Insurers expect to pay out 10% more for medical care

A new survey predicts it will cost insurers about 10.5% more to pay for members' medical care next year, an increase that will probably be covered through higher premiums or cost-cutting.

Even if it doesn't serve to predict precise premiums, the projection by Aon Consulting is an important indicator, said Rick Judy, partner in the Payer Practice of PricewaterhouseCoopers' Health Industries Advisory. For physicians, the information offers a tool in contract negotiations and a signal about how intense those negotiations are likely to be.

"Based on the way cost trends are going and that we know there are limits to the number of dollars in the system, there are going to be potentially more stalemates," Judy said. "We're not predicting good things."

In a report released Aug. 15, Aon Consulting predicted a slight decline in what is known as the "medical cost trend," the year-over-year change in the cost of medical care.

The estimate is based on Aon's survey of health insurers, and predicts how much more the plans will spend over the next year. Plans define that year as a 12-month window that begins anywhere between April and September. The latest projection is down slightly from an anticipated 10.6% increase a year ago, and well down from 16% annual increases in 2002 and 2003.

Experts and analysts say the medical cost trend doesn't usually translate directly into health insurance premium costs -- premiums probably won't go up by exactly 10.5%. Premiums could increase by 20%, or by much less, depending on whether insurers choose to make any other changes to their plans, said Tom Lerche, health care practice leader for Chicago-based Aon Consulting.

As in past periods when premium prices have hit what he called "capacity," levels, there will be more contentious negotiations, Judy said. "You'll see more of those signs at a medical office saying, 'We no longer accept Blue Cross Blue Shield of X,' because of some stalemate."

One reason for hardball negotiations and intense medical management is that physicians receive the largest percentage of medical spending. According to Milliman Medical Index, a breakdown of medical spending computed by the Seattle-based actuarial firm, about 34% of what is spent on an average family's health care -- both what the insurer pays and the family's out-of-pocket spending -- goes to physicians. That's more than goes to either inpatient or outpatient care, and more for medications.

Spending on outpatient services rising

Milliman's most recent report, released in May, found spending on physician care had increased at a slower pace from 2008 to 2009 than had other categories of medical costs. Spending on outpatient services increased by an average of 10.2% over the last year -- the fastest of any category -- while spending on physician services grew by just 6%.

Outpatient care now represents 17% of the $16,771 in annual health costs for a family of four (including the employer contribution for workers' coverage), while inpatient care is at 30%.

As medical costs continue to rise, physicians can expect tighter medical management by health insurers, including scrutiny of diagnostic testing and tighter controls on prescriptions, analysts said.

Kate Fitch, principal and health care consultant for Milliman, said health plans have recently been very focused on tracking and trying to drive down what they see as medically unnecessary or preventable hospital admissions and readmissions. They also have been able to cut costs by aggressively managing high-tech imaging costs.

However, trying to cut spending by cutting payment rates is less favored than it once was, Fitch said. "With providers really becoming more savvy at negotiating rates, that's not really as impactful as it has been in the past."

Some employers and health plans are trying to drive down costs on the patient -- or worker -- side.

Lerche and Fitch both said employers and health plans are trying to control medical spending through wellness and disease-management programs. Also in use are value-based plan designs, which can include elements, such as zero-dollar co-pays for diabetic supplies, meant to help prevent hospitalizations and complications from chronic diseases.

"Employers are increasingly looking longer-term," Lerche said.

But Fitch said that while promoting employee health may be the "right thing to do," and could save money by boosting productivity, there's little evidence it really saves employers money on health insurance premiums.