Multiple-choice question: disease management, cost shifting and prescription-drug initiatives are some of the strategies insurers are using to stabilize health-care expenses. (Cover Story: Health-Care Costs).

Insurers are scrambling to contain mounting health-care costs as consumers clamor for more services.

An aging population, increased drug costs and stifling utilization rates all have a hand in one of the largest problems facing the nation--rising healthcare costs. Health-care spending, which currently comprises the largest sector in the U.S. economy, continues to escalate at double-digit rates. National health expenditures are expected to climb to $2.6 trillion in 2010, twice as much as in 2000.

While there's still no silver bullet to slow down rising health-care costs, insurers are adding disease-management programs and pharmaceutical initiatives to their arsenal and shifting costs to consumers.

* Demand Soars

Insurers are not optimistic health-care expenditures will stabilize, given the changing demographics, new technologies and treatment options, and increased pharmaceutical costs.

People of retirement age require more medical care. In 1999, nearly 60% of those over age 65 visited medical specialists, and they averaged 6.8 ambulatory visits, compared with the average 3.5 visits by all other age groups. The number of retirees will grow exponentially between 2010 and 2030 as baby boomers reach 65.

New technology is responsible for almost 50% of the total increase in the cost of health care over the last 30 years, according to the Blue Cross Blue Shield Association. An explosion of new and improved technologies and treatments to improve patients' quality of life has come on the market, and more consumers are taking advantage of them.

But the fastest-growing component of health care and foremost cost driver today are prescription drugs. Spending on pharmaceuticals grew by more than 17% last year, due to increased use driven by direct-to-consumer advertising, new drug developments and the continued use of expensive brand names.

While the increase in prescription-drug costs is expected to slow, the problem is far from over. The number of prescriptions being dispensed in the United States is expected to soon reach 2.9 billion a year.

The government also has made an effort to control these mounting costs. Last year, at least 18 states passed laws to contain or moderate state and consumer drug costs, while several other states made administrative adjustments to their Medicaid programs. Medicaid spending for outpatient drugs increased by an average 18.1% per year from 1997 to 2002, according to the National Institute for Health Care Management.

* Disease Management

Many insurers are paying more attention to the potential for disease-management programs to improve quality and slash health-care costs. Disease management considers the total health status of a patient and offers a prescribed routine of wellness, prevention and treatment to avoid or to delay acute episodes. Most programs provide patients with an individual to help manage the routine.

"These programs are a win-win situation for everyone--patients are healthier, doctors have assistance to help manage diseases, purchasers receive lower premiums and insurers can manage costs better," said Dr. Sam Ho, senior vice president and chief medical officer for PacifiCare Health Systems Inc., Santa Ana, Calif.

Disease-management programs are designed to improve quality of care and health outcomes while decreasing health-care costs. They identify the "sickest of the sick"--those policyholclers with chronic illnesses who tend to pop in and out of hospitals regularly, said Dr. David Kaplan, a principal with management consultant Tillinghast-Towers Perrin. About 3% of people spend between 40 cents and 45 cents of every dollar on medical costs, he added.

With these programs, "the industry now has a preventive measure that can help educate and get the right services and tools in the hands of these patients who need it," said Maureen Sullivan, senior vice president of strategic services for the Blues association.

Disease-management programs have increased quality of care and have produced substantial healthcare cost savings, said Dr. Donald Young, president of the Health Insurance Association of America.

For example, during the first year after development, PacifiCare Health System's disease-management programs, such as those for heart and lung patients, have resulted in an $8.6 billion savings on a net basis. And the savings more than offset start-up costs, said Dr. Gordon Norman, vice president of health-care quality.

Some insurers, however, are still waiting to see results. "The jury's still out as to how effective these programs are going to be," said Ben Cutler, president and chief executive officer of Fortis Health, While he hasn't seen any studies that suggest whether these programs are marginally cost effective, he is optimistic that the long-term benefits will result in some cost savings across the industry.

For the programs to effectively reduce costs, consumers must be convinced of the financial repercussions of their own behavior, said Cutler. "It's pretty hard to change people's behaviors without economic consequences, and that's the element that is now missing in most of these programs."

While the programs may increase overall savings, they often increase prescription costs because of the nature of diseases usually targeted for improvement and the fact that medications are a very important part of these programs, said Dr. Barry Schwartz, vice president of care and network management for Blue Cross & Blue Shield of Florida. "While there may be a decrease in emergency-room or hospital costs, it's common for drug costs to go up," Schwartz said.

