The NearTerm Outlook for Private Health Insurance Spending

1
The Near-Term Outlook for Private Health
Insurance Spending

• Kenneth E. Thorpe, Ph.D.
• Vanselow Professor of Health Policy and
• Director, Institute for Health Services Research
• Tulane University School of Public Health
  Tropical Medicine

Presented at Is Health Care Inflation
Re-Emerging? a conference sponsored by the
Council on the Economic Impact of Health System
Change, Washington, D.C. September 16, 1998
2
Overview

• Recent Growth in Private Health Insurance
  Premiums
• Slow growth between 1994 and 1997
• 2.5 percent below growth real GDP

3
Why Do We Care About Rising Private Insurance
Premiums?

• Value for money (i.e., are the incremental
  costs greater than the incremental benefits?)
• Lower wage growth
• More uninsured if rising faster than wages

4
What Accounts for the Slow Growth?

• One-third of those with private insurance shifted
  to lower cost managed care plans
• Managed care
• resulted in slower growth in provider payments
• substantial reduction in in-patient utilization

5
Hospitals Cross-Subsidized Lower Profits From
Private Health Insurance With Higher Profits
Medicare, Medicaid and Non-Patient Care Revenues

• Costs of treating privately insured patients
  increased 2 percentage points faster than
  payments each year between 1993-1996

6
Most Recent Data?

• Most comprehensive single source FEHB
• Increased 8.5 during 1998 and 10.2 during 1999

7
Factors Influencing Near-Term Trends in Health
Insurance Premiums

• Rising drug costs
• Increased 22 during 1998 in FEHB
• Increased 13 overall
• Adds approximately 2 to 4 percent to premium
  growth
• Hospital costs
• Increased by 3.7 up from 3.1
• Managed care saturation
• 85 enrollment
• Information technology

8
Table 2a. Aggregate Hospital Payments and Costs,
by Payer, 1993-96 (millions of dollars)
9
Table 3a. Recent Experience With Private
Insurance Premiums FEHB, 1991-1999

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Factors Affecting Private Health Insurance
Premiums During the Next Ten Years

• High recent growth in real GDP
• Demographic changes in insured workforce
• Innovation in disease treatment
• Balanced Budget Act of 1997
• Legislative environment
• Changes in industry structure and relative
  bargaining strengths of purchasers and providers

11
High Growth Real GDP

• Over last three years, averaged 3.7, this year
  3.8
• Full percentage point higher than 1993-96
• With lag, increase demand for medical care
  through 2001

12
Demographic Changes

• Rising share workers aged 45 and over - 1986
  accounted for 28 workforce, 1996 31.7, by 2006
  nearly 40
• Medical care spending 45 higher among those 45
  to 54 compared to 35 to 44
• Could add additional 4 to trend

13
Pace of Innovation

• Human Genome Project - will result in 6 to 20
  fold increase in number of drug targets
• Currently 350 biotechnology medicines either in
  human clinical trials or at the FDA for approval
• Example Alzheimers Disease - prevalence
  4,000,000 and annual economic cost (health care
  plus lost wages) 100 billion has 17 medicines in
  development
• Direct marketing - 3 billion or so annually

14
Balanced Budget Act

• Growth in hospital payments under Medicare cut in
  half
• Resulting growth rate closer, though lower, than
  recent historic expenditure growth
• Could make generating additional discounts by
  private health plans more difficult

15
Legislative Changes

• Patients Bill of Rights (0 - 4) potential
  impact on plan premiums

16
Change in Bargaining Power
Forces Contributing Toward Enhanced Purchaser
Bargaining Power

• Excess capacity
• Horizontal consolidations in the managed care
  industry
• Expanded use of health and productivity
  management and disease management interventions

17
Change in Bargaining Power, cont.
Forces Enhancing the Prospects for Enhanced
Supplier Bargaining Power and Higher Cost Growth

• Few lives left to move to managed care
• Supply side consolidation in the form of
  physician practice management, physician-hospital
  organizations, and provider-sponsored networks
• Rising medical loss ratios
• Rise in direct consumer marketing by
  pharmaceutical firms

18
Projected Range of Growth

• Based on historic relationships between
  demographics, insured lives, real GDP plus
  health-sector intangibles
• Range of growth in nominal premiums of 4.7 to
  7.8 over the next ten years. Similar to average
  experience within FEHB this decade