COST CONTAINMENT AND MANAGED CARE

Between 1970 and the early 1990s, the average annual increases in the cost of medical care were approximately twice the average annual increases in the consumer price index. No single factor accounts for these increases. Rather, it was a combination of the following reasons:

Technological advances. In the last few years, many exciting technological advances have taken place. Numerous lives are now being saved by such techniques as CAT scans, MRIs, fetal monitoring, and organ transplants. As miraculous as many of these techniques are, they are also very expensive. Technological advances can also prolong the life of the terminally ill and increase associated medical expenses.

Increasing malpractice suits. The providers of care are much more likely to be sued than in the past, and malpractice awards have outpaced the general rate of inflation. This development has resulted in higher malpractice insurance premiums, a cost that is ultimately passed on to consumers. The increase in malpractice suits has also led to an increase in defensive medicine, with routine tests likely to be performed more often.

Increases in third-party payments. A growing portion of the country's health care expenditures is now paid by private health insurers or the government. Patients and providers of health care often have no financial incentives to economize on the use of health care service.

Underutilization of medical facilities. Currently, the United States has an overabundance of hospital beds, and a surplus of physicians is also beginning to develop. Empty hospital beds are expensive to maintain, and an oversupply of physicians tends to drive up the average costs of medical procedures so that physicians' average income does not drop.

Design of medical expense plans. Many medical expense plans now provide first-dollar coverage for many health care costs. There is often little incentive for patients to avoid the most expensive forms of treatment.

AIDS. The continuing increase in the number of AIDS cases over the past 10 years has resulted in increasing costs to employers. Costs in excess of $100,000 for an employee with AIDS are not unusual.

An aging population. The incidence of illness increases with age. Current demographics indicate that this trend will be a source of cost increases for several years to come.

During the period from 1994 to 1996, several factors caused the cost of medical expense coverage to remain uncharacteristically stable, particularly for managed care plans. Many providers of medical services and medical expense plans were reluctant to raise costs while the Clinton health care proposal was being debated. In addition, managed care plans were holding down premiums while actively increasing enrollments.

However, the late 1990s started to see significant increases in health care costs, particularly because of skyrocketing costs for prescription drugs. There is a feeling among benefit consultants that expanding managed care plans have saturated the market to the point that savings resulting from additional employees moving to managed care plans will be modest. There is also an interesting trend occurring among medical providers. The large number of mergers of hospitals and other providers of medical services in many parts of the country may in fact shift the balance of bargaining power to these providers from managed care plans and other buyers of medical services. In addition, costs will increase somewhat because of federal and state legislation that continues to mandate benefits.

Increasing health care costs have become the concern of almost everyone—government, labor, employers, and consumers. In this introduction to cost containment, many of the measures employers use are enumerated.