Business, Heal Thyself

By Jyoti Thottam

Like it or not, just about every U.S. company is in the health-care business, one way or another. Employer-sponsored health plans are a treasured benefit for American workers and, for their bosses, a valuable tool for luring the best people. But double-digit growth in health-care costs, coupled with an uncertain economic future, has pushed many businesses to look for new ways to cut their health-care costs.

Strategies vary, but the result is to shift more of the direct costs to employees. This year 9% of large employers, including Ford and Sears, announced that they would scale back health benefits for retired workers. Many employees already pay more for family coverage; one small technology firm recently offered a cash bonus to employees for switching to their spouse's plan. Xerox once tried adjusting its health-care allowance so single workers would get more and those with families a bit less. "After three years, we killed it," says Helen Darling, a former benefits manager for Xerox and now president of the Washington Business Group on Health. "All the people who were in the family category screamed miserably: 'I wouldn't have had all these children if I knew you were going to cut our family allowance!'"

Health-care premiums have risen 12.7% between spring 2001 and spring 2002, far outstripping inflation and wage growth, and things aren't getting any easier. According to a recent survey by the Kaiser Family Foundation, 78% of companies with 200 or more workers plan to increase the amount paid directly by their employees for health care. And the U.S. Census Bureau reported last week that the number of Americans without health insurance rose sharply last year.

TIME invited a panel of five experts to help make sense of the impact of rising health-care costs on business. Joining Darling were Drew Altman, president and ceo of the Kaiser Family Foundation; Uwe Reinhardt, a health-care economist at Princeton University; Gail Shearer, director of health-policy analysis for Consumers Union; and Gail Wilensky, an economist and senior fellow at Project HOPE, an international health foundation.

TIME: Health-care costs are of concern right now because of the state of the economy. But if the economy improves, will that change anything?

ALTMAN: The economy will not change the trajectory of health-care costs. Those are going up.

WILENSKY: When the economy is sluggish, it gets your attention. But if the economy were to rebound and be robust, you'd see more tolerance on the employer side and on the employee side for some additional increase in health-care costs.

REINHARDT: Cost containment in the employment system works only in recession. In a tight labor market, the quality of the health-insurance package is your come-on in the market, and that means no holds barred, no cost containment. We are facing a 20-year tight labor market in America. You may have spurts of recession, but we will have a booming labor market again, and this problem won't be solved.

SHEARER: We're really worried that as the recession goes on, more people are going to be uninsured and underinsured.

TIME: So what will employers do in the near term?

DARLING: As far as employers are concerned, we see no end in sight. In the prior five years, employers' share of health-care costs have been rising compared with consumers'. Employers will be increasing not only cost sharing in the premium paid each month but in every possible way, with either a co-payment or co-insurance.

ALTMAN: Every rock we looked under, we found problems for employers; more than 70% of them plan to ask their employees to pick up a greater share of the tab next year.

SHEARER: Yes, employers are paying the bills for health insurance, but about 90% of those costs are passed on to employees in the form of lower wages. We're concerned that employers are shifting those very obvious identifiable costs to their employees, but at the same time they're also shifting more of the direct premium costs to employees.

WILENSKY: This is the first time we've heard non-economists agree to the concept that in fact employees are really paying for employer-sponsored insurance.

TIME: Do you think the cuts in retiree health benefits are a recession measure?

DARLING: No, they're permanent. Basically, we have a group of people--you can think of it as World War II veterans--who are marching through retirement with these extraordinary benefits.

REINHARDT: I think the danger for those already in retirement or close to it is that employers will find legal ways to whittle away benefits if it's absolutely necessary. I think it's a sleeper issue: more of the share of the health-care costs of the elderly will have to be borne by them or by Medicare, because employers have the legal means to pull out.

DARLING: Anybody under, I would say, around 40 in this country, except for public employees, will not have retirement medical coverage, period. Zero.

REINHARDT: And I think that is a healthy development.

TIME: Because it will create pressure for better Medicare benefits?

REINHARDT: Because it's time for young people to start saving.

SHEARER: This group of people 55 to 64 tend to have a lot of health conditions, but they don't have a lot of options. There will have to be a public-policy response to make sure they have some options.

WILENSKY: We talk a lot about the baby boomers and the impact they're going to have on retirement spending, Medicare, Social Security, ad nauseam. What people don't always think about is that the baby boom was followed by the baby bust. So it's really a double whammy. Both of those are going to cause this continuing labor shortage and require employers to be unbelievably creative in keeping older workers.

ALTMAN: The day will come when almost 65% of all voters will be 50 or older. So that is going to fundamentally transform the politics of this issue. It also means we will focus more on issues like prescription drugs and less on equally or more compelling problems like the uninsured.

REINHARDT: Ten or 15 years ago, the ratio of health-care spending for 55-year-olds to 25-year-olds used to be about 2.3 to 1. Now it's closer to 3.5 or 4 to 1. An older person now costs more. It's the new technology.

DARLING: It's also drugs.

REINHARDT: And it will be ever more difficult to have social solidarity within the company, as younger people realize the hit they're taking in their paycheck.

ALTMAN: Every time I increase our pension benefit to fight companies that have stock options in Silicon Valley, my younger employees go crazy because they couldn't care less about the pension.

TIME: Is there any consensus among businesses and consumer groups that providing coverage for the uninsured is a good thing for everybody, that higher premiums reflect the number of uninsured?

