Forces driving up the costs of retiree healthcare in the year 2002
Why are we seeing renewal rates in the neighborhood of 15% to 20% this year (and sometimes even higher?) This article discusses the some of the main forces that are joining together to make employers' lives miserable this year.
(1) Increased cost of Medicare Supplement policies - this is an area in which annual increases have been as high as 200% - 300%. The huge numbers here are due to the leveraging effect inherent in Medicare Supplement premiums - benefits paid under these policies are what's left over after Medicare acts as primary payor. So, as Medicare covers a shrinking portion of healthcare costs, the remaining piece grows at a rate much faster than the overall rate of healthcare inflation. It's a tip-of-the-iceberg problem, and calls into question the value of the actuarial/marketing model, used extensively in the early to mid 1990's, that put an accounting value of $0 on all future Medicare Risk policies (which share a similar cost profile to Medicare Supplement policies in the valuation process.)
(2) Shakeout of providers - Partly in answer to the Balanced Budget Act of 1997, which introduced Medicare + Choice (Part C), Medicare HMOs have exited the market in droves. At the same time, a shortage of actual delivery mechanisms, including available PPO networks, has developed in certain areas of the country, most notably the Bay Area of California. This has put employers and large, multiple employer plans such as Cal PERS, in a bind by restricting their ability to offer a competitive range of options to employees.
(3) Peak of underwriting cycle - Simply put, insurers and HMOs were shifting costs to Medicare, and/or pricing their products based on the perceived ability to do so for the foreseeable future. The rate increases seen in 2000 and 2001 reflect the inability to further shift these costs.
(4) Increased legal action surrounding HMOs - In addition to the Medicare reimbursement problem, managed care faces an uncertain political future in this country due to the extensive adverse publicity it has received. Gone are the days when increased penetration by managed care served as a panacea for employer's healthcare decisions.
(5) Strength of pharmaceutical industry lobbying - It's difficult to understate the devastating effect that the double-digit increases in prescription drug costs have had on the market and on the desirability of retiree medical benefits in general. Once comprising about 10% of the total healthcare bill, it is not uncommon to see the drug component now running between 30% and 40% of the total. Efforts by forward-thinking members of Congress and by the Bush Administration (most notably Tommy Thompson of Health and Human Services) have met with extreme and virulent resistance from the organized forces of both small and large pharmaceutical companies. In one sense, this has been instructive in revealing where much of the problem lies. However, the outlook for overcoming this monolithic political force is grim at present, in the author's opinion.
(6) There are a number of smaller factors - such as mental health parity, privacy legislation, the new Section 125 rules - that all will increase compliance costs for health plans. The increase in cost brought about by these changes is beyond the ability of any actuary to measure accurately.
Next month, we will take a look at ways that employers can help to limit their liabilities as part of the collective bargaining process.
The above contains excerpts of an article written by T. Louis Filliger to be published in the January issue of the Journal of Pension Benefits, and appears here with their gracious permission.
