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Why the Health Care Cost Curve Is Bending
Successful cost-management initiatives have helped slow the rate of increase

By Edward Kaplan and Christopher Calvert © Sibson Consulting  11/15/2013

Although health plan costs continue to rise, there is encouraging news for employers and other health plan sponsors: the rate of increase in health plan cost trends has fallen to the lowest level in 14 years, according to the 2014 Segal Health Plan Cost Trend Survey.

Medical health plan cost trends still outpace the consumer price index for all urban consumers by a margin of at least three to one, which continues to hinder real wage growth.

What Is the Cost Trend?

The cost trend is a forecast of per capita claims cost increases that takes into account various factors, such as price inflation, utilization, government-mandated benefits, and new treatments, therapies and technology.

Although there is usually a high correlation between a trend rate and the actual cost increase assessed by a carrier, the cost trend and the net annual change in plan costs are not the same. Changes in the costs to employers can be significantly different from projected claims cost trends, reflecting such diverse factors as group demographics, changes in plan design, administrative fees, reinsurance premiums and changes in participant contributions.

Trend Projections for 2014

All medical plan types are expected to experience trend rate declines in 2014. For example, the trend rate projection for high-deductible health plans (HDHPs) without prescription drugs is 8.3 percent for 2014 compared to 9.1 percent projected for full-year 2013.

Figure 1. Summary of selected medical, prescription drug carve-out, and dental cost trends.


(click on graph to view enlargement)

Successful Cost-Management Initiatives

Although it remains to be seen whether the deceleration in trends projected for 2014 have been influenced by short-term economic forces, the Affordable Care Act (ACA), or another unidentified factor, it seems likely that health care cost-management initiatives that employers have been using for years are paying off. Examples include the following:

  • Value-based cost sharing. Many plan designs now include greater levels of participant out-of-pocket costs to reduce overly utilized health treatments and encourage greater use of higher-value services and treatments.

  • Vendor network management. Network provider contracting is being more aggressively managed to remove high-cost outlier providers who cannot prove their value. More employers are supporting managing network provider reimbursement increases more tightly to obtain deeper discounts and conducting data-driven renewal negotiations.

  • Consumerism to promote individual health management. Participants are becoming more educated consumers. Recent examples include programs such as:

    • Choose Wisely, which lists five questions patients should discuss with physicians about medical tests and procedures that may be unnecessary (and, in some instances, can cause harm).

    • The Five-Star Quality Rating System, created by the Centers for Medicare & Medicaid Services (CMS) to help consumers compare how nursing homes’ quality of care and services vary.
Health Care Delivery Changes

Significant changes in the health care delivery system could have long-term implications for health care costs. These newer initiatives are expected to succeed over the longer term:

  • Provider reimbursement. These arrangements are beginning to shift from the fee-for-service model to alternative payment models, such as bundled payments, which are designed to encourage providers to coordinate care and reward efficiency by taking risk.

  • More transparent costs. A growing number of health care companies have invested heavily in new member-support decision tools that provide more information on health treatment costs. There are also publicly available transparency tools, such as:

    • Hospital Compare (CMS-published data on what providers charge for common services, which shows significant variation across the country at over 4,000 Medicare-certified hospitals).

    • Fair Health, an independent not-for-profit corporation with a web portal that allows consumers to access a medical cost transparency database to determine out-of-network reimbursement.

  • Emergency room alternatives. Increasingly, employers are encouraging participants to seek care for minor illnesses in lower-cost settings, such as telemedicine and walk-in clinics.

  • Managed hospital care. The Hospital Readmissions Reduction Program, which requires the CMS to reduce payments to hospitals with excess readmissions, has helped reduce overall hospital spending by including comprehensive strategies for discharge planning, medication management, and continuum of care.

  • New provider risk arrangements. There is growing use of patient-centered medical homes, which focus an increased level of comprehensive health care resources on primary care and prevention for patients with chronic conditions.Also, as accountable care organizations (ACOs) expand, they will offer new options for employers. ACOs, which have mainly been developed for the Medicare population, are networks of providers and suppliers that agree to be jointly accountable for managing the health of participating populations across the care continuum.

  • Reference-based pricing. In this approach, a plan makes a defined contribution towards covering the cost of a particular service, to steer participants to higher-quality hospitals or physicians for specific procedures or conditions (e.g., the California Public Employees' Retirement System’s use of maximum allowance for hip and knee replacement), is expanding.
Conclusion

While medical plan cost trend continues to decelerate, overall health plan costs are still on the rise. Faced with this reality, employers are becoming increasingly more progressive and creative in their efforts to manage costs while delivering high-quality, cost-effective health care.

As the Affordable Care Act kicks into full gear in 2014 and as the economy continues to improve, it is unclear if health plan cost trends will continue to decline or return to the historic, inflationary underwriting cycle. Employers must be ready to implement new requirements introduced by the Affordable Care Act and to determine their impact on plan costs. It is important that they play an active role to continue to get the most for their benefit dollars.

Edward A. Kaplan is a senior vice president and leader of the national health practice for Sibson Consulting. He created the Segal Health Plan Trend Cost Survey. Christopher Calvert is a senior vice president and leader of Sibson Consulting’s health practice, New York. He has more than 20 years of experience working in the health care industry.

This article originally appeared in the November 2013 issue of Sibson Consulting's Perspectives and is reposted with permission from Sibson Consulting, a division of Segal. © 2013 by The Segal Group Inc. All rights reserved.

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