WILENSKY: Not when it comes time to put their money down, no.

ALTMAN: There's always been tremendous support for the goal. Very little willingness to pay and absolutely no agreement on how to get there.

TIME: What's behind the increase in health-care costs?

WILENSKY: The two biggest drivers are hospitals and prescription drugs. In pharmaceuticals, there's been some inflation in prices, but that accounts for a relatively small amount of the increase. Most of the increase has been the substitution of newer, more expensive products for lower-priced products.

REINHARDT: Another reason is, this system is administratively very expensive. We spend $390 less per capita on health care than Germany because our clinicians are very efficient, but we spend $360 more per capita on administration. In other words, everything we squeeze out of the clinicians, we blow on administration.

TIME: Aren't there ways to get control of administrative costs?

WILENSKY: The information-system issue has been around for a long time--trying to get away from writing down paper charts, billings, just going to a more automated electronic system.

REINHARDT: But there are exciting products--UltraLink, Vivius--which people are using to build an electronic interface between employer and employee and also the provider. In the next 10 years, we'll have major breakthroughs there. I'm amazed it hasn't come earlier.

TIME: Why hasn't it?

WILENSKY: You've had information-systems decisions made for the radiology department, for the ambulance, for the other parts of the hospital. Very little thought has been given to how they can communicate.

TIME: Is there anyone who does a good job managing these systems?

REINHARDT: American Airlines. It uses a system called UltraLink.

WILENSKY: The Children's Hospital and Health Center--San Diego was attempting to get around this, but it is very rare.

TIME: Is it clear how much cost savings you would get through evidence-based medicine, in which doctors follow conservative guidelines for treatment, based on medical research?

WILENSKY: No, it isn't. What is clear is you would get a lot of value for your money. There is a general belief that on balance you would save some, but people want to have access to the newest, latest medical technology, even if it's not really clear that what you buy is worth the increase in cost.

ALTMAN: I'm all for evidence-based medicine, but I don't think it's a solution to the cost problems. In reality, in medical practice there are some things that are clear you do, some things that are clear you don't do, and a lot of mush in the middle.

SHEARER: Oregon set up a commission to study the effectiveness of different medications. Eventually this is going to lead to the state of Oregon selecting preferred drugs and negotiating for the prices. Our drug costs are increasing at 17% a year. If we could make some inroads into bringing those increases under control, we could save billions of dollars a year. This is one little glimmer of hope.

TIME: Are there specific strategies that individual businesses have tried in an effort to respond to their cost pressures and the needs of their employees?

WILENSKY: The postal workers are going to now be offering something that Medtronic has been offering for a while, in which the employer puts in a block of money, there's a block of money which the individual is responsible for--essentially a deductible--and then above that cap regular insurance kicks in.

DARLING: There are about 200,000 people in these so-called consumer-driven health plans in the whole country. By 2003 there will probably be another eight companies planning to roll them out as options. It's extremely complicated. The winners are relatively low users, and the losers are going to be those who are higher users. The suggestion is that this plan will change people's behavior, so that the overall cost will be lower, but unfortunately it all depends on exactly how it's designed. If you don't do something clever with the cap, very quickly you will have more and more people going into the insurance. All the big companies--Humana, PacifiCare, UnitedHealthCare, Cigna, Aetna--have their own models.

SHEARER: We are really concerned about the potential to shift costs to sicker people. It's one thing for someone who is healthy to get $1,000 and put it in an account that can grow year to year. Great. But that's diverting dollars away from our health-care system to go to healthy people. We thought the health-insurance system was about spreading risk broadly among the healthy and the sick. If these plans start taking off, we will gradually shift to a system with everybody facing much higher deductibles.

REINHARDT: This shifting to the sick is absolutely there. There will be some overall savings, but there will also be a major redistribution of the financial burden of health care from the healthy to the sick, because the sick will, every year, have to pay the whole thing. Then the money that stays in those healthy employees' accounts no longer goes into the health system. Think of the health system as a hungry wolf. It will eat, and if it doesn't get it in this bowl of vittles, it will eat somewhere else: in the catastrophic policy.

ALTMAN: Good for some people, bad for the system.

WILENSKY: I don't think we should trash this quite so fast. What we are talking about is, is it unreasonable to have to pay for routine procedures, even if they're nontrivial? In all areas of our life, we have routine expenditures that we are expected to pay for. It is a very interesting idea, and people in the business community are considering it.

TIME: Isn't there a disincentive for employers to offer any coverage at all?

WILENSKY: The answer is yes, but that's O.K. Large employers are likely to offer health insurance because it is regarded as a benefit. What we want to do is allow for the existing system to continue but recognize that lots of small entrepreneurs, lots of individuals, are not going to get employer-sponsored insurance.

TIME: So where will the pressure come for the small businesses?

WILENSKY: Are you sure that's where you want the pressure? These are people who, if they're not providing health insurance, are giving higher wages to their employees.

DARLING: Some of the smaller firms got bigger hits in the past couple of years. I know last year in this country an awful lot of small employers were seeing 28%, 35%, 40% increases in health-care costs.

ALTMAN: Small employers are the most screwed. That's the plainest English I could make it.

DARLING: I had one very small manufacturing company in the Midwest tell me that the difference between its projected retiree medical liability for 2003 over 2002 was $32 million. How many widgets--or whatever it makes--is it going to have to sell to make up that difference?