted in older employee populations. Because older workers are more prone to health problems, companies are seeing a rise in chronic conditions, costly medical problems and the use of prescription drugs, plus an increase in the amount and frequency of catastrophic claims. Annual Health Care Costs per Employee, National Averages 0-11 A 10 Health Care Costs per Employee, Major Metropolitan Areas B Source (both): Hewitt Health Value Initiative, 10 2

3 Health Care Reform Implications It is too early to know exactly what impact health care reform will have on health care costs in the long run, but there are some clearer early implications. There are several provisions going into effect that are expected to raise costs, at least in the short term, including: Covering dependents up to age 2 Elimination of certain lifetime and annual limits Required coverage of preventive services Prohibiting coverage rescissions No pre-existing condition exclusions for children What Can Employers Do? You and other employers are undoubtedly trying to determine how to keep accelerating health plan rates from having debilitating repercussions on your organization. After years of trying to absorb most of the costs because of attraction and retention issues, many firms are now trying to attack the root causes of rising costs with sustained, systemic changes. Especially with the uncertainty of the overall impact of health care reform, many employers are looking at strategies to manage costs both in the short and long term. Using Health Care Data to Drive Strategy A separate Hewitt Associates survey found that employers cite using health care data to make strategic health plan decisions as their top cost-cutting strategy. However, the survey also discussed the importance of going beyond just accessing data, and understanding how to apply it to make decisions and implement strategic changes. Greater Emphasis on Consumer-Driven Plans An increasingly popular trend in the health care industry is the adoption of consumer-driven health plans, typically involving and HRA or HSA. These plans offer cost-savings for the employer, but also benefit the employee as well. With proper education, employees can become smarter health care consumers, which can save them and the company money. Promoting Employee Health and Wellness Health and wellness initiatives have become another popular health care cost management strategy in recent years, and remain one of employers top cost containment strategies. As more and more employers are realizing, improving employee health and wellness can effectively lower health care costs and increase productivity. As this trend continues, many employers are creating more comprehensive programs, targeting specific diseases and including dependents in the initiatives. Incentives for participation are growing in popularity as well (including incentives for dependents), but it is important that effective incentives are used. Rewarding employees for participating in a program or meeting a health goal is much more impactful than incentivizing simply the completion of a health risk assessment. Many employers are instituting penalties for nonparticipation as well, often in the form of higher premiums or additional employee cost-sharing. It is also important to note that Especially with the uncertainty of the impact of health care reform, employers are looking at strategies to manage costs in the short and long term. successful wellness and disease management initiatives are dependent on quality employee education and communication techniques. Increased Employee Cost-Sharing Though companies will continue to shoulder the burden of increasing health care costs, many are choosing to pass more and more costs to employees. These are a few of the strategies for doing so: Moving from fixed dollar copayments to a coinsurance model (employee pays a percentage of costs for each health care service) Increasing deductibles and out-of-pocket maximums Increasing employee cost-sharing for non-network providers Offering consumer-driven plans, either as an option along with a traditional plan, or as the primary plan Dependent Management Strategies Employers are changing the way the manage dependents and finding huge cost-saving opportunities. Dependent eligibility audits can save companies huge amounts of money, as studies show that an average of to 12 percent of dependents are actually not eligible to be on the health plan. Many companies are also shifting to a per-member premium structure, rather than just individual and family. In addition, an emerging trend is companies requiring spouses to pay more in premium or assessing a surcharge, to encourage spouses to enroll in their own employer s plan. Strategic Vendor Management A more recent trend involves companies more aggressively evaluating their vendor relationships and replacing or eliminating those vendors not producing measurable results. Employers are also increasingly looking for opportunities to consolidate vendor relationships to get the most for their money. Long-Term Solutions vs. Short-Term Fixes Particularly due to the financial pressure many employers are under, short-term tactics like employee cost-sharing are still prevalent. However, employers are increasingly exploring multiyear plans and longer-term initiatives to improve overall employee health and strategically manage costs into the future. Especially in the wake of health care reform, many employers are becoming more concerned with developing strategies that have sustainability in keeping costs down.

