S P E E C H

HEARING ON THE RISING COSTS OF HEALTH CARE: HOW ARE EMPLOYERS AND EMPLOYEES RESPONDING?

Before the employer-employee relations subcommittee of the house education and the workforce committee

Statement of Henry E. Simmons, M.D., M.P.H., F.A.C.P.
President of the National Coalition on Health Care

June 18, 2002

Mr. Chairman and members of the Subcommittee, thank you for the opportunity to testify before the Subcommittee on rising health care costs and how employers and employees are responding to those increases. I am Dr. Henry Simmons, President of the National Coalition on Health Care. The Coalition is the nation’s largest and most broadly representative alliance working to improve America’s health care. The Coalition was founded in 1990 and is non-profit and rigorously non-partisan. Former Presidents Bush, Carter, and Ford are our honorary Co-chairs and our Co-chairs are former Republican Governor Robert D. Ray of Iowa and former Democratic Congressman Paul G. Rogers of Florida. Our members include major corporations, the nation’s largest consumer, religious and labor groups, as well as health care provider groups and our nation’s largest health and pension funds. Collectively, our 80 members employ or represent more than 100 million Americans. Our membership list is attached to my written statement.

The Rising Costs of Health Insurance

National health care spending is rising rapidly and this year will exceed $1.54 trillion – more than $5,400 per capita. That is four times what we spent on health care in 1980, and the total bill is expected nearly to double to $2.8 trillion by 2011. Our per capita health care costs are far higher than those of any other industrialized nation and our health outcomes are no better.

The premiums that employers, employees, and individuals pay for health insurance are rising at the fastest real rates in history. On average, premiums jumped 12 percent last year and – depending on plan type – are projected to increase 12 to 16 percent this year. Hewitt Associates recently reported that preliminary HMO increases for 2003 are averaging 22 percent – nearly 7 percent higher than the increases Hewitt found for this year. Out-of-pocket costs are also rising rapidly.

These huge increases are occurring at a time of low general inflation. Why? And why should Congress, employers and the public be concerned?

Causes of Rapidly Rising Health Insurance Premiums

The recent and ongoing surges in health insurance premiums are being driven by a confluence of two sets of forces, old and new, which have come together to create the equivalent of a “perfect storm” in health care.

The first set – traditional cost drivers – includes a mix of:

• Poor quality, waste and inefficiency due to inadequate quality control, inadequate science and a structurally flawed health care system
• Advances in medical technology
• Increasing service intensity
• The high costs of end-of-life care
• High administrative costs
• Cost-shifting to cover the costs of care for the uninsured and underinsured
• Fraud and abuse
• General inflation, and
• State mandates

To these have now been added a new set of forces – emerging cost drivers –which include:

• A longer and deeper insurance underwriting cycle, designed to help insurers and health plans make up for premium shortfalls in recent years
• Increased use of medical technology
• Pressures from Wall Street on for-profit health plans to raise premiums in order to increase profits
• Escalating prescription drug costs and utilization
• Diminished competition due to provider consolidations and tougher negotiations with health plans for higher reimbursements
• The medical needs and demands of 77 million baby boomers
• Soaring medical malpractice insurance premiums and, with them, an increased tendency for physicians to order extra tests and make treatment decisions that limit their risks
• Consumer demands for easier and broader access to care, and
• International terrorism

How Are Employers and Employees Responding?

In answer to the Subcommittee’s question as to how employers and employees are responding to rapidly rising costs, the answer is very poorly. In fact, in the absence of major national policy changes and system restructuring, they will be unable to deal with the problem.

Why Should Congress, Employers and the Public Be Concerned?

First, we have not one, but three systematic problems – rising costs, decreasing coverage, and pervasive, destructive, and expensive quality problems. These problems are interrelated and growing worse. To successfully deal with one, we must deal with them all. Whatever employers and other private sector payers have been doing to contain costs isn’t working.

Second, what is especially worrisome is that we are seeing startling premium increases at a time of low general inflation and even though employers, especially big companies, have become more sophisticated about health care purchasing. Health care premiums for even the largest and smartest employers are out of control. Costs for small businesses and individuals are rising even more rapidly.

Third, increasing health care costs for employers and employees – and sharply rising premiums in the non-group market – will produce dramatic increases in the number of Americans without health insurance. The Coalition estimated in its recent report, “A Perfect Storm: The Confluence of Forces Affecting Health Care Coverage,” that due to cost increases the number of uninsured Americans may have increased, just in 2001 and 2002, by 6 million. A summary of our report is attached to my written testimony.

Fourth, many of the new wave of ostensible cost containment tactics that employers are edging towards – increased cost-sharing, defined contributions – are in fact ways to shift costs, not contain them. If and as more companies move in this direction, we will see the employee share of health care spending continue to rise. The effect would be the equivalent of a wage decrease – with some added disadvantages.

With increased cost sharing through higher deductibles and co-payments, more and more employees would put off needed health care for financial reasons – the very scenario that health insurance is meant to protect against. And with defined contributions, many would drop coverage altogether because of sharp increases in the costs of maintaining it.

Fifth, we have created a perpetual motion machine in health care, which is headed in the wrong direction. All our problems are growing worse and present policies and procedures will not be powerful enough to enable employers and employees to address these problems.

Summary

The Coalition believes that we will need a major new public policy initiative to respond to surging health insurance premiums. Our members are working to encourage a renewed national debate about the large-scale issues facing American health care – and about the options for system-wide reforms that will be necessary to contain costs, achieve coverage for all, improve the quality of care, assure equitable and sustainable financing, and simplify administration.

We commend the Subcommittee for beginning the process through today’s hearing and we appreciate the opportunity to share with you our members’ views and experiences. I would be pleased to answer any questions.