Private Insurance Healthcare Dollar 30¢ Physician Services Healthcare Cost Trends 31¢ Hospital Care 14¢ Prescription Drugs 11¢ Admin 10¢ Other Medical.

Private Insurance Healthcare Dollar Private Insurance Healthcare Dollar

3030¢¢

Physician Physician ServicesServices

Healthcare Cost Trends

3131¢¢

HospitalHospitalCareCare

1414¢¢

PrescriptionPrescriptionDrugsDrugs

1111¢¢

AdminAdmin1010¢¢

Other Other Medical Medical

Services Services

33¢¢

Nursing Nursing Home & Home & Home Home HealthHealth

11¢¢

Durable Durable Medical Medical

ProductsProducts

Source: BCBSA April, 2003

US Attitude Toward Health Care Benefits

• Entitlement attitude: Employees feel it is a right due to

them by their employer

• Similar to pension plans turning to consumer driven

401(k) plans - we have been seeing health care plans

taking this path of consumer driven

Definitions - Benefit Plans

• Traditional Indemnity Plans– Major medical plan design, usual coinsurance of 20%,

with a deductible

• Managed Care

• Health Maintenance Organizations: HMOs

• Preferred-Provider Organizations: PPOs

• Point-of-Service Plans: POS

• HMO: a closed system, providing comprehensive services, assuming full financial risk

• POS: combines HMO style controls (e.g. gatekeeper) with PPO freedom to go outside

• PPO: allows out-of-plan usage (with higher co-pays) generally fee-for-service

Common Forms of Managed Care Vary in Degree of Integration

Most

Degree of Integration

Least

Recent Factors Influencing the Growth of Health Benefit Costs

Aging Population

• U.S. male’s healthcare spending doubles in the 45 to 54 age group; rises 50% in the 55 to 64 group

• In the US, One in five people will be 65 or older by 2030.

Nurse Shortage Growing More AcuteNurse Shortage Growing More Acute

Key Cost Drivers: Hospital Nursing Shortage

Source: U.S. Census Bureau data, Internal Release Date: April 2, 2001; and National Sample Survey of Registered Nurses, 2002, HRSA, Bureaus of Health Professions, Division of Nursing

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2,400

2,500

2001

2003

2006

2008

2010

2012

2014

2016

2018

2020

Shortage of 434,000 Nurses in 2020

Required

Available

Obesity and Sedentary Lifestyle Factors

• Chronic disease

• Impaired physical function

• Impaired quality of life

• At least 300,000 premature deaths

• About $90 billion in annual U.S. direct health care costs

Archives of Internal Medicine

Large Claims Drive Most of the Cost

5%

53%

10%

25%

35%

19%

50%

3%

% of Employees % of Claims

$150 per person

$20,000 perperson

Annual Change in Average Total Health Benefit Cost, 1996-2005

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Total Health Benefit Cost for Active Employees: All Employers 1996-2003

$3,703 $3,594$3,817

$4,097$4,430

$4,924

$5,616

$6,430

1996 1997 1998 1999 2000 2001 2002 2003*

Average Annual Premium Costs for Covered Workers, Single and Family 2005

$3,782 $3,767$4,150

$3,914 $4,024

$9,979

$10,456

$11,090$10,801 $10,880

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Traditional HMO PPO POS All Plans

Source: The Kaiser Family Foundation and Health Research and Educational Trust's Employer Health Benefits Annual Survey 2005

Single Coverage

Family Coverage

Percent of Premium Paid by Workers 2000-2005

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits: 2005

11%

29%

14%

26%

14%

26%

16%

28%

16%

27%

0%

5%

10%

15%

20%

25%

30%

Single Family

'88 2000 2001 2002 2003 1988 2000 2001 2002 2003

Reaction to Spiraling Costs

• HMO Act (1973) introduces federal policy support for managed care provided through organized delivery systems

• Self-funding of benefits

• Cost-shifting to employees

• Managed care

History of Medical Expense Coverage

CONSUMERISM

• Employees will now need to be aware of the actual

costs of their health care and to become savvy health

care consumers.

Future Outlook

• Smaller Employers hit harder …..

