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Fiddling while Rome burns

by Emily Friedman

First published in Modern Healthcare, September 27, 2004

Industry focus on 'slowing' health-cost rise ignores looming disaster

On Sept. 9, the Kaiser Family Foundation/Health Research and Educational Trust released an annual survey of employer-sponsored health insurance. It found that employers' premiums increased in 2003 by "only" 11.2%, down slightly from the previous few years, but still more than five times the overall national inflation rate of 2.2%. Earlier this year, the CMS announced that overall health spending rose by "only" 7.8% in 2003, also down a bit from the past few years, but 31/2 times general inflation. Both announcements were greeted by many observers as good news, because things weren't quite as bad as had been feared.

Good news? It was as if Gen. George Armstrong Custer's lieutenant had ridden up to him at the Little Big Horn, after surveying the enemy, and had announced, "General Custer! There aren't really 6,000 of them! There are only 5,700!"

The Kaiser/HRET study also revealed that employees' share of insurance premiums continues to rise, as do other forms of employee cost-sharing, and that the proportion of employers offering coverage to their workers fell to 63% from 68% three years ago. Among smaller employers, the percentage is now 59%; it is down to 52% for firms with fewer than 10 employees.

This being an election year, these announcements did not go unnoticed by politicians. Indeed, the air is filled with proposals concerning health insurance: association health plans through which small employers could band together to negotiate better prices; "stop-loss" public catastrophic protection for employers with large losses; tax credits large and small; plans to allow smaller employers and uninsured workers to buy into the Federal Employees Health Benefit Plan; and many others. And desperation over prescription drug costs has prompted the political leaders of cities and states to start helping their citizens and employees buy drugs from Canada and other foreign countries, over the strenuous objections of the federal government.

One would think that policymakers might also want to focus on the core problem underlying the insurance and pharmaceutical crises-the skyrocketing cost of healthcare. Instead, they are proposing various ways in which taxpayer money can be used to subsidize those costs. In fact, they are doing more than that: One of the stranger provisions of the very strange Medicare Modernization Act of last year prohibits the Medicare program from negotiating with pharmaceutical firms for lower prices.

Another provision allocates taxpayer money to bribe employers so they won't ditch retiree benefits, which are receding faster than grandpa's hairline. Yet another shovels money to health plans that participate in Medicare. Even the stopgap Medicare drug discount-card program allows the card-sellers to change drug prices weekly. Anyone want to bet which way they are likely to go? So not only are policymakers avoiding directly addressing healthcare inflation, they have actually moved to preserve and even increase it.

It is easy to blame politicians for not doing anything positive, but there's plenty of blame to go around, as the various healthcare sectors have been demonstrating for the past two or three years. When the Center for Studying Health System Change reported in 2001 that hospital costs, and not prescription drugs, were responsible for the largest share of healthcare inflation, it caused something of a stir. About then, the War of the Studies erupted. Insurers issued a study blaming hospitals-especially mergers and market consolidation-for double-digit inflation; hospitals shot back with an analysis declaring that the real culprits were insurance premiums and prescription drugs. Health plans countered with a study showing that "medical advances" and providers were the major drivers of inflation. Another insurer-funded study blamed pharmaceutical firms, whose lobby labeled the report "baloney."

They even started to sue each other. Aetna sued Abbott Laboratories after Abbott raised the price of its AIDS drug Norvir by 400% in 2003. The lawsuit was suddenly dropped in May. Aetna declined to say why, but published reports pointed out that Abbott was one of the health plan's customers.

The blame game continues to drag on. Meanwhile, there's money to be made. As the cost debate raged and storm clouds began to encircle his firm, then-Tenet Chief Executive Officer Jeffrey Barbakow cashed in $111 million worth of stock options. UnitedHealth Group Chairman and CEO William McGuire earned $94 million in 2003, and at the end of the year still held $721 million in stock options. Health plans, once touted as the magic bullet for controlling healthcare costs, are enjoying record profitability. The pharmaceutical industry, by many measures, is the most profitable sector in the U.S. economy. A hospital building boom is under way.

Hewitt Associates predicts that health plans will ask employers for 2005 premium increases averaging 13.7%. The CMS predicts that healthcare spending will double by 2011 to $2.8 trillion, or 17% of gross domestic product.

In 1904, the crowded paddlewheeler Gen. Slocum caught fire while cruising on the East River, killing 1,021 people, mostly women and children. No one-not the boat's owners, the shipping firm's board, city inspectors, the state of New York, or anyone else-was willing to take responsibility for the causes of the disaster. Those included leaky fire hoses, rotten life jackets, unusable lifeboats, untrained crew, lax government safety standards and greed.

Can anyone in healthcare smell the smoke yet?

First published in Modern Healthcare, September 27, 2004

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