At a recent meeting with a prospective client, I was pitching ideas to reduce health care costs when she cut things off.
"We're not concerned about that," she declared. "Our costs are starting to trend down."
When I asked if claims were lower, she said no. Was her renewal quote less? No. Were there improvements in demographics or risk profiles? Still no.
So why did she think costs were coming down?
"My consultant says what we're doing seems to be working," she replied. "And everything I read says the same thing — health care costs have topped out."
In her view, we've turned a corner, and the best thing to do was simply to stay the course. She saw no need to change strategy, or, for that matter, advisers.
The Twilight Zone
The thought that health costs are declining may reflect a "parallel universe," but it's hardly an isolated view. Many employers, prompted by brokers and consultants, now believe, as recent EBN headlines announced, that their "Focus on Plan Design [is] Paying Off" and that, nationwide, "Medical Costs [are] Declining."
Now, I'm not picking on EBN, whose articles have been balanced and clear. The problem is the mainstream media, which doesn't really "get" benefits. They've led many to conclude that health costs are actually abating.
In fact, recently, in briefing managers about upcoming benefit changes, I was confronted by someone waving an article from his local paper.
"Why are you increasing our premiums 15%," he asked, "when it says here that health costs are going up only 6% this year?"
Facing facts
Data are easily misconstrued, creating impressions that are outrageously wrong.
In this case, it's the facts that are outrageous. What most employers have been doing with benefits is not working. Medical costs are both on the rise and poised to increase even faster. And most plan-design decisions will not "pay off," but only ensnare employers in a steeper cost spiral.
The truth is we're not turning a corner. We're about to veer off the road.
A closer look
A new study from Towers Perrin claims that U.S. health care expenses will increase by only 7% in 2008 — "among the lowest [growth rates] of the last five years." But few have noticed how skewed the data are — starting with precisely who can expect to see this low renewal rate.
According to Towers, its study "represents primarily Fortune 1000 companies with operations in numerous locations . . . [and] health benefits for the 315 participating companies [of] nearly $30 billion." So the projections are hardly applicable to average employers — and certainly not to my prospect, with about 1,000 FTE's and a budget that's invisible compared to the TP composite.
The study's skewed further by what Towers terms different levels of "performance" in managing megasized plans. The unfortunate "lower performers" typically incur substantial additional costs —of about $1,500 per employee, per year.
If things are this much worse for corporate behemoths, imagine the plight of a small or mid-sized employer — without the resources or leverage of a "top-performing" Fortune 1000 benefits department.
Hewitt's cost report, cited in EBN, projects a more realistic, but still unrepresentative, increase of 8.7%. Still, it says, employee costs will jump by 10%. In fact, Towers notes, their contributions will rise at rates "roughly more than twice that of [their] annual merit increases."
Off the charts
The latest Segal Company report agrees that things are getting better — for employers. In this "fifth consecutive year of declining medical trends," Segal observes that "trends for prescription drug coverage are projected to decelerate most." You'd think this was fabulous news.
But you'd be wrong.
The firm's projections may be lower for its client base, but they're higher than those of Hewitt and Towers. Segal sees increases of about 11% for all plans, including consumer-driven. As for "decelerating" prescription costs, Segal projects increases of — about 11%. Though arguably better compared to prior years, it's hardly cause for celebration.
A closer look confirms that the factors that most affect benefit costs are arching ever-upward. Health care inflation continues to outpace general inflation by large margins — between 68% and 321%, depending on medical service. And, despite employers' efforts, utilization is increasing at a steady clip — by 3.2% (for hospital stays), 4.3% (prescriptions), and 5.5% (doctor visits). The conditions creating "cost creep" are as calamitous as ever — and worse if you have an aging workforce, retiree coverage, or employees who view benefits as near-entitlements.
Wrong end of the telescope
The reality is that the average reader of this column is probably staring at 2008 cost increases of 9% to 15%. You're probably not comforted by learning that "high-performers" in the Fortune 1000 pony up a bit less. Instead, you face tough benefit decisions, and have no doubt learned, through experience, that cost-shifting and design-tweaking don't produce sustainable savings.
In fixating on the percent of cost increase instead of what's driving the charges, we've been conned into looking through the wrong end of the telescope. The industry wants us to focus on what we can't control rather than on what we can. Our brokers and consultants find it easier, and more profitable, to reassure than to challenge us. And, admittedly, it does make us feel somewhat better about our prospects.
In The Sun Also Rises, Ernest Hemingway's main character was presented with a similarly bleak reality — "spun" with a similarly positive twist and similarly specious claims. But Hemingway heroes were always well-grounded.
In one of the most understated closing lines in American literature, the protagonist listened to the hype, stared out the window, and calmly took in all that he'd been told.
"Yes," [he] said.
"Isn't it pretty to think so?"
Of course, the line had nothing to do with our health care system, or the thought that we'll all ultimately be okay.
But it would sure be pretty to think so.
