Over the past year, we have been inundated with the ACA (Affordable Care Act) and the various components of the law; whether it be the individual mandate, insurance exchange marketplaces, or employee notices. At this point, employers are gearing themselves for 2015 when the mandate will apply to employers that have 50 or more full-time employees. It is anticipated that as we get closer to January 2015, the activity level will reach a fever pitch as it did last year.
From the time this law was proposed, the debate has raged on why this program should or should not be in effect. The overwhelming majority of people do agree that health care cost is always too high and outpaces normal CPI. Why is this? Who is at fault? Some people state it is the insurance companies’ fault, others the doctors and hospitals, and still others, anybody who is part of the system or just U.S. culture in general. (Americans always want the best and most advanced health care no matter what the cost.)
Certainly, when the debate was going on, the remarks made by the proponents and opponents of the ACA sometimes were not completely accurate. Is it really the fault of the insurance companies or, for that matter, the government or any entity that sponsors health care? First, we need to understand what are the key components of health care in the United States. I feel the best analogy to use is a four-legged table. The first leg is the patient, the second leg the plan sponsors/employers, the third leg is the third party administrator or insurance company and the fourth leg the medical providers, whether they be doctors or hospitals. As you are aware, a table is most effective when it is lying evenly balanced on the floor. If one leg is longer or shorter than the other, the table is tipped or is out of equilibrium. This essentially is the case with health care in the U.S.
First Leg - The Patient
First let’s examine the patient, who utilizes health care services. Since World War II, health care benefits became an important aspect of an individual’s benefits package from their employer. These early plans were utilized to supplement a person’s income due to salary controls imposed by the government during the war. With the economic boom that occurred after World War II, these programs became increasingly more popular. Initially, doctor and hospital coverage was provided, followed later by major medical and prescription drug coverage. Programs that were sponsored by the labor unions had very low deductibles and out-of-pocket expenses. These plans would give employees the opportunity to see a doctor and generally not pay anything out-of-pocket. In a sense these programs were viewed more like entitlements than they were “employee benefits”. The one thing that plans of this era did not provide coverage for was wellness and preventive services. It was the philosophy of insurance companies and employers that employees had a personal responsibility to stay healthy.
Unfortunately, lifestyles in America became more sedentary. The lack of physical activity, the abundance of unhealthy food and the ability to access entertainment from all sources (from your living room for example) has led to alarming increases in disease. Statistics indicate that more than 70% of the country does not take proper care of themselves. However, whether you take care of yourself or not, in the event you become ill, you want to have the best possible medical provider that is available no matter what the cost as long as you have insurance. Should medical programs go “all out” to help a person who did not take personal responsibility for their health? Should a person who fails to take their medication be treated the same as someone who has met all of the protocols, but still has encountered additional health care issues? This is an interesting question and I can imagine if such a procedure was implemented, the legal profession of the U.S. would be the first to defend the patients’ rights no matter how the person lived their life, whether healthy or unhealthy. The bottom line is that the majority of people do not take any responsibility for the quality of their health. Yet, these same people want the medical industry to get them healthy again. So, it is safe to say that responsibility is lacking on the part of many people who are afflicted with chronic diseases. Certainly, this is a major driver of health care cost increases.
Second Leg - Plan Sponsors/ Employers
Plan sponsors/employers provide health care coverage in order to attract and retain their employee workforce. These sponsors or employers can be as tiny as 2 employees or the more than 50 million people that the Federal Government provides coverage for through federal government employee plans, Medicare, Medicaid and Veterans’ programs. Depending upon the plan sponsor, some will provide a generous benefit and others bare bones; it all depends upon their philosophy. The one constant that plan sponsors all share is controlling the cost of the program so it is manageable as a business expense. Here could be the problem - if the emphasis is on controlling cost rather than controlling the health of the population and if the plans’ deductibles, co-pays and co-insurance are too high, then employees and their families may not utilize the plans; this seems to be the current trend. If this is the case, then an employer can expect rising medical cost because people cannot afford to go to the doctor at an earlier stage in the disease process. Plan sponsors/ employers must understand there is a delicate balance between cost control and an effective plan. Most employers do not understand that a medical plan is made up of two cost components – direct and indirect cost. The direct cost is simple, this is what it costs the employer to operate the plan; it is black and white and it is easy to calculate. However, employers can have indirect costs of one to three times the direct costs they incur. Indirect cost is not as easy to quantify, but is made up of such things as productivity, quality of work, absenteeism and presenteeism by employees who come to work sick subjecting other employees to their sickness. Plan sponsors must be certain that they address these issues in order for their employees and dependents to take advantage of the benefits of the program. When applicable, a wellness and prevention program that drives employees into taking better care of themselves will produce substantial dividends over time. The net result will be a healthier workforce that will be far more productive than one that has not had the advantages of a sound medical program.
