The sky is not falling. Premiums will rise, but not nearly so high as some have predicted.
Paul Ginsburg, a Harvard-trained health economist, for the last couple of years has bucked the dire predictions that health care costs would soar, arguing that the accounts such warnings were based on were, in fact, exaggerations. Crunching numbers from a variety of sources, he concluded that there was "only a small upswing in the rate of increase of costs." Managed care can still lay claim to its title as the champion that finally contained health care costs.
But maybe not for long. In a recent interview with Peter Wehrwein for Managed Care, Ginsburg says both political and market forces are chipping away at the ability of managed care companies to control underlying health care costs. Meanwhile, the insurance cycle and a consolidation in the industry are likely to push premiums up. Yet Ginsburg says managed care's biggest problem may not lie so much in dollars and cents, but in the industry's bad image.
Ginsburg, a nationally recognized economist and health policy expert, has been president of the Center for Studying Health System Change since its founding in 1995. The center is a Washington-based research organization funded by the Robert Wood Johnson Foundation. Previously, Ginsburg was the founding executive director of the Physician Payment Review Commission, which was created to provide Congress with expert advice on Medicare and Medicaid. Ginsburg has also worked for the Rand Corp. and the Congressional Budget Office.
MANAGED CARE: One point you make is that the media got it wrong about managed care premiums. How wrong did they get it and why?
PAUL GINSBURG: Well, they got it wrong for two years. What seems to have happened in both 1997 and 1998 is that perhaps early in the year or late in the previous year, there were stories based on anecdotal information about premiums increasing much more rapidly than before. But when the systematic data about premium change started coming out, it was shown that that wasn't the case. Ironically, data on 1998 premiums, which established that premiums had not soared, were stale almost immediately because of the focus on what's going to happen in 1999. And for 1999, the media expects much higher increases than in 1998.
MC: Do you think the media has the '99 story wrong?
GINSBURG: Unlike the previous two years, I'm not arguing with them. A fairly dramatic change in the insurance market has taken place over the last six or twelve months.
MC: To what extent are premiums driven by factors other than cost? And might we see a growing gap between premiums and health care costs?
GINSBURG: There are two reasons that trends in premiums and trends in underlying costs diverge. One is errors in forecasting: When you are writing a health insurance policy for 1999, you need to predict what costs will be in 1999. And you can make errors, particularly when the trend changes. The other is the competitive state of the health insurance industry. In the early 1990s, the health insurance industry grew and was very profitable and companies were attempting to establish themselves in additional markets. So, in a sense, the modus operandi was setting premiums as low as possible. Insurers lost a lot of money as a result. Recently, the stance of insurers changed and restoring profitability became a higher priority. Insurers started withdrawing from Medicaid and Medicare and some commercial markets.
MC: In plain English, did they set premiums too low in pursuit of more customers?
GINSBURG: Yes, they did. I can't say any individual company made a mistake. But the industry as a whole made a big mistake. They were all trying to undercut each other and, as a result, the overall industry performance was very poor. This is something not unique to health insurance. You see patterns like this in other industries.
MC: But don't we have something else going on here? You had a whole new insurance market, managed care. This wasn't a market that existed five or ten years ago in its current form.
GINSBURG: True. And what happened is that the many managed care plans, at least according to anecdotal reports, knew that they just needed to price a certain percentage below the traditional plan they were competing with and they could increase their market share. I think their profitability in the early '90s was unprecedented in health insurance. But as managed care became so dominant in the market, that strategy didn't work anymore. And they were competing with other managed care plans instead of with traditional plans.
MC: Weren't they also able to make profits by driving down hospital admissions and length of stay?
GINSBURG: Well, actually, hospital admissions and length of stay have been falling for 15 years or even more. And that trend just continues. Another way of looking at it is that trends in health care costs came down sharply for reasons not fully understood even today. And premiums lagged.
MC: One thing you have looked at is wages in the health care sector, which traditionally have run ahead of wages in other sectors. And you seem to have picked up in your survey a trend toward health sector wage increases coming back into line with wage increases in other sectors.
GINSBURG: The growth rate has come into line.
MC: Is that one reason why the underlying costs fell? And do you have any sense of where that's going?
GINSBURG: I believe health care providers have faced much more aggressive health plans than in the past — health plans seeking discounted rates. One way providers responded was to try much more vigorously to cut their costs. So if you look at the trend of hospital costs per day or per admission, they've been extremely low for the past few years, responding to this pressure. One of the things that hospitals will do in the face of this pressure on their costs is provide wage increases that are smaller. So, I believe that the slowdown of the rate of growth of wage increases is the result of the market pressure on the providers of health care.
MC: You've tracked what is going on with expenditures on drugs: the double-digit trend starting in '95. There are more drugs on the market, more lifestyle drugs. And now, with tamoxifen, it seems like we may be entering the era of chemoprevention, perhaps.
