Employers in Massachusetts routinely complain about health insurance costs rising two, three or…eight times faster than inflation. But not so much lately. As of April 1st, the base rates for small businesses insurance premium increases will average 1.8%. Interestingly, the state’s economy grew at the same rate for the last quarter of 2011 and is forecast to be growing at 4% when the low insurance rates take affect this spring.
So have we solved the problem of rising health care costs in Massachusetts? We put this question and a few others to four economists:
1) Health insurance premium increases have slowed and are, for the immediate future, at or below the inflation rate. Have we fixed the problem of rising health care costs?
GRUBER: It is way too early to say that. We need a number of years of premium growth that averages roughly the level of economic growth before we can say we have tackled this problem. We had three such years in the mid-1990s, but then costs grew faster than ever.
CUTLER: We are addressing the problem, but we haven’t solved it. The market is moving towards a system where costs are a consideration for providers. That is good, but we need to do more. Medicare, Medicaid, and the remaining private insurance firms need to change as well, and we need to be explicit about the targets we seek to achieve. I am encouraged by what is happening, but equally convinced that there is more to be done.
ALTMAN: No. The long term cost drivers are still in place. You know, a heavy person can go without a meal for a while and they won’t die. We have set in place forces that will lower costs, but we don’t know yet if they will have a lasting effect. This is the third time in my lifetime that I’ve seen costs drop and then rise again.
ROSENTHAL: It is welcome news that small group premiums are increasing by only 1.8% this year. This figure mirrors a national slowdown in health care spending (though it is lower than the latest figures on national health expenditure growth of 3.9%). While the 1.8% growth in premiums will keep insurance affordable for more Massachusetts residents, it is unlikely that we have fixed the problem of rising health care costs. I conclude this in part because we have seen periods of slower growth in the past that reverse themselves and because we really have just begun to tackle underlying drivers of rising costs (more on this below).
2) What are the main reasons why health care premiums are not increasing as much as they have in the past?
GRUBER: The main thing to emphasize is that we don’t know for sure. But likely factors include: the recession; the growth in patient cost sharing; the growth in tiered networks; and political pressure on insurers and providers to restrain price increases. I don’t see this as any structural change on the provider side, which is the key next step.
CUTLER: The recession is a major factor. People don’t have the money or the time to devote to medical care. Further, cost sharing has increased, patients are responsible for more of the cost of their care, and this adds to the desire to economize. Some structural factors have changed. For example, physicians now worry more about overuse of care, and think more carefully about reducing medical errors such as eliminating hospital acquired infections and reducing unnecessary readmissions.
ALTMAN: The providers and insurers realize that if they don’t do something on their own to lower costs, the government may take some action that will make their lives miserable. So they are seriously trying to keep costs low. The question is, can they do this on their own over the long term, and the answer is we don’t know. History suggests the answer is no, but there are some things that give me hope.
ROSENTHAL: In general, premiums follow trends in health care costs — the amount insurers pay to health care providers. So the main reason premiums are growing more slowly is likely because these payments grew more slowly last year. If I had to speculate I would guess that payments grew more slowly in part due to the lingering effects of the recession — when incomes are down or people feel financially insecure, they consume less health care. Second, in part due to a report by the Attorney General highlighting the high prices some providers in the Commonwealth are paid, I would guess that there was some downward pressure on prices last year too — that is, fees grew more slowly. Finally, it is possible that the diffusion of global payment and other payment reforms are starting to have an impact. My guess is that this part of the equation is small but may be more important in the future.
3) How much, if any, credit do you give to the adoption of global payment contracts in Massachusetts?
GRUBER: Basically zero, as far as I know.
CUTLER: I give some credit to these plans. They have fostered a sense of cost consciousness, which is good. Government pressure has also been important, as has pressure from patients.
ALTMAN: The hope is that global payments will help lower costs. The other aspect is that we are moving to tiered networks, and they really frighten the high end hospitals, like Partners. So Partners is working hard to not stay high cost. The problem is, tiered or limited networks could trigger a consumer backlash like we had with managed care in the 90s. Tiered networks are just as important as global payments in reducing costs, but they must be designed in a way that people accept them.
ROSENTHAL: See above. I think it is too early to credit global payments with these premium growth figures but it may be an important part of longer term affordability.
4) Should the government set a target for future health care cost increases, and if so, how much?
GRUBER: This is a tough call. Normally I am not a huge fan of such measures but I think in our state it might be the necessary stick to effect real change.
CUTLER: Yes, we should have a target for cost increases. I believe the most helpful way to think about targets is in terms of state income growth. Tax revenues, business revenues, and household income all rise with state income. Thus, there is a huge difference between costs rising at or below the rate of income growth and costs rising more rapidly than that. This does not imply a single number for growth or a time frame to achieve it, but simply that the income metric is a natural one to focus on.
ALTMAN: If the market is working, the consequence of losing market share will force prices down and the state might not need to do anything. Partners has done amazing things to lower costs, partly in response to competition from Steward. Even the big fight between Tufts Medical Center and Blue Cross was a fight over small increases. But if the pressures let up, health care inflation will come back as it did in late 90s.
We should set a target, of Gross State Product (GSP) plus .5-1% (because of aging baby boomers). You can’t keep health care costs flat without reducing access to or the quality of care.
ROSENTHAL: Most health systems set a budget and use the budget to force them to prioritize needs. Budgets need not be “hard” (not a penny more) but they do need to be enforced with consequences to work. Responsible consumers use budgeting in every other area of their lives. It is time to move in this direction in health care too. But there needs to be some public debate about where budgets will be set (by service line? by region? individual hospital?), the amount of these budgets, and the enforcement mechanisms.
5) What should the consequences be for insurers or providers who exceed the target?
GRUBER: There should be some sort of insurance rebate to the purchaser.
CUTLER: There isn’t a single answer. The private sector will have consequences, and government may as well. The consequences may vary if the target was missed because prices increased (perhaps because of limited competition), because people turned out to be sicker than expected, or because there were new ways to treat people that were valuable but expensive. The best rules have flexibility and room for analysis. The state’s coverage legislation set goals and left technical decisions to a body of experts. That may be a model for the cost side as well.
ALTMAN: Government should let the market play out for a few years. There are some very interesting things happening here, global payments and restricted networks. Attitudes are changing, cautiously. The state would track progress towards a target and not implement regulation, but it would be an option if needed. Finally, we can’t do this in Massachusetts alone, forever. The rest of the country has to start playing by the same rules, or else the resources and people will go elsewhere.
ROSENTHAL: We are likely going to need to phase in consequences around budgets — perhaps shared savings initially and then moving to taking money away from providers or payers that continually exceed targets. We also need to account for differences in populations served, capabilities, and more broadly the causes of high and growing costs.
I’ve been listening to the controversy around questions four and five for several months now. One dispute is about what the target for health care cost growth should be. These are the options various groups have proposed:
- Gross State Product (GSP) +1 (remember GSP was 2.3% last quarter)
- GSP (flat)
- GSP -1
- GSP -2
Only one employer group has been pushing for GSP -2. Other key stakeholders say cutting spending that much would devastate the health care industry. But the base rate for small business premium increases, while not the same as health care spending overall, will be at or below GSP this Spring. And the world is not falling apart. So how low can we (reasonably) go?