* Cost Shifting

Insurers also are practicing health-care cost containment by shifting costs to consumers.

"Rising health-care costs are the most pressing issue facing employers and the health insurance industry today, and we see this as a challenge to also create opportunity for people to start to rethink benefit designs and offer consumers more choice," said Dr. Jack Lord, chief innovation officer for Louisville, Ky.-based Humana.

Some insurers are offering a portfolio of choices that allow customers to tailor options to fit individual and family needs. And new cost-containment paradigms call for employees to kick in a larger percentage of premiums and copayments. For example, the number of companies with a $15 office copay rose to 24% in 2002 from 11% in 2001, according to the global outsourcing and consulting firm Hewitt Associates. At the same time, employers offering $10 copays dropped to 58% this year, from 64% in 2001.

"This has been a 'Model T' industry where you could have any color you wanted--as long as it was black;' Lord said. Insurers are now trying to change all that by creating models that put choice back into the hands of consumers, lower their health-care costs and reduce companies' expenditures.

For Humana, this shift to customercentric plan designs has meant offering totally customizable benefit options and open enrollment and eliminating terms such as health maintenance organizations and preferred-provider organizations, Lord said.

Bloomfield, Conn.-based Cigna Healthcare is among those building benefit models designed to help consumers understand their options better. "In the past models, we created the mind-set that everything cost a $10 copayment, but now we're building more real costs and information into our plan designs," said Kate Quinn, senior vice president of product development. One example is Cigna's Health Savings Account, a consumer-driven health plan that combines an employer-funded health savings account with a PPO plan, so consumers can choose how to spend their healthcare dollars. Cigna will provide information about what certain procedures cost, various treatment options, outcomes and calculators to assess needs to assist this effort.

Several insurers also are building different types of care designs around both networks and benefits. One of the latest efforts among some insurers is tiered-network designs, in which providers are categorized according to cost and members are charged significantly higher copayments for using more expensive physicians and facilities. These networks are designed to encourage members to frequent providers that cost insurers less. According to a recent Wall Street Journal article, copayments range up to $250 per day for preferred facilities and up to $400 per day for treatment at a "nonpreferred hospital."

In addition, many consumers are now opting for higher-dollar deductible plans with lower coinsurance rates. The once-popular 100%-coverage in-network, 80%-coverage out-of-network, with $250-deductible plan is giving way to a 90% in-network, 70% out-of-network, with $1,000-deductible structure, said Jill Serin, vice president of group medical for Guardian.

Some insurers believe they need to take the process one step farther. "If at the end of the day all you do is shift costs to employees, you really haven't done enough," said Charles Berg, president and chief operating officer of Trumbell, Conn.-based Oxford Health Plans. Rather, it's important that insurers continue to manage health-care costs in a balanced, high-quality way, he added. "In the past, there was too much emphasis on approaches that impacted all patients and providers in ways that were good but often created too much administrative work. Now, with the availability of data and technology, we are able to focus more on members who utilize the most services and on providers who consume an inordinate amount of health-care resources."

Pharmaceutical Initiatives

Insurers also are turning to new pharmaceutical benefit designs and initiatives to curtail these growing expenditures. They are focusing on mail-order delivery, generic drugs and cost-shifting to employees.

Members' out-of-pocket share of prescription-drug costs has steadily declined over the last decade from 63% in 1990 to 18% in 1999, but a growing number of insurers are trying to reverse that trend with three-tier cost models that shift more of the cost of pharmaceuticals to consumers. Under the tiered system, consumers incur the lowest out-of-pocket costs for generic drugs, higher costs for preferred brand-name drugs and the highest costs for nonpreferred brand drugs.

Fortis Health values its three-tier system. Because direct-to-consumer advertising and high-usage rates are driving inflated demands for costly medications, these benefit designs allow Fortis Health to offer members financial incentives for using generic drugs when available, while still allowing customers to opt for brand-name drugs if they are willing to foot a larger portion of the bill.

Employers also are taking a closer look at the advantages of three-tier copay models. Slightly more than 30% of employers surveyed by Aon Consulting in its employers' 2002 health-care cost-control strategies survey have implemented a three-tier copay this year, and Aon expects to see even more activity in these plan designs in the future. In addition, it expects that employers eventually will move to four-and five-tier plans.

Ties That Bind

The often-discordant relationship between insurers and providers is slowly beginning to coalesce, and insurers are optimistic that this collaboration will help manage health-care costs.

"We stress to providers that we're here to help facilitate good care and work cooperatively with them to ensure quality care for their patients," said Dr. David Ferriss, vice president and specialty medical director for Cigna Healthcare programs. He also said that many providers now have a better understanding of what Cigna is trying to accomplish through its various programs. In addition, providers acknowledge that as Cigna's nurses interact with patients, they help contain costs.

Guardian also is seeing the benefits of tightening bonds. "At one point, the pendulum swung to one side where doctors told us what they wanted to charge us and the number of services they'd provide, which resulted in costly payments for insurers," said Serin. Several years later, the pendulum swung to the opposite side, she said, where insurers instructed providers to cut costs, not perform certain services and ensure everything was checked and approved before they used it. Times have changed, however, and the pendulum is now beginning to swing back toward the center with a balanced accord among providers, insurers and consumers. "If everybody has a stake in the process, as opposed to each having their own individual stake, a leveling of costs will result," Serin said.

Until patients and providers together start to question whether a medical service or prescription justifies the cost, little progress will be made in driving down costs, said HIAA's Young. But he anticipates that over the next three to five years, both providers and insurers will realize that they must collaborate on these issues if they're going to rein in these costs, because "over a longer time frame, these costs will be unsustainable."

[GRAPH OMITTED]

Health Spending as Part Of the U.S. Economy

Health expenditures represent the largest component in the 2001 U.S.
gross domestic product. Total GDP was $10.2 trillion.

                  Percentage of GDP

Auto                    3.7%
National Defense        3.9%
Housing                  10%
Food                    9.7%
Health                   14% *

*Projected

Sources: Blue Cross Blue Shield Association, Bureau of Economic
Analysis, Centers for Medicare and Medicaid Services

Note: Table made from bar graph

RELATED ARTICLE: An End in Sight?

Insurers agree that the problem of mounting health-care costs is far from over. In fact, many predict the industry will face significant double-digit increases before costs take a downward spiral sometime in the future.

"Unfortunately, there's not a lot of good news on the horizon," said Ben Cutler, president and chief executive officer of Fortis Health. He believes that health-care cost drivers--including demographics, technology, new drugs, an aging population, obesity and less healthy consumers--are all moving in the wrong direction.

"The only thing on the horizon that has a prayer of beginning to ameliorate inflation is the increasing focus on a more patient-centered, choice-based finance system where consumers are more involved around economic decisions regarding their family's health," Cutler said. Already, many insurers are implementing product benefit designs centered on putting greater choice, flexibility and decision making into the hands of consumers.

Increasing health-care costs will lead to higher health insurance premiums. According to a recent survey by the University of California-Los Angeles, many employers nationwide expect health insurance premium rate increases of 20% or more next year and plan to make "substantial changes" to their health plans to shift more of the cost to employees.

"I don't see insurers having the tools to bring [premiums] back down immediately and believe new technologies and drugs will only continue to push costs higher," said Dr. Donald Young, president of the Health Insurance Association of America.

Renewal rates also are projected to rise. Health maintenance organizations, point-of-service plans and preferred-provider organizations are expected to raise costs an average of 16% for 2003 renewals, with indemnity plans forecast at 18.3%, according to a recent survey of 2002 health-care trends by Aon Consulting. While these numbers have been fairly consistent over the past two-and-a-half years, this is the first time in 10 years that predictive cost increases for HMOs are relative to PPOs, said C. William Sharon, senior vice president for Aon. In the past, HMOs generally had a 1% to 3% lower cost trend rate than PPOs. Sharon said managed-care companies' restructuring of HMO products to become more like PPOs has leveled this trend.

In addition, Aon believes some carriers will come in with higher Jan. 1, 2003, renewals than originally anticipated. "Our early experience is that it's going to be a very tough renewal season, and many of our clients will experience big increases, and carriers coming in with those increases aren't going to be as flexible on negotiations as they may have been in the past," said Sharon.

But many insurers believe the problem of rising health-care costs is one that can eventually be solved. "By focusing on where change needs to occur to increase affordability and working diligently with those that can effect that change, we can make a difference," said Maureen Sullivan, senior vice president of strategic services for the Blue Cross Blue Shield Association.

The challenge for insurers lies in deciding what interventions make the most sense for providers, consumers and themselves. Many believe consumers will play a bigger role in the process than ever before. "By having more information and more direct financial stake through increased cost sharing, consumers will participate willingly in disease-management programs that will positively impact the course of their disease and the quality of their lives," said Dr. David Kaplan, a principal with management consultant Tillinghast-Towers Perrin.