COST OF HEALTHCARE GOES “PLAID”

One of my favorite comedy movies of all time is Mel Brook’s, SPACE BALLS; a spoof on “Star Wars” and, one of my favorite scenes in the movie is when Lord Helmet, (Darth Vader) and his crew are chasing down Lone Star (Hans Solo) in his ship.

Lone Star goes to warp speed as Lord Helmet orders his captain to engage warp speed also and closes in. Then Lone Star goes from warp speed to ludicrous speed. Lord Helmet responds and orders his captain to hit the ludicrous speed button, too and closes in.

Closing in and feeling confident, Lord Helmet wrings his hands and says, “I’ve got you now Lone Star,” but suddenly Lone Star’s ship disappears and Lord Helmet’s captain looks at his radar screen bewildered and exclaims, “PLAID, THEY’VE GONE PLAID, SIR!” Shocked and amazed, Lord Helmet shouts back, “PLAID, THERE’S NO SUCH THING AS PLAID SPEED, HOW DID THEY GO TO PLAID? GO PLAID, GO PLAID! WHAT-A-YA MEAN WE CAN’T GO PLAID?”  Meanwhile, Lone Star’s ship is out of site completely off the radar screen and beyond capture or control.

As I look back at and think about what’s transpired over the last 20 + years of the healthcare and health insurance industry I’m reminded of that scene as the cost of healthcare rockets up out of control, but the difference is I’m not amused by comparison.

Healthcare at Cruising Speed

Prior to 1980/82, health insurance was widely controlled and distributed by a national network of Blue Cross & Blue Shield regional “franchise” plans located throughout the country. The commercial (non-Blues) companies like Prudential, Metropolitan, Travelers, CIGNA and Aetna shared a smaller slice of the market. Most, if not all, of the “pre-80s” group plans were based on “fixed-dollar-value” or, “indemnity” schedule type plans with the Blues having their own proprietary information data base. Most of the commercial companies used what was referred to as the California Relative Value Study or CRVS (Schedule). The CRVS incorporated an assigned Relative Value Unit (RVU) or point value for a specific medical condition/procedure, i.e.; 80 RVUs (points) for an appendectomy, or 60 RVUs for a gall bladder removal. Further, these CRVS type plans offered a pre-defined Conversion Factor of $10, $15 or $20 used to multiply by the RVU (point-value) of a particular condition or medical procedure. For example, a policy with a $10 conversion factor would pay or reimburse professional fees of $800 for an appendectomy and $600 for a gall bladder removal. A $15 CF and $20 CF would obviously pay (reimburse) more and of course carry a higher price tag, too. Life was simple and healthcare Fuel consumption at “cruising speed” was minimal.

Healthcare at Warp Speed

Around 1979-1980, a new breed of healthcare insurance was introduced by the commercial carriers called Usual, Customary & Reasonable (UCR) and was just beginning to take root. These new plans basically abandoned the defined, fixed-dollar CRVS and indemnity schedule plans and, payment/reimbursement was; for all intents and purposes based on billed provider charges. Healthcare costs were rising, but not out of control and employees were absorbing more cost as the defined, fixed-dollar indemnity plans were unable to keep up. The new and improved UCR plans promised higher benefit payments, lower employee out-of-pocket costs, and lower premiums. Employers, who were fed up dealing with the increasing displeasure of their employees, gobbled up the UCR sizzle and for a very short time enjoyed lower premiums while employees enjoyed higher benefit payments. Life was great and healthcare fuel consumption although higher was still affordable even at “warp speed.”

Healthcare at Ludicrous Speed

At the close of 1979, the total cost of healthcare nationally was $255 Billion; representing less than 10% (9.9%) of our Gross National Product (GNP).

From 1980 to 1990/93, the cost of healthcare increased a staggering 281%! (From $255 billion to $717 billion). As a percent of GNP it surged by a walloping 40% from 9.9% to 13.8% representing the largest historical increase in healthcare costs (as a percent of GNP) ever in a decade’s time frame!

More than a coincidence, this incredible spike in healthcare costs is a direct result of the shift to the new and improved Defined Benefit “UCR” Health Plans from the previously popular Defined Contribution “fixed-dollar” Indemnity Plans.

Not only did the cost of healthcare go into “ludicrous speed” during the 80s, but with that a paradigm shift occurred from employees’ funding healthcare inflation in a “Defined Contribution” environment to employers’ funding healthcare inflation in a “Defined Benefit” environment.

Along with the Clinton Administration in 1992, came the “threat” or “promise” of a single-payor national healthcare insurance plan, but ahead of it, the insurance industry had already begun to introduce “managed care” strategies and tactics as potent as closed-panel HMOs in California to the kinder gentler PPO plans, or the benign cost-saving measures like “mandatory second surgical opinions” and “mandatory outpatient surgeries” taking root in the mid-west – ahead of the HMO movement out West.

Managed Care Plans, et al “managed” to limit the increase in healthcare costs from 1994 to 2004 to 16% of the GNP representing a 15% increase from 13.8% of GNP at the end of 1993. Compared to the 40% increase from 1980 – 1990/93, this was good news, but nonetheless, healthcare costs had officially exceeded “ludicrous speed” by 1994. Life was fantastic during the 90s. The high-tech internet phenomenon made millionaires, but healthcare fuel consumption at “ludicrous speed” was exceedingly high, and the tanks were running dangerously low.

“Plaid, They’ve Gone Plaid, Sir!”

Although healthcare costs appeared to level-off with a slight 2% bump from 14% of GNP in 1993 to 16% by 2004, the overall cost of health care -- everything from hospital and doctor bills to the cost of pharmaceuticals, medical equipment, insurance and nursing home and home-health care -- doubled during this time weighing in at an additional $140 billion; according to the Centers for Medicare and Medicaid Services. So too, did the growth rate in GNP at an average of 6% per year skew or dilute the good-news perception that healthcare costs had stabilized. Moreover, employees rejected the tougher restrictions of managed care in the late 1990s, but yet demand all the latest advances in medical technology; rendering the closed-panel HMO and EPO type plans all but extinct as employers gave in and settled on the kinder, gentler and more expensive (fee-for-service) PPO plans. However, as an unintended consequence of resisting managed care and the refusal to adopt healthier lifestyle behaviors, employees’ out-of-pocket expenses for healthcare has increased by more than 125% from 2000 to 2004.

The “good news” that increasing healthcare costs had finally slowed down by 2004 was officially replaced by the “bad news” that trends stabilized in 2004 at a relatively high rate of growth that is also no longer sustainable as more and more workers are driven out of healthcare insurance and more and more employers are dropping group health insurance plans all together.

“GO PLAID, GO PLAID! WHAT-A-YA MEAN WE CAN’T GO PLAID!?”

Depending upon what side of the aisle you’re on, a single-payor healthcare system may or may not be the solution to the impending healthcare crises we face, but unless we effectuate significant, and perhaps drastically improve financial results between (now) 2007 and 2020, it may be the only option we’re left with by default as the cost of healthcare continues to go “plaid” and we don’t have a ship fast enough to capture and control it. .

For a fresh new approach and innovative, non-conforming ideas on how I can save you money providing healthcare benefits to your employees and help you control your healthcare cost in the future, write: mark.capuano@skyinsure.com, or call me at 330-492-3373.

http://www.markcapuano.com. http://www.skyfi.com. This article may be reprinted with Author’s email, phone number and web address included. Copyright © 2005-2007, Mark L. Capuano. All rights reserved.