4 Which Solution is Right for You? Should you pass costs on to employees at the risk of losing some of them? Or, should you try to manage costs in some of the other ways discussed in this report? Ultimately, it is a decision that you need to come to through thoughtful and detailed analysis of your plans and with the advice of your broker-consultant. Below are some questions you can address in order to begin developing an effective strategy that is right for your organization. Is our program structure, plan design and pricing appropriate? Do we have the right vendors, services, contracting and funding in place? Are our employee communication efforts appropriate and effective especially in regards to employee health and wellness and/or consumerism? Do we have effective disease management and wellness programs for our employees? Do our pricing and plan design features encourage costconscious behavior on the part of our employees? Are we thinking about long-term solutions rather than simply quick fixes for this year? What Should I Tell My Employees? It s a fact: health care costs and health benefit costs continue to increase at exceptionally high rates from year to year. You want to continue to offer valuable health benefits to your current and future employees, and you want those benefits to help you attract and retain quality employees. However, you also need to consider the cost-effectiveness of those benefits at a time when hefty rate hikes are the norm, rather than the exception. The information contained in this report is designed to help you understand why your renewal rates may have increased, and to consequently help you educate your employees about the reasons for any plan or contribution changes you may have to make. If your employees understand current trends in the health care industry, they will be more supportive of changes and will appreciate the resources required to provide them with their health care benefits. Perspectives is provided to Tooher Ferraris Insurance Group clients for informational purposes. Please seek qualified and appropriate counsel for advice on how to apply the topics discussed herein to your employee benefits plan Zywave, Inc.

5 PERSPECTIVES PROVIDING INSIGHT INTO TODAY'S EMPLOYEE BENEFITS ISSUES Special Report: Prescription Drug Trends Tenth Edition Overview Prescription drugs are a vital part of health care plans, and it is important for employers to understand the trends beyond prescription drug costs and what they can do to manage those costs. Spending in the U.S. for prescription drugs was $2.1 billion in 08, more than times the $0. billion spent in Although prescription drug spending has been a relatively small proportion of national health care spending, it has been one of the fastest growing components compared to hospital and physician services. However, due to various trends, the rate of increase in drug spending has declined in recent years. By 08, the annual rate of increase in prescription spending was %, compared to 5% for hospital care and 5% for physician services (Figure 1). Figure 1: Average Annual Percentage Change in Selected National Health Expenditures, Hospital Care Physician & Clinical Services Prescription Drugs Source: Kaiser Family Foundation calculations using National Health Expenditure historical data from Centers for Medicare & Medicaid Services. Annual prescription spending growth slowed from 1999 ( percent) to 05 ( percent) because of the increased use of generic drugs, the increase in tiered copayment benefit plans, changes in the types of drugs used and a decrease in the number of new drugs introduced. 2 The annual change in drug spending in 0 (9 spending) increased as a result of a number of factors, including the implementionation of Medicare Part D. The 07 change in drug spending (5 percent) decelerated because of an increase in the generic dispensing rate, slower growth in prescription drug prices and growing consumer safety concerns about certain drugs. The 08 drug spending change ( percent) declined because of a slight decline in per capita use of prescription drugs due to the impact of the recession, a low number of new drug products, and safety and efficacy concerns. As seen below in Figure 2, the share of prescription drug spending paid by private health insurance increased substantially between 1990 and 05 (from 2 to 8 percent), contributing to a decline in the share that people paid out-of-pocket (from 5 to 2 percent); the public funds (government) share of expenditures increased from to 1 28 percent in that period. However, the implementation of the Medicare Part D drug benefit in 0 substantially changed the mix of funding sources, as the government s share rose from 28 to 7 percent between 05 and 08, while the private insurance portion fell from 8 to 2 percent, and the consumer out-of-pocket share declined from 2 to 