Aging baby boomers experience boom in health care costs

By Lori Widmer

Thanks to a period of stagnant economy, losses in 401(k) investments, and an aging population that didn't figure huge losses into its retirement savings plans, more employees are staying on beyond retirement age. What's that going to do to your clients' and your agency's health care programs?

Are you ready for another year of double-digit health care cost increases? No? That's too bad. According to the Spring 2003 Health Care Trend Survey conducted by Aon Consulting, your clients can expect to see an average 16% increase in costs. Increases for PPO plans are expected to be above 17%. Point-of-service programs are going to see 16.1% in price hikes, and HMOs will see an increase of 16.4%. Those increases are approximately eight times the annual general inflation rate of 2.1%.

If you're looking for good news down the road, look again. According to a study by Project HOPE and the Office of the Actuary, Centers for Medicare and Medicaid Services in Baltimore, health care spending over the next 10 years is expected to outpace economic growth. As a result, the health care "share" of the gross domestic product is expected to climb to near 20% by 2013.

More bad news--baby boomers expect to work well into their 70s and beyond, according to a recent AARP study. If they're lucky, they'll still have health care coverage. Guess who they're hoping to get it from? That's right--their employer.

Current crisis

Congress recently approved the Medicare budget for 2004. President Bush countered two months later with a call for an additional $134 billion increase on top of the already huge $400 billion budget. The White House says the extra monies are needed for the addition of a prescription drug benefit to Medicare.

That's just this year. Wait until baby boomers hit retirement age, say experts. "As the baby boomers reach retirement at the end of this decade, millions of individuals will be entering the Medicare program," says Robert Hartwig, chief economist for the Insurance Information Institute. "That's part of the debate behind Medicare reform and prescription drug benefits. The Medicare reform benefit that was recently passed is going to cost far more than originally estimated."

That creates yet another costly scenario--uninsured people. Right now, 43.6 million people in the U.S. have no health coverage. Yet these same people do not stop incurring medical expenses, say the experts. Who pays? You and your clients.

Aging employees

Given all this, it's no surprise that half the employees surveyed are staying put in their jobs, or working part time in order to offset health care costs, as 30% in the AARP study stated. What that adds up to is more cost for everyone. "Employers are going to face higher premiums," says Hartwig. "Employees are going to pay a greater share of it. Invariably, taxes are going to have to rise. Unfortunately, we're already seeing a shaving off of benefits. It's in the form of higher deductibles and copayments, and higher premiums for employees--and in a record number of uninsured individuals."

According to the 2000 U.S. Census, it is expected that 54 million workers will be between the ages of 50 and 64 by 2010. The 50-plus population of the U.S. will stand at approximately 90 million. That's one-quarter of the population looking to draw more frequently from Medicare and other health care programs. Experts cringe at the numbers, predicting shortages in coverage and more people joining the ranks of the uninsured. Congress is working feverishly toward a solution that many times seems just out of reach. According to the Committee on Small Business: "As we debate protective legislation in Congress, we must accept the fact that any of the alternatives we consider will increase the costs of health insurance for small employers." Even the solutions sound painful.

Where health care is heading

Will there be a raise in the age limit for Medicare? "That's one thing that's been discussed," says Hartwig. "It's likely to meet enormous opposition from senior citizens." However, that doesn't change the obvious. "The fact is that the health care spending rose to $1.7 trillion in 2002. These are astounding growth rates. This is about 15% of GDP. It's the case that the elderly do require more intensive use of health care systems.

"If we go out five years, it's the same system we have today, but getting more expensive," he says. "If we go out 15 years, the current system will be creaking, with a very substantial portion of the population uninsured, with costs consuming 20% of GDP, and Medicare facing an enormous unfunded liability potentially. It's a very scary scenario when you look 15 years out and baby boomers are beginning to retire and the underlying cost of health care continues to rise at double-digit rates, especially if there's a period of economic weakness where the employer feels it needs to cut this benefit. We wind up with millions and millions more people without health insurance."

This is where most experts think that experimentation with alternatives will happen. Medical savings accounts, which had difficulty gaining a foothold in the benefits arena, may make a successful comeback. Tax credits are another option, with the federal government possibly deciding to help offset patient health care costs.

Also, medical malpractice reform, which has been responsible for the migration of health care providers from state to state in search of less expensive malpractice coverage, could alleviate some of the ills that befall the health care industry's prognosis.