GINSBURG: Yes, rising drug expenditures is the biggest current problem in controlling costs. And you know, there's some aspect of it — I'm not aware if anybody's measured it — where there may be substitutions; that spending more on drugs may have some offset in hospital costs or physician costs. I think there's an aspect of price as well, which is difficult to measure. But I suspect that there is much less resistance to high pharmaceutical prices now than there was before. There's less resistance by patients because their drug coverage is more extensive.
MC: They don't see the out-of-pocket expense. This is sort of like the incentives in the old-fashioned indemnity system, where the people just didn't see the costs.
GINSBURG: Yes. We've switched from a situation where people were paying a deductible for drugs and, say, 20 percent of the cost. Now they're just paying five or ten dollars per prescription. So in a sense, some patient sensitivity has been removed, which would imply that, as pharmaceutical companies are bringing new drugs to market, they might set the price higher than they would have a few years ago.
MC: Of course, they have to get on the formulary or get Medicare or Medicaid to cover it.
GINSBURG: Actually, that's one thing that has surprised people — that formularies are not used very extensively. Employers have really held back managed care plans by asking for less management of pharmaceutical expenditures than the plans were ready to deliver.
MC: Why do you think the employers have done that?
GINSBURG: Employers — who were, of course, earlier enjoying very low premium increases — were concerned about a negative reaction by employees toward strict formularies. Now, this could change, given the fact that employers are now paying, or going to be paying, higher premiums, and may be willing to consider cost-control mechanisms — if they weren't before.
MC: Does this whole conversation we've been having about underlying health care costs argue for or against the managed care insurance companies' capacity for controlling costs?
GINSBURG: The process of getting these costs back under control was not a public policy. It happened through individual employer and employee decisions about what health insurance to buy. In a decentralized process, we wound up with great results on cost. The real question for the future is: How far are we going to go? It's one thing when premium increases are very low to say, "I think I want a less tightly managed product." The decisions might be very different if we start being confronted with much higher premium increases. Then it's a matter of, "Well, I don't like it, but I also don't like the alternatives of paying a lot more for health insurance." So if you look at society and the policy world, you're going to be finding that the interests that fight restrictions on managed care are employers.
MC: Well, isn't this what the fight over the Patients Bill of Rights was all about? Basically the employers didn't like the Democratic version of that legislation.
GINSBURG: Yes, precisely. They're the organized interest most worried about cost-increasing aspects of protection. But what's harder to put your finger on is policy makers who worry about Medicare and Medicaid outlays because we're in a situation where the government is both a central regulator of the health care system and also an enormous purchaser.
MC: In 1999 and 2000, do you expect the upward trend in premium increases to continue?
GINSBURG: I would say more than continue. I expect it to spike. I would think that we'll be seeing in 1999 that number come in between a six- and eight-percent increase from last year.
MC: What about underlying health care costs?
GINSBURG: My expectation for the underlying costs is that the rate of increase will probably go up. But it could be significantly below what it was in the 1980s. And I think there are three factors involved. One is a backlash against managed care. And actually, I suspect so far, the market forces have been more powerful in this area than the policy forces. And by the market forces, I mean people asking and demanding — often through their employers — broader networks, more out-of-network opportunities, and direct access to specialists. These changes are going to make it more difficult for managed care companies to contain costs. And then we have the impact of policies. I'm getting the sense that the 48-hour postpartum rules really have had an impact on costs — they really have increased lengths of stay for maternity. That may be a desirable thing to do, but it has cost them some money. So that's factor number one. Number two is that I don't think that managed care is going to be able to get bigger discounts from providers, and probably will even lose ground. Providers are getting into a stronger negotiating position vis-à-vis managed care companies, partly because of consolidation, particularly in some of the smaller urban markets.
MC: And the third factor?
GINSBURG: New technology and advances in medicine. Just in the pharmaceutical area there is such a full pipeline of new products that are attractive, yet very costly.
MC: I see this as being bad news for managed care. Americans don't like the idea of someone in an office somewhere telling them which doctor they can go to. And then, from an employer or benefit manager's perspective, it's not controlling costs anymore.
GINSBURG: I wouldn't say its not controlling costs anymore. Even if premiums spike, it's not in double digits. And also, it's going from a base that is a lot lower than it would have been if not for managed care. In other words, those one- , two- or three-percent increases year after year for a few years have lowered that base compared to what it would have been otherwise.
MC: Still, they're going to have to make a case for themselves.
GINSBURG: I think their biggest problem is that anti-managed care feelings have pervaded our culture. Insurance companies have never been popular. Because what was their job — just to sometimes deny a claim? In a sense, we hired them to protect us from ourselves because if we didn't hire them, we couldn't afford to pay for health care. There's no industry where all the companies are perfect. But most people's negative feelings about managed care aren't from their own experiences. They're from what they've heard of others' experiences.
MC: Thank you.