21 percent. Figure 2: Percent of Total National Prescription Drug Expenditures by Type of Payer, Notes: Consumer Out-of-Pocket includes spending by consumers for health care services not covered by a health plan and cost-sharing amounts (coinsurance, copayments, deductibles) from public and private health plans. It does not include consumer premium payments and cost sharing paid by supplementary Medicare policies, which are included in the Private Health Insurance category. Medicare s and Medicaid s shares of public funding changed when the Medicare drug benefit took effect in 0. Between 05 and 08, Medicare s share grew from 7 to 0 percent, and Medicaid s share fell from 70 to 2 percent (Figure ), because Medicare replaced Medicaid as the primary source of drug coverage for beneficiaries with coverage under both programs. Figure : Distribution of Total Public Prescription Drug Expenditures by Type of Payer, 05 & % 5 1% % 7 25% % 70% 0% 10% % 0% 0% 50% 0% 70% 80% Other Public Medicaid Medicare Source: Kaiser Family Foundation calculations using National Health Expenditures historical data from Centers for Medicare & Medicaid Services. 2 7 Consumer Out-of- Pocket Private Health Insurance Public Funds Source: Kaiser Family Foundation calculations using National Health Expenditure historical data from Centers for Medicare & Medicaid Services. 5

6 Dollars Factors Driving Changes A number of factors contribute to changes in prescription drug costs. Increased Utilization. The number of prescriptions dispensed in the U.S. in 09 increased 2.1 percent, a larger growth rate than the 1.0 percent increase in 08 over 07. From 1999 to 09, the number of prescriptions increased 9 percent, compared to a U.S. population growth of 9 percent. 5 Lack of Adherence. A recent study found that the rate of unfilled prescriptions has increased. Together, health plan denials and patient abandonment resulted in 1. percent of all new, commercial plan prescriptions going unfilled in 09, up 5.5 percent from 08. A 09 study found that drug-related morbidity, including poor adherence (not taking medication as prescribed by doctors) and suboptimal prescribing, drug administration and diagnosis, costs as much as $289 billion annually, about 1 percent of total health care expenditures. 7 Price. Prescription drug prices increased. percent in 09, 2.5 percent in 08, 1. percent in 07 and. percent in 0. The average annual growth in prescription drug prices from 00 to 09 was. percent, compared to.1 percent for all medical care and 2.5 percent for all items. 8 Changes in Types of Drugs Used. Prescription drug spending is affected when new drugs enter the market and when existing medications lose patent protection. New drugs can either increase or decrease overall drug spending, depending on price and how the new drug relates to existing drugs on the market (replaces something, is a new treatment, adds competition, etc.). Drug spending is also typically reduced when brand name drugs lose patent protection and face competition from new, cheaper generic substitutes. FDA analysis of data shows that for products with a large number of generics, the average generic price falls to percent of the branded price and lower. 9 Several high-sales brand name drugs are expected to go off-patent in the next five years. New competition from generic drugs may bring down costs for patients. 10 Sales and Profitability. Prescription drug sales were $00. billion in 09, an increase of 5.1 percent over 08. This increase was over double the 1.9 percent increase from 07 to 08. IMS Health attributes the 09 growth to various factors including stronger demand, manufacturing pricing practices, greater use of specialty drugs and fewer product safety issues. 11 IMS Health forecasts a to percent annual growth in the U.S. pharmaceutical market in the next five years. 12 PPACA Changes Affecting the Pharmaceutical Industry. The Patient Protection and Affordable Care Act, enacted March 2, 10, includes several provisions that affect the pharmaceutical industry: Imposes an annual fee on certain manufacturers and importers of brand name drugs whose branded sales exceed $5 million. Establishes a process for FDA licensure of biosimilar (i.e., interchangeable) versions of brand name drug; drugs are granted 12 years of exclusivity before biosimilar versions of a drug can be approved. Changes certain drug labeling requirements and requires the HHS Secretary to determine whether adding certain information to a prescription drug s labeling and advertising would improve health care decision-making. Insurance Coverage Lack of insurance coverage for prescription drugs can have adverse effects, including not filling prescriptions or skipping doses because of cost. Prescription drug coverage comes from a variety of private and public sources, including employer coverage, individually purchased policies, Medicare and Medicaid. PPACA Changes Affecting Prescription Drug Coverage. PPACA provisions affecting prescription drug coverage include: Significant expansion of coverage to the uninsured. PPACA provides that prescription drugs is one of the essential health benefits that must be included in health plans in the new Health Benefit Exchanges and in the benchmark benefit package or benchmark-equivalent for newly eligible adults under Medicaid. Rebates, discounts and other benefits for certain Medicare Part D beneficiaries over the next several years Response A variety of public and private strategies have been implemented to try to contain rising prescription drug costs. 