Employers’ Health Cost Growth Continues to Moderate: Ain’t It Awful?! by Jeff Goldsmith

THCB welcomes first time contributor Jeff Goldsmith of Health Futures. Jeff will be blogging for us on a periodic basis, so expect more insightful commentary from him in the near future. Among those in the know, Jeff has long been considered a leading futurist. From 1982 to 1994, Jeff served as National Advisor for Healthcare at Ernst & Young. From 1980 to 1990 he was a lecturer at the Graduate School of Business at the University of Chicago. He currently serves on the editorial board of Health Affairs.

Last week, the Kaiser Family Foundation released its annual Employer Health Benefits Survey, which revealed that premiums for employer sponsored health insurance rose only 6.1% for 2007, compared with almost a 14% increase in 2003.  One would not have known that this is actually good news from KFF President Drew Altman’s comments, however: “No-one in the real world is celebrating because it doesn’t feel like moderation”.  He went on to say that “we’ve seen these periods of moderation before, and they never last.”  The Report also showed that the percentage of employers offering coverage remained stable for the third year in a row, as did the percentage contribution workers had to make for individual and family plans.   

Altman is certainly right that health cost growth will eventually resume- he’s the author of a famous Grand Teton-like exhibit which shows the cyclical flare-ups in employer costs over the last 45 years.  But it is not clear what “real world” Dr. Altman  is thinking about. For people who actually meet payrolls every week (my definition of the “real world”), a 56% reduction in the growth rate of one of their most explosive costs of doing business in four years time is nothing short of phenomenal good news.   

The difference between the 2003 and 2007 premium increase on a roughly $800 billion health premium base is $62 billion in new corporate cash flow, money that can be used to increase wages, invest in R+D or new plant, or  hire additional workers.  (And sure enough, in Kaiser Foundation’s own data, wage increases grew from about 2% on 2004 to almost 4% in 2007).   

What has produced this cost moderation is still not clear.   My theory is that increased cost sharing has, over a number of years, compelled families to be more careful about their use of health services.  That is not inherently a bad thing. Despite these increases, out-of-pocket share of health costs  continued to fall through 2005, according to CMS’ Office of the Actuary.   

We bear only about 12.5% of total US health costs directly; the remainder is paid for by business and government.  Even if you add to out-of- pocket spending the amount taken out of our paychecks for health insurance premiums, we spend about the same amount on Christmas presents every year.  The difference is that we don’t expect other people to pay for our Christmas presents.   

But cost sharing increases would not account for the soggy admissions growth for hospitals, the plummeting demand for expensive heart care (and the reduction in heart attack admissions to hospitals), or record low rates of prescription drug cost growth, which stem from the explosion in generic drug options. All these changes have made a contribution to the subsiding premium trend.  Some other notable trends, like falling nursing home census, have affected public, rather than private, expenditures.   

None of these “real world” phenomena, which have hammered down the market capitalizations of some of health care’s great companies- Amgen, Johnson and Johnson, Pfizer, Merck, Medtronic, Boston Scientific, etc. – are more than tangentially related to cost sharing. Dr. Altman’s comment that it “doesn’t feel like moderation” would no doubt amuse the investment analysts who follow our nation’s drug and medical device companies, because their top lines are behaving a lot like they are in recession, resulting in tens of thousands in layoffs.   

In 1964, popular psychoanalyst Eric Berne published a best selling book on transactional psychotherapy called “Games People Play”.   Some of these famous and repetitive patterns of interaction between people entered the popular lexicon, including “If It Weren’t For You”, “Let’s You and Him Fight”, “Now I’ve Got You, You Son of a Bitch”, etc.  Of all of these however, my personal favorite was “Ain’t It Awful”, in which everyone sits around and reflects on what a mess the world is, and contributes fresh examples. “Ain’t it Awful” is about the  morbid search for the bad in daily life, and generates a lot of what an analyst might term “secondary gain”.   

The American health policy community has a particular fondness for this neurotic pastime, and they are playing it now. (“Just wait a little.  Costs are sure to go back up!!”)   Sometimes it seems like it’s the only game in town.    If you want to see moderating health costs as a problem, and are creative enough, you can think of reasons why this is bad.  And how helpful is that? 

Sure, health care is very expensive, and lots of people don’t have appropriate access to it.  So let’s fix those things.  The good news is that we are a resource-rich and inventive society that is perfectly capable of finding the answers.    But, while we’re at it,  it is worth considering that one reason why health cost growth is moderating is that we are doing a bunch of things right.  It might even be that the lower rates of increase in cost reflect slow but measurable progress in our battle against intractable human illnesses such as heart disease and cancer.    I guess it’s all in how you look at it, and which “real world” you live in.