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Health Care Cost Trends

Last month I asked, just how low will medical cost trend go?

Apparently, still lower.

Health care cost trends have been falling for a number of years since peaking in 2002 at around 14%. Recent reports have annual commercial health plan trend as low as 5.5% to 6.5% in a few places.

The good news about lower health care cost trends continued as publicly traded health plans reported their third quarter results. Most health plans reported falling medical cost ratios on a constant basis, favorable claim development from prior periods, and pricing trend continuing to outpace actual pricing trend.

Once again for the third quarter WellPoint reported that the trend they are pricing into their contracts is greater than the actual cost trend they are experiencing: “Commercial premium yield exceeded total cost trend…resulting in an increase in underwriting margin.” Coventry reported the same thing saying, “Commercial premium yields showed a favorable price-to-cost spread in the third quarter.”

This month, the Federal Employee Health Benefits Program (FEHBP), which covers eight million federal workers, retirees, and their families, said it would increase overall premium by an average of only 1.8% in 2007.

The federal program has historically tracked with private sector costs—albeit at slightly lower levels. The FEHBP saw increases of 12.7% in 2002, 11.3% in 2003, 9.5% in 2004, 7.4% in 2005, and 6.4% in 2006. Granted, some of this is reserve adjustments from prior years but this is still surprisingly low.

A leading employee benefits firm, Hewitt Associates, LLC, also said that their survey of employee benefits costs found that employer costs would continue to moderate in 2007. Hewitt projects employer costs will rise 7.7% in 2007—7% for PPO plans, 8% for HMO plans, and 9% for point-of-service indemnity plans.

However, the drop in trend is not uniform around the country. Hewitt reports trend increases as low as 2.5% in Minneapolis, 5.7% in Philadelphia, and 6.5% in New York City. They also report trend rates as high as 13.1% in San Antonio, 12.8% in Hartford, and 10.5% in San Francisco. Last month, the Boston Globe reported Massachusetts would see at least a 10% trend rate for the seventh year in a row.

Third quarter publicly traded health plan results confirm that health plans continue to rack-up record profits on the heels of declining claim cost trends. The health care cost trend profit windfall, coming from cost trends falling faster than pricing trends, continues on.

From the Hewitt survey, it is clear that not all employers (and their employees) are benefiting from the full benefit of these declining trend rates.

While the news about trend rates is improving, that doesn’t mean health care costs are any more affordable for workers. The Kaiser Family Foundation annual survey of health insurance now pegs the average cost of family health insurance at $11,480 per year.

Even with the relatively moderate rise in health care costs for 2007 employer health care costs will have doubled since 2000.