Wall Street Analysts Predict Several Years of Higher Health Plan Premiums

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Wall Street Analysts Predict Several Years of Higher Health Plan Premiums

Conference Executive Summary | June 10, 1999

Average health plan premium increases of 6 to 7 percent in 1999 marked the start of a trend that would likely persist through 2002, according to a panel of Wall Street analysts assembled by HSC. The analysts noted that underlying health care costs were rising at a somewhat more moderate pace than premiums. They also agreed that the Balanced Budget Act of 1997 (BBA) had hit health care providers harder than anyone had initially anticipated, and that the future of Medicare managed care was in jeopardy due to proposed risk adjustment policies.

Premium Increases

After several years of slow premium growth and shrinking profitability, managed care plans were reasserting themselves by negotiating higher rates with employers and rebuilding profit margins. The analysts -- Karen M. Boezi of Coral Ventures, Norman M. Fidel of Alliance Capital Management, Geoffrey E. Harris of Warburg Dillon & Read, and Patricia F. Widner of Deerfield Management -- were participating in HSC's fourth annual Wall Street roundtable.

As evidence of the premium increases taking hold, the analysts pointed to CalPERS -- the second-largest purchaser of health care benefits in the nation -- which had recently accepted a 9.7 percent rate increase for the year 2000. Other purchasers with less bargaining power would likely face even steeper hikes. "Right now, we are in the early stages of a big upswing in premiums, margins and profitability in the industry," Harris stated. The trend was expected to last several years.

Providers Under Pressure

Despite rising premiums, health care providers were not benefiting. Plan payment rates to providers were climbing only about 2 percent. Most providers lacked the market power to negotiate more favorable terms with health plans -- a problem compounded by provider oversupply in many local markets. Many providers had also struggled to manage global financial risk under managed care contracts and were trying to shift that risk back to plans.

The underlying costs of delivering health care services were growing by roughly 5 to 7 percent annually, Fidel estimated -- a pace higher than 18 months earlier, fueled by consumer demands for broader provider choice and easier access to services. "We had a three-year period when premiums didn't rise, the economy was strong and consumers wanted more freedom," Fidel observed. "Now, costs are rising and the question is: How does people's desire for freedom compare with their desire to keep costs down?"

BBA and Medicare Payments

Low rates of Medicare payment increases under the BBA, combined with proposed risk-adjustment policies, spelled serious trouble for Medicare+Choice -- Medicare's managed care program. A number of health plans had already scaled back participation by raising enrollee premiums and cutting benefits. If a new Medicare prescription drug benefit were enacted, the outlook for Medicare+Choice would grow even bleaker, the analysts agreed. The BBA was also devastating other parts of the industry. Hospitals, skilled nursing facilities, and home health agencies were reeling from frozen or strictly limited Medicare payment rates. While few hospitals had closed, post-acute care providers were going out of business, and their prospects looked worse still.

The roundtable was moderated by HSC President Paul B. Ginsburg and HSC Health Researcher Joy Grossman. HSC, an independent research organization funded exclusively by The Robert Wood Johnson Foundation, provided objective, timely analyses about changes in the nation's health care system and their impact on consumers.

Sources and Further Reading

Kaiser Family Foundation -- Employer Health Benefits Survey -- Annual data on employer-sponsored health insurance.

Health Affairs -- Peer-reviewed health policy research.

Robert Wood Johnson Foundation -- Health policy research and programs.