Health Insurance Costs Continue to Rise

Health Insurance Costs Continue to Rise
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Blame Prescription Drug Prices

The actuarial service firm Milliman recently released the 2015 Milliman Medical Index (MMI), an index that tracks the hypothetical costs of a family of four with health insurance coverage through an average employer-sponsored preferred provider organization (PPO). Initiated in 2001, this index is unique in that it measures the collective costs of healthcare benefits instead of focusing on just an employer's share or the premiums.

To no great surprise, the MMI index rose in 2015. The MMI reached $24,671 for 2015, compared to $23,215 in 2014 and $22,030 in 2013. The 5.4% cost increase in 2014 was the smallest in the history of the MMI, but 2015 represents a larger percentage increase (6.3%). Since the initial reading in 2001, the MMI index has shown an almost tripling of costs.

This year, prescription drug costs are leading the charge. Pharmaceutical costs grew by 13.6% over the previous year, considerably higher than the 6.8% average growth over the last five years. Thanks to this increase, 15.9% of the total healthcare spending for the hypothetical family of four is now taken up by prescription drug costs.

While all costs are increasing, the employee's portion of the cost is increasing at a higher rate. Defined as the total of payroll deduction and out-of-pocket costs, over the last five years, the employee's cost burden has increased by almost 43% compared to 32% for employer's costs. For 2015, employer contributions covered 58% of the costs ($14,198) while employee costs of $10,473 were split between $6,408 in employee contributions (26% of the total) and $4,065 in out-of-pocket costs (16% of the total).

Broken down into the components of spending, the largest components are inpatient facility care and professional services (physicians and other support personnel). Both take up 31% of the cost. Outpatient care takes up 19% of the costs, pharmacy charges are 16% of the costs, and the remaining 9% covers miscellaneous costs -- things such as medical equipment, home health care, and ambulance transport.

While prescription drug costs account for most of the increase, professional services costs rose by only 3.6% -- the lowest rate in the history of the MMI. Physicians bear little of the load for the 2015 increases.

Why have drug costs spiked? According to the Milliman report, the combination of expensive new specialty drugs and a price increase for both brand name and generic drugs contributed to "the perfect pharmaceutical storm." Adding to this perfect storm is the rise of the use of compounded drugs (along with a rise in their price) and the "patent cliff" of expiring patent protection for well-known drugs like Lipitor and Nexium. While the shift to generic is an initial improvement for consumers, once generic alternatives are established, the more popular drugs raise the generic price component.

The reforms of the Affordable Care Act (ACA) do not affect the MMI much, since the MMI is focused on employer-based group health plans and the ACA is aimed at individuals and smaller employers. However, Milliman suggests that continuing trends will eventually trigger the "Cadillac tax" (an excise tax on higher-cost, higher-benefit plans) for the MMI average family. Milliman estimates that smaller employers may cross the excise tax line as early as 2018.

Indirect costs from the ACA may also affect the MMI family, as lower income from the individual market may shift costs toward the employer market to make up the difference.

The bottom line of the Milliman report: health insurance costs are going up yet again. Future MMI reports are likely to reach the same conclusion. The only real question is how much the costs will rise, and whether the cost increases are broad or concentrated in one particular area.

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