Private Insurance Healthcare Dollar 30¢ Physician Services Healthcare Cost Trends 31¢ Hospital Care 14¢ Prescription Drugs 11¢ Admin 10¢ Other Medical Services 3¢ Nursing Home & Home Health 1¢ Durable Medical Products 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 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 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

Annual Change in Average Total Health Benefit Cost,

Total Health Benefit Cost for Active Employees: All Employers

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

Percent of Premium Paid by Workers Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits: 2005

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

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 benefits EBRI, 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

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

Retiree Health Benefits Trends Percentage of Firms Offering Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits: 2003

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

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.