Third Leg - Third Party Administrator (TPAs) or Insurance Companies
The third party administrator or insurance company has been involved in the health care industry since the 1930s. Generally, it is the function of this entity to provide insurance coverage for its policy holders in the event they need medical care. During the ACA debate, insurance companies were demonized by profiting on peoples’ health issues. It is important to note that an insurance company’s desired profit margin is 2% of their health care premiums. Clearly, this is a low profit margin; however, at the same time, it is based upon a very large number because of what health care premiums are today. Part of the ACA requirements for 2014 is that pre-existing condition limitations would be eliminated for all plans whether insured or self–funded. By eliminating this provision, the risk factor increases between 10%-15% more in order to cover this risk. Another factor that causes issues for the third party payers is that of the U. S. Government. The U. S. Government is the largest plan sponsor in the United States, however, the U. S. Government is also a third party payer/insurance company. This is inherently a conflict of interest. First of all, a plan sponsor wants the lowest possible cost as does the TPA. Because of the volume of business that is generated by the U.S. Government, they have great leverage on medical providers. This leverage drives the cost of services to levels lower than what are paid by other TPAs/insurance companies. As an example, a commercial insurance company such as Blue Cross or AETNA would pay $22,000 for a procedure. The U. S. Government would pay $12,000 for the same procedure. This difference causes an issue for both the TPA/insurance company and the medical provider. The TPA, in order to remain competitive, will attempt to negotiate better rates with the medical providers. This is currently being done through selected credentialing as well as limited networks which will not include out-of-network providers. Clearly, this is causing and will be causing major issues as we move into the future. The conundrum that the TPAs face is that the Federal Government’s payment schedule is driving costs into the commercial sector.
Fourth Leg - Medical Providers/Doctors and Hospitals
Since the late 1980s, doctors and hospitals have seen a steady reduction of their reimbursements for medical services. TPAs, insurance companies and the Federal Government have reduced their fees on a regular basis. These fee reductions have been devastating to hospitals that provide services for Medicare and Medicaid patients. In the past 10 years, many facilities were forced to close because their fee reimbursements would not support their facility. This seems somewhat of a contradiction when we are constantly talking about higher health care costs and yet we see medical facilities closing down. Why is this? Regulations drive higher costs to these facilities. They are required to have a certain number of staff on duty and have quality control that assures every patient proper care and with the reduced fee income, it puts a strain on the facility to the point that it closes. Doctors are suffering in the same manner to the point that they are selling their practices to large Accountable Care Organizations or simply retiring. This is a dangerous trend because it is apparent that there will be fewer and fewer doctors in the time when the baby boomer generation is increasing in age which will increase health care cost. Add to this equation a minimum of 15 million more people that will be covered under the ACA that will add more strain to the system. This means that the cost for both hospitals and doctors will increase because there will be fewer and fewer facilities that will be able to provide care.
In conclusion, when we look at our health care table analogy, we can understand that every one of the legs does cause costs to increase due to the process: whether it is participants not doing what they can to stay healthy, plan sponsors making access to care difficult, third party administrators and government driving providers out of the system, or the medical providers themselves demanding greater fees because of government regulations. All indicators are that health care costs will continue to outpace the U.S. CPI.
For more information regarding this topic, please contact your local UHY LLP professional or the author of this article:
John DePalma, MPH
Employee Benefits Consulting Services, Inc.