• The threshold of pain for employers is 12%--at which point employers take action (Mercer, 2003)

• What things look like if employers do nothing? Chart

Plan Costs at Expected Increases Per Year

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

2003 2004 2005 2006 2007 2008

Pla

n C

os

t P

er

Ac

tiv

e E

mp

loy

ee

Traditional

HMO

PPO/POS

$15,196

$11,665

$13,372

Responses by Smaller Employers

• 19% made changes to health plans

• 65% increased deductibles and co-pays

• 35% switched insurers

• 30% increased employee share of premium

• 29% cut back on scope of benefits

• 26% increased the scope of benefitsEBRI, January 2003 Issue Brief

Prescription Drug Facts

• Spending on prescription drugs rose 11.3% last year, rising to $182 billion

• Constitute only a relatively small proportion of overall health care spending (about 9.4%), but

• Prescription drug costs accounted for 44% of the increase in total health care spending

• Controlling prescription drug costs is a primary issue in controlling the rise in health care costs

• Fastest-growing component of health care spending

Prescription Drug Cost Increases

13.8%

16.9%

18.3%17.8%

16.9%17.5%

1998 1999 2000 2001 2002 2003*

c. 2003 Mercer Human Resource Consulting

Growth in Prescription Costs

• Increased utilization

– More drugs being prescribed

– Multiple drugs to treat multiple conditions

– Physicians greater trend to treat using drugs

• Increased drug prices

– Lack of true competition in the market

• Increased Direct-to-Consumer Marketing

Growth in Prescription Costs

• Promotion of drugs to providers

• Drug samples

• Highest cost drugs are most commonly prescribed

• High priced drugs have rapidly rising prices

• High priced drugs are most heavily advertised

Employers Pay Biggest Portion of the Cost

0

5

10

15

20

25

30

35

40

45

Private PlansIndividualsGovernment

Percent of US Drug Expenditures by Payer

43.9%

34.3%

21.8%

Source: Prescription Drug Trends, Kaiser Family Foundation (November 2002)

Versus Consumers Who

• Want access to the “best” drugs

• Generally don’t have knowledge of how much the drug actually costs when paying a small co-pay

• As a result of direct-to-consumer advertising, the consumer is more aware of the drugs that exist that may improve their health and lifestyle

– More likely to try new meds and fill Rx

– Process endears providers to patients

Drug Cost Control Strategies

• Preferred drug lists & formularies

• Use of multi-tiers

• Increase co-pays

• Percentage co-pays

• Expanded use of generics

• Require participating doctors to write “brand necessary.”

Drug Cost Control Strategies (cont.)

• Drug utilization review (DUR)

– To catch overuse, interactions, length of use, etc.

• Disease management

• Use of managed care

• Cover over-the-counter drugs

• Pharmacy counseling

• Consumer education

• Evaluation of pharmacy benefit managers (PBMs)

Retiree Health Care

• Stagnant economy + fast-rising health care cost =

hastened decline of retiree health benefits

Firms That Offer Retiree Health Coverage, 1993 - 2003

Source: Mercer National Survey of Employer-Sponsored Health Plans, 2003

28%

21%

35%

46%

40%

28%

0%

20%

40%

60%

80%

100%

1993 1999 2003

Offer Coverage to Medicare-eligible Retirees

Offer Coverage to Pre-Medicare-eligible Retirees

Retiree Health Benefits Trends Percentage of Firms Offering

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits: 2003

66%

38%

10%

0%

10%

20%

30%

40%

50%

60%

70%

1988 2003 2003 - (All Small Firms, <200 Workers)

All Large Firms (200+ Workers)

Retiree Health Care

• Stagnant economy + fast-rising health care cost =

hastened decline of retiree health benefits

• Watson Wyatt survey of 56 larger employers (5,000+)

– 20% have already eliminated retiree plans for new hires

– 17% now require retirees to pay the full premium

Disease Management (DM): Approach

• Preventive programs to educate and get the proper services into the hands of patients with chronic illnesses

• Chronic illnesses regular hospital utilization

• Prescribed routine of wellness, prevention and treatment to avoid or to delay acute episodes.

Disease Management Programs

• Purpose: Improve quality of care and health outcomes while decreasing health-care costs

• Companies purchase these services through their insurance provider or separately from DM companies such as Health Management Corporation

Disease Management

• Focus on conditions including:

– high blood pressure, high cholesterol

– excess weight; diabetes

– Asthma; heart conditions, oncology

• In 2002, 11 chronic conditions accounted for 58% of total health-care plan payments

Watson Wyatt

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits: 2003

Percentage of Firms’ Opinions on the Effectiveness of Cost Containment Strategies

14%

22%

10%

6% 51%

49%

44%

54%

0% 20% 40% 60% 80%

Consumer-Driven Health Plans(High Deductible Plans w/

HSAs)

Disease Management

Higher Employee Cost Sharing

Tighter Managed Care Networks

Very Effective

Somewhat Effective

68%

66%

59%

57%

Eliminate Health Care Insurance

• Trend among smaller employers has been to eliminate health care insurance:

– 60% of the 41 million that do not have insurance are members of families who own or work for small businesses.

• Cash-out option: One alternative to offering benefits

– The employer pays workers higher wages in lieu of insurance. The worker can choose to buy health insurance on the individual market.

– Shifting employer dollars from benefits to wages.