One solution

Still, some think that the problem lies in the perspective. "For the last 20 years, we as a nation have been trying to control the supply side, and we have tried to manage doctors and charges and utilization," says Karen Roberts, senior vice president for Aon Consulting's San Francisco office. "That has failed. There are no more silver bullets and no easy solutions. We must start to manage the demand side. That means understanding who our cost drivers are, identifying those chronic, complex cases and managing them so that there's a better outcome for the patient."

Roberts has identified a four-step plan that she says will lower employer costs by 5% to 7%. First, the company needs to establish guiding principles. "They need to understand what they need to do to better educate and manage those cost drivers, and understand what level of intervention they are comfortable with. How passive and how aggressive do they want to be?" Identification and understanding is the critical step, given the HIPAA regulations and the complexities of most programs, says Roberts.

Another step is to benchmark the company's health and welfare choices. Roberts say, "Once you have a set of guidelines or a mission statement, if things don't track to that statement, you have no business doing it. Rather than have extraneous ancillary programs that don't meet your guiding principles, implement only that which can be measured."

Third, determine the implications of your choices against your guiding principles. An important component of this step is to properly manage your vendors. "Your vendors should be able to tell you what kind of results you can expect, based on your data, population, types of chronic illnesses and the severity and co-morbidities in that chronic population. Many are guaranteeing these results. That gives an employer much ease," she continues.

Last, set the strategy into place and execute the plans. Pay special attention to how the entire corporate culture is affected by the plans. "You could have the greatest wellness program in the world, but if you're serving junk in your cafeteria, then you can't say you're a proponent of wellness and prevention," Roberts explains. "We're advocating a change throughout the culture. It's not going to be cheap, but it's going to pay for itself in not too long a time frame."

And cost is the main reason many companies resist change, according to Roberts. "There's no corporate buy-in to it because there's an upfront cost to it. It's easier to slam in a pre-packaged deal. It won't work. They're not doing data analysis, they're not benchmarking, and they're just slamming in a program. It kills me to see it."

Other solutions

Those reluctant to pay upfront costs need alternatives. Health Savings Accounts, or HSAs, are another way to find medical dollars. Like their Medical Savings Accounts (MSA) predecessors, HSAs are a tax-free way to earmark portions of an employee's wages toward paying medical expenses. The difference? HSAs are available to all employees, whereas MSAs were strictly for small companies. The plans offer lower deductibles, and 100% of the deductible amount can be contributed to the savings account.

Yet will HSAs be any better than MSAs? The short-term answer seems to be "it depends." Experts are cautious in putting too much emphasis on HSAs and not enough on curing the ills that plague health care. "We can shift costs and cut plans until we're blue in the face," says Roberts. "It does absolutely nothing to address our cost drivers. Talk about coming to a point where you can't sustain that activity any longer--we're almost there."

Hartwig believes medical malpractice reform is a start. "It will drive down the cost for doctors and hospitals to operate." The current conditions, exacerbated, will create a situation in which Americans will look elsewhere for affordable coverage. "You already see it happening. People living in border states organize trips to Canada for prescription drugs. For actual health care, I think that could be the case, too. People may cross the border into Mexico and Canada for treatments. Western-trained doctors may even set up shop in those locations. I think it's quite likely to happen."

The idea of a national health care system has been bandied about since the Clinton Administration. Hartwig believes it's necessary, but may be a hard sell. "A national health care program means that there will be some rationing of health care. That's a dirty word in this country--rationing. HMOs call it 'managed care.' It's simply a form of rationing that translates into lower prices for your employer. However, when the government is doing the rationing, the connotation is more negative."

In the end, the current state of health care will have to change in order to meet the needs of an aging workforce and an aging population. Employers may see a leveling out of costs. "That's because they're shifting more costs to the employees," Hartwig says. "The underlying costs remain very high." That means that employees, looking toward a more expensive retirement, will have to hang on a few more years.

Agents will need to work with their clients to find innovative solutions to the burgeoning health care costs. For some, the captive route may prove attractive. (For more information on this option, see the "Enterprise Risk Management" column in this issue.) *

The author

Lori Widmer is a freelance writer and editor who has written extensively on insurance and risk-related topics. She has written for both online and print media. She may be reached at loriwidmer@comcast.net.

By 2010, one-quarter of the population [will be] looking to draw more frequently from Medicare and other health care programs.