Premiums Going Up
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SUSAN DENTZER: Precision is the watchword here at Accurate Machine Products in Johnson City, Tennessee. This 50-year-old family-run business produces a range of custom-made and sophisticated machine products. Recently the plant was running six days a week to produce nuclear shipping containers for the Department of Energy.
KEN GOUGH: Extremely tight tolerances, incredible quality control, lots and lots of testing. I’m here to tell you they’re well designed and we’re doing our best to build them right.
SUSAN DENTZER: Ken Gough, Accurate’s president, says maintaining a strong company that can produce high-quality work comes with a high price tag.
KEN GOUGH: A business like this has very high capital costs. The machine tools are expensive. We are employing highly skilled people, and they do not come cheap. And then built into that, we also have a very expensive benefits package that we need to compete for those good people.
SUSAN DENTZER: And in the last few years, the costs of a big part of that benefits package, health insurance, have been going through the roof. Gough’s sister, Janie Whittimore, who is Accurate’s vice president and human resources manager, says the company’s health costs rose 38% in 1999. Now Accurate’s health insurance company, Blue Cross/Blue Shield of Tennessee, has calculated that costs will go up again in 2000, boosting Accurate’s bill another 22%.
JANIE WHITTIMORE: We can’t absorb that 22% as a small business. We can’t do it. I don’t know what the answer is. I know that we can’t continue on this track.
SUSAN DENTZER: Accurate’s cost for health insurance for roughly 50 employees reached about $85,000 last year, just about what the company made in profit. In the future, Whittimore says the firm may have no choice but to shift more costs to employees or cut benefits.
JANIE WHITTIMORE: And that, to me, is the most devastating part of it, is to sit down with your employees and say, “guys, you’re going to be paying another 15%, 20% again this year.”
SUSAN DENTZER: Steep hikes in health insurance costs aren’t just a problem for small businesses like accurate. They’re also affecting larger companies like Eastman Chemical, the Tennessee-based chemical producer that was spun off from the giant Eastman Kodak company several years ago.
ROB JOHNSON, Eastman Kodak: In 1998 our costs went up about 12%, and this year we’re looking about 10%.
SUSAN DENTZER: Rob Johnson manages health and welfare plans for the roughly 40,000 people whose insurance is paid for by Eastman, including 13,000 employees, their dependents and retirees. Johnson says the hike in health costs is coming on top of huge jumps in raw materials prices that recently prompted the company to cut 1,500 jobs.
ROB JOHNSON: We’re spending over a million dollars a week on health care, and again, that’s money right off our bottom line.
SUSAN DENTZER: Late last year many companies learned they’d face sharply higher health insurance premiums in 2000, and they began notifying their workers of resulting changes in benefits. That process is now producing a rude awakening. In recent years, companies thought that they had licked the monster of rising health care costs, mainly by shifting their workers into HMO’s and other forms of managed care plans. For a while, that seemed to work and employers’ costs for health care grew more slowly or even fell. But now companies have discovered that managed care isn’t managing care or costs nearly as well as they’d hoped.
TOM KINSER: Our customers indicate they’re not happy.
SUSAN DENTZER: Tom Kinser is president and chief executive officer of Blue Cross/Blue Shield of Tennessee. The not-for-profit company’s health insurance products cover Accurate’s workforce, as well as about two million other people in the state. Kinser recalls that health costs soared in the 1980′s, leading to the broad embrace of managed care and a slowdown in costs.
TOM KINSER: We really had a period in the early 90′s, until recently, a relatively flat, or at least price increases that bore some sensible relationship to the Consumer Price Index. Well, recently that’s all started to change.
SUSAN DENTZER: John Sheils, who analyzes health spending trends for the consulting firm the Lewin Group, says part of what’s now driving up premiums isn’t entirely unexpected. In industry jargon, it’s called the insurance underwriting cycle.
JOHN SHEILS: You go through periods where HMO’s and insurers in general are very competitive, and they want to increase their market share. They’ll use… They’ll give you fairly favorable premiums. Then after a while the insurers realize that they have started to accumulate some potentially costly people, and they start experiencing losses, and they realize that they’re exposed, overexposed. And they’ll start raising premiums to try and recover those losses.
SUSAN DENTZER: But Sheils is quick to add this is only part of the explanation. Perhaps the biggest impetus to rising health care premiums is innovation. That means everything from sophisticated new technology for treating serious diseases like cancer, to a veritable boom in the supply and use of prescription drugs.
JOHN SHEILS: A banana in 1980 is the same thing as a banana in 1999. So there isn’t any reason for the price of a banana to be very much different between 1980 and 1999. But health care in 1999 doesn’t look anything like health care in 1980.
SUSAN DENTZER: And nowhere does health care look more different now than in the use of prescription drugs. There are more new drugs on the market than ever before.
ANNOUNCER: Today’s prescription Detrol is proven effective to treat…
SUSAN DENTZER: More drug company advertising directly to consumers, and as a result, exploding consumer demand.
ANNOUNCER: It’s Prilosec time.
ROB JOHNSON: Prescription drugs are the fastest growing piece, or sector, of our health costs. Hopefully, and we believe, that some of that is being driven by drugs that are going to add future value to keep employees healthy and reduce heart attack, strokes, and so forth in the future.
SUSAN DENTZER: But that value is coming at a steep price.
ROB JOHNSON: If you look at our list of top drugs, it’s drugs that have come on in the last few years that are the top dollar cost drugs, that part of the cost factor, too, is the direct to consumer advertising.
SUSAN DENTZER: Take the number one most expensive drug used by Eastman employees, heavily advertised Prilosec. The drug is used in treatment of a condition called gastro-esophageal reflux disease, or GERD. That’s when some of what’s in your stomach flows back up into your esophagus through a faulty valve. The condition is also called heartburn. To treat occasional bouts of heartburn, you can take over- the-counter medications. For more persistent cases, more people are turning to heavily- advertised Prilosec, whether or not they really need to.
ROB JOHNSON: It’s a great drug when it’s used for the appropriate reasons, but I think there is the possibility, I think distinct possibility, that some people that could benefit from using Tums or Rolaids are using a $100-a-month drug on a daily basis.
SUSAN DENTZER: Then there are popular allergy remedies like Allegra and Claritin. They’re a new class of antihistamines that don’t produce the drowsiness of comparable drugs. The drugs can run about $70 a month. But on the other hand, Ken Gough says they’ve been a godsend for at least one of his workers.
KEN GOUGH: He has allergies so bad that were it not for these new antihistamines, that he probably couldn’t do his job. Talk about a double-edged sword, the new medicines that are available to us today. They allow people to get out and work and live normal lives that they could not have done before, but it’s bankrupting us.
SPOKESMAN: The cost for Scrip in Nashville is about four dollars more than it is in Jackson.
SUSAN DENTZER: Meanwhile, insurers are trying to tackle the issue of rising drug costs. It’s a frustrating process.
TOM KINSER: Right now the only thing we can really do is promote generics, change the deductible and co-pay, and we really feel at the mercy on the branded drugs promoted by advertising. They have patent protection for 17 years. They can charge virtually anything the markup will bear for that extraordinary period of time. We have very little way to negotiate with them, or any other typical economic levers you can use.
SUSAN DENTZER: Put all of that together with an aging population of employees, and the costs skyrocket. That’s the situation facing both Accurate and Eastman.
ROB JOHNSON: We haven’t hired many people in the last few years, so we have a lot of employees and retirees who are in their 40′s, 50′s, and early 60′s. If you’ve ever looked at a cost curve by age, you know what happens after age 40. The costs begin to go up almost exponentially on a per capita basis.
SUSAN DENTZER