1 Utilization Management Strategies. Health plans have responded to rising prescription drug costs by increasing enrollee cost-sharing amounts, using formularies to exclude certain drugs from coverage, applying quantity dispensing limits, requiring prior authorization, and using step therapy (starting with the most cost-effective drug and progressing to more costly therapy only if necessary). In 09, over three-quarters of workers with employer-sponsored coverage were in plans with three or more tiers of cost sharing for prescription drugs, almost times the proportion in 00 (27%). 1 Figure shows worker copayment amounts for three- and four-tier structures. Figure : Among Covered Workers with Three- or Four-Tier Prescription Drug Cost Sharing, Average Copayments, Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 00-09, Exhibit 9. *Fourth-tier drug copay information was not obtained prior to Generic Preferred Nonpreferred Fourth-Tier* A 09 survey of individually purchased health policies found that the vast majority had drug benefits, with copayments being the predominant form of cost sharing. All HMOs and the majority of PPO/POS policies charged copayments which averaged, respectively, $10/$1 for generic drugs, $2/$28 for preferred brand name drugs, and $/$8 for nonformulary drugs. Fewer than half of the PPO/POS policies had a prescription drug deductible, while over half of the HMOs had a drug deductible. 15 Discounts and Rebates. Private and public drug programs negotiate with pharmaceutical manufacturers (often using contracted organizations known as pharmacy benefit managers) to receive discounts and rebates which are applied based on volume, prompt payment and market share. Medicaid. Historically, prescription drugs have been one of the fastest-growing Medicaid services. Medicaid spent $19. billion for prescription drugs in 08, an increase of.5 percent over Medicaid requires drug manufacturers who want to sell their products to Medicaid patients to agree to pay rebates to states for

7 outpatient drugs purchased on behalf of Medicaid beneficiaries. PPACA increases the Medicaid drug rebate percentages for several types of outpatient drugs and requires that the resulting savings be remitted to the federal government. Medicare. The Medicare Part D drug benefit shifted spending from the private sector and Medicaid to Medicare, making Medicare the nation s largest public payer of prescription drugs (from 7 percent in 05 to 0 percent in 08). Medicare prescription drug spending as a share of total U.S. prescription spending rose from 2 percent in 05 to 22 percent in 08. Medicare prescription drug spending totaled $52.1 billion in 08, an increase of 1 percent over Purchasing Pools. Some public and private organizations have banded together to form prescription drug purchasing pools which increase their purchasing power through higher volume and shared expertise. Consumers. Consumers are turning to a variety of methods to reduce their prescription costs, 19 including requesting cheaper drugs or generic drugs, using the Internet and other sources to make price comparisons, using the Internet to purchase drugs, buying at discount stores, buying over-the-counter instead of prescribed drugs, buying drugs in bulk and pill-splitting, using mail-order pharmacies, and using pharmaceutical company or state drug assistance programs. Importation. The high cost of prescriptions has led some to suggest that individuals be permitted to purchase prescription products from distributors in Canada or other countries (it is currently illegal, though it does still happen). Importation issues such as actual savings amounts, drug safety, and marketplace competition and pricing continue to be debated. Outlook HHS projects U.S. prescription drug spending to increase from $2.1 billion in 08 to $57.8 billion in 19, almost doubling over the 11-year period. The average annual increase in drug spending from the previous year is projected to increase from.2 percent in 08 to 5.2 percent in 09, and then rise to 7. percent in 19 (reflecting increases in drugs prices, the number of new drug approvals and the share of expensive specialty drugs). Drug spending as a percent of overall national health spending is projected to increase somewhat from 10.0 percent in 08 to 10.2 percent in In the coming years, implementation of various provisions of PPACA will affect prescription drug coverage, utilization, prices and regulation. Coverage and utilization of prescription drugs will be expanded by PPACA s: - Health insurance mandate and premium and cost-sharing subsidies - Designation of prescription drugs as an essential health benefit to be covered by private health plans through the new Health Benefit Exchanges and by Medicaid for newly eligible adults - Medicare prescription drug rebate, cost-sharing and catastrophic threshold changes. Prices charged to government programs will be affected by changes to Medicaid rebate requirements and expansions to the Section 0B program. Prescription drug regulation will be affected by the new process for licensure of biosimilar versions of brand name biological products and by drug labeling requirements. These and other PPACA changes will ultimately impact national spending for prescription drugs in ways yet to be seen. Reprinted with Permission from the Kaiser Family Foundation. The Henry J. Kaiser Family Foundation is a non-profit, private operating foundation dedicated to providing information and analysis on health care issues to policymakers, the media, the health care community, and the general public. The Foundation is not associated with Kaiser Permanente or Kaiser Industries. 1 All spending amounts in this report are in current dollars (i.e., not adjusted for inflation.) 2 Aaron Catlin et al., National Health Spending In 05: The Slowdown Continues, Health Affairs 2, no. 1 (January/February 07) Micah Hartman et al., National Health Spending In 07: Slower Drug Spending Contributes To Lowest Rate Of Overall Growth Since 1998, Health Affairs 28, no. 1 (January/February 09) Micah Hartman et al., Health Spending Growth At A Historic Low In 08, Health Affairs 29, no. 1 (January 10) Kaiser Family Foundation calculations using data from IMS Health, (Press Room, US Top-Line Industry Data 08), and Census Bureau, http;// The per capita number may differ from the number reported at KFF s website because of differing data sources which use different retail pharmacy definitions (e.g., IMS Health includes mail order, Verispan does not). Wolters Kluwer Pharma Solutions, Inc., Pharma Insight 09: Patients take More Power Over Prescription Decisions (March 10), %Media.pdf. 7 New England Healthcare Institute, Thinking Outside the Pillbox: A System-wide Approach to Improving Patient Medication Adherence for Chronic Disease (August 09), ch_to_improving_patient_medication_adherence_for_chronic_disease. 8 Kaiser Family Foundation analysis of Consumer Price Index, All Urban Consumers, U.S. City Average, not seasonally adjusted, accessed April 28, US Food and Drug Administration, Center for Drug Evaluation and Research, Generic Competition and Drug Prices, accessed March 12, IMS Health, IMS Forecasts Global Pharmaceutical Market Growth of 5-8% Annually Through 1; Maintains Expectations of -% Growth in 10, April, 10, (Press Room, Press Releases). 11 IMS Health, IMS Health Reports U.S. Prescription Sales Grew 5.1 Percent in 09, to $00. Billion (April 1, 10), online at (Press Room, Press Releases). 12 IMS Health Press Release, ibid., April, See also Kaiser Family Foundation, Cost Containment Strategies For Prescription Drugs: Assessing The Evidence In the Literature (March 05), Kaiser Family Foundation and Health Research and Educational Trust, op. cit., Ex. 9.1, 15 America s Health Insurance Plans, Center for Policy and Research, Individual Health Insurance 09: A Comprehensive Survey of Premiums, Availability, and Benefits (October 09), 1 Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics Group, at 17 Ibid. National Conference of State Legislatures, Pharmaceutical Bulk Purchasing: Multistate and Inter-agency Plans, 08 edition (Updated May 8, 08), 19 Devon Herrick, National Center for Policy Analysis, Shopping for Drugs: 0, National Center for Policy Analysis, Policy Report No. 270 (October 0), US mail services sales have increased 5% since 0, though their share of total US prescription sales has increased only slightly -- 07: $. billion in sales, 1% of total prescription sales; 0: $28.9 billion in sales, 1% of total prescription sales. IMS Health, (About Us, Press Room, US Top-Line Industry Data, 07 U.S). 21 Kaiser Family Foundation, Prescription Drugs: Advertising, Out-of-Pocket Costs, and Patient Safety from the Perspective of Doctors and Pharmacists (November 0), 22 US Department of Health and Human Services Task Force on Drug Importation, Report on Prescription Drug Importation (December 0), ix, 2 Christopher J. Truffer et al., Health Spending Projections Through 19: The Recession s Impact Continues, Health Affairs 29, no. (March 10),