printable versionVANTAGE POINT: Why health care costs are going up again
BY JOHN ETCHEMENDY
Information about Open Enrollment will soon be arriving at the homes of Stanford faculty and staff. Unfortunately, the packets will again show that health care costs continue to go up for both Stanford and its employees. For some plans, the prices are going up dramatically.
It's important to remember that Stanford offers six health care plans: three health maintenance organizations (HMOs) and three self-insured plans that offer access to Stanford physicians, specifically, Only@Stanford, Three Choice and Lumenos. Stanford pays the full price of the lowest priced health care option for individual employees, that is, Kaiser. If an employee chooses a plan other than Kaiser, the employee pays the difference in cost between Kaiser and that plan. It is the increased prices in the self-insured plans that I most want to address in this piece.
First let me say that I am confident our Human Resources staff have done their best to mitigate increased costs by designing a variety of programs that give us many choices; aggressively negotiating prices in partnership with other employers; finding a fair balance between deductibles, co-payments and premiums; and introducing programs to encourage healthy life styles. In theory, the resulting competition for your health care dollars among our vendors should result in lower prices.
The reasons for the increases in the HMO plans (PacificCare, Healthnet and Kaiser) can be attributed to the usual suspect: a dysfunctional health care system subject to a complex marketplace. Here, our struggles with costs are no different than those of other employers. Nationwide, average premiums increased 9.2 percent in 2005, according to the annual survey conducted by the Kaiser Family Foundation and Health Research and Educational Trust. That increase is higher than both the growth in workers' earnings and the rate of inflation. Increases locally have been even higher.
But the increase in rates in our other health care offerings—the three self-insured plans that give access to Stanford physicians—are subject to a far more vexing problem. This is a problem for which we have no easy solution.
By way of background, in 2001, Stanford Hospital and Clinics ceased accepting HMO plans that reimburse hospitals and doctors with flat monthly fees regardless of the cost of the patient care provided. These are called "capitated" plans. These plans did not cover the higher cost of delivering health care in an academic setting, and so our hospitals had to stop accepting these HMOs or else continue to lose money. They stopped accepting capitated plans and, partly because of that, have returned to financial health.
Unfortunately and as a result, many faculty and staff no longer had access to Stanford physicians through their HMO plans. So, the university stepped in and created several self-insured plans that provided that access, but at a higher price. The challenge with self-insured plans is that they must take in as much as they pay out for health care services. But for the last several years, our plans haven't done that; hence, their steadily accelerating price.
Here is what I suspect is occurring: The plans that offer more flexible access, including access to Stanford physicians, will always be somewhat more expensive than HMOs that more narrowly limit an enrollee's health care choices. But this base-level difference does not account for the full cost differential between the HMOs and self-insured plans. Rather, what happens is that healthier employees tend to choose HMOs for their coverage in order to enjoy lower premiums, while less healthy employees tend to choose the self-insured plans to gain greater flexibility and access to Stanford physicians. The employees choosing an HMO do so knowing that if they become seriously ill, they can always switch during the next open enrollment period to a more expensive plan that gives them the added flexibility their HMO does not offer. They can do this because during open enrollment, all of our plans accept new enrollees regardless of prior conditions.
As a result, the faculty and staff members who choose plans that give them access to Stanford physicians tend to be people who make extensive use of medical services, especially in comparison to those who choose HMOs. They also tend to be older—another high risk factor that ultimately increases health care costs.
This difference in enrollment patterns increases the cost differential between the HMOs and the self-insured plans, and this difference must in turn be reflected in the price of the plans the following year. But when the price gap between the plans widens, even more of the healthy enrollees in the self-insured plans feel they must abandon them for one of the cheaper HMOs. This further increases the cost per individual of the self-insured plans, causing the cost of these plans to inflate each year even faster than general health care costs.
Please don't think I'm criticizing either the quality of the HMO plans or the employees who choose them because of their lower prices. This behavior is both rational and predictable. The problem, however, is that the collective effect of these choices is bankrupting our self-insured plans. In time, they will become too expensive for anyone to afford.
Lower costs depend on shared risk among many people, most of whom are healthy and make little use of medical care. But our self-insured plans are attracting fewer and fewer people, many of whom require extensive care. Thus, the prices for these plans are increasing exponentially.
A reasonable question to ask is why the university doesn't adjust the costs of all the plans to compensate for the different risk profiles of employees in the different plans. The answer is that we do, to the extent that we can. Each year we adjust the costs across the board based on three "risk factors" of each plan's participants: age, gender and prescription drug usage. This adds to the cost of the lower-cost plans (and hence to the university's subsidy) while decreasing the cost of the self-insured plans—effectively spreading the health care risk in a more equitable fashion. But this annual "risk adjustment" will never equalize the costs, both due to the basic differences in the plans and because the risk factors only tell part of the story. As a result, the behavior I've described continues to accentuate the price difference between plans.
What are the solutions? Unfortunately, none is particularly good.
First, we could take away all choice from employees and just offer a single plan. As long as we offer several options, with different levels of access and service, the underlying price difference will result in the differential enrollment patterns I've described. The problem with this solution is that our employees have very different needs and deserve a choice of plans to serve those needs. Thus, this solution is not an acceptable one for most Stanford employees.
Second, we could not allow people who initially enroll in one plan to switch to another the following year. Employees would have to choose, once and for all, whether they want the flexibility of a more expensive plan or are willing to stay in a less expensive plan regardless of their future health care needs. This would prevent people from enrolling in one plan while they are healthy and switching to another when they get sick. The problem with this solution is obvious: An individual's needs and circumstances can change. A health care plan that suits your needs when you start working at Stanford may no longer suit them five or 10 years later.
Third, we could allow employees to change plans, but severely restrict those changes. There are various ways we might do this. One possibility would be to ban changes whenever there is a "pre-existing condition." In other words, if you were diagnosed with an illness while enrolled in one plan, you would not be allowed to switch to another plan during the following open enrollment period. Another possibility would be to require a full year's notice before changing plans: During open enrollment, you could choose a new plan, even if you had a pre-existing condition, but you would remain in your old plan for a full year before the change took effect. Either of these options would prevent plan switches based on recent changes in an individual's health. This third solution seems preferable to the first two, but would still be a major departure from our current enrollment policy.
Understandably, none of these solutions would be welcomed by Stanford employees. Nevertheless, we may have to consider them in order to maintain the self-insured plans.
There have been many explanations of accelerating heath care costs, but one of the more provocative I have read was written recently for the Annals of Internal Medicine by Victor Fuchs, professor emeritus of economics and of health research and policy.
Professor Fuchs points out that American health care, with its emphasis on high-technology treatments and specialization, has resulted in a reimbursement system that focuses on expensive treatments delivered when illnesses are at their worst and most expensive rather than on lower-cost prevention. Few of the cost-containment mechanisms in other countries exist in the United States. So Americans spend nearly 50 percent more on health care than the next highest-spending country.
He concludes, "Probably only comprehensive reform of health care finance—the way funds are raised and the way they are paid out—can bring about the necessary organizational changes that will give physicians the information, infrastructure and incentive to deliver cost-effective care to the entire population."
In many ways, Stanford is a microcosm of the macro health care struggles Fuchs describes.
I share this information to answer in advance the inevitable and understandable questions that faculty and staff will have when they see the price increases this year. I know and understand the difficult tradeoffs that employees face when choosing the health care plan best suited to their circumstances and budget. I wish there were a simple way to make those decisions easier.
