CEO SUMMARY: Spiraling health costs are about to become a headline issue once again. There is widespread evidence that health insurers are seeking premium increases of 20% from the nation’s biggest employers. Aetna recently announced a second quarter 2001 operating loss of $95.9 million. Increased utilization was a major factor in this loss. Labs may find it tougher to negotiate higher test prices.
HEALTHCARE COSTS ARE ABOUT to become a high-profile issue in the nation again. Many HMOs are pushing for 2002 premium increases of 20% or more.
It’s been several years since American businesses faced double digit year-to-year increases in healthcare costs. Despite its many failings, the managed care industry was able to reduce the annual rate of healthcare costs for most of the 1990.
That situation appears to be ending. William M. Mercer, Inc., a major human resources consulting firm based in New York, reports that almost 500 HMOs and other types of health plans have offered initial premium proposals to employers with an average increase of 20%. Mercer believes that, following negotiations, most employers will agree to increases of between 15% and 20%.
Lab Test Reimbursement
For laboratories seeking higher reimbursement for lab testing, this is an unwelcome development. HMOs are pushing double digit price increases because they are experiencing higher rates of utilization by their beneficiaries. This situation is not expected to change.
Higher utilization of healthcare services is one reason why Aetna, Inc., the nation’s largest health insurer, posted a second quarter operating loss of $94.9 million. For second quarter, Aetna’s commercial HMO medical cost ratio (MCR) was 91.3%. In contrast, its MCR for second quarter 2000 was 86.8%.
Aetna attributes increases in healthcare utilization to three factors: 1) Aetna members made more visits to specialists and hospitals; 2) there were significantly more radiology tests performed; 3)pharmacy prescriptions exceeded Aetna’s predictions.
Aetna’s experience is mirrored by several other health plans. Kaiser Permanente reported an 11% drop in income for the second quarter. Kaiser attributed some of this change to higher utilization and disclosed that strong demand for hospital services was forcing it to send members to community hospitals outside its own system.
It’s a similar story at Pacificare Health Systems, Inc., which is trying to evolve away from its former provider contracting model of 100% capitation, which pushed all the risk on the providers. Pacificare reported a decline in net income of 78%, from $69.2 million in second quarter 2000 to just $15.3 million in second quarter 2001.
Like Aetna, Pacificare saw a significant increase in the medical claim ratio of its commercial HMO. The MCR jumped from 82.9% in second quarter 2000 to 89.2% for second quarter 2001.
Fundamental Market Shifts
THE DARK REPORT believes these developments within the managed care industry signal several fundamental shifts in the healthcare marketplace. Each will have different consequences for the clinical laboratory industry.
First, a review of utilization patterns indicates that the medical claims ratios of Medicare HMOs did not increase by as much as the MCRs of commercial HMOs. One interpretation of this is that, as increasing numbers of baby boomers turn 50, their healthcare utilization increases, but they are not yet old enough to be in the Medicare program.
Assuming this demographic fact is driving increased utilization in commercial HMOs, laboratories should be studying, in advance of contract negotiations, in what ways the demographics of the aging baby boomers will change lab test utilization.
Second, compared to 10 and 15 years ago, there are more therapeutic drugs which have significant and positive effects. It is reasonable to expect steady increases in both the number of prescriptions written and in the length of time that the patient is required to take these therapeutic drugs. For example, it’s estimated that the new cholesterol management guidelines might require as many as 30 million Americans to participate in drug therapy.
This trend can favor the lab industry, as more diagnostic tests linked to specific prescriptions (the concept of pharmocogenomics) enter the marketplace. However, in the short term the impact will probably be minimal.
Third, THE DARK REPORT predicts that both employers and managed care companies, responding to double digit increases in healthcare costs, will expand deductibles, co-pays, and out-of-pocket requirements in coming years. This can have both a negative and a positive effect on laboratories.
On the negative side, collecting deductible and co-pays directly from patients has always been a frustrating and expensive process. Any increase in these types of arrangements will eventually lead to larger write-offs of uncollectible accounts by labs.
On the positive side, if employers and insurers increase deductibles, co-pays, and out-of-pocket requirements, they will also have to offer patients more choice of laboratory providers. THE DARK REPORT believes this fact, combined with increased consumer interest and knowledge about laboratory testing, will benefit those clinical laboratories and pathology group practices which understand this trend and market themselves directly to the public.
Variety Of Consequences
Taken cumulatively, the return of sustained, year-to-year double digit increases in the cost of healthcare will have a variety of different consequences for the laboratory industry. For these reasons, labs and pathology groups will be well-served to review and rethink their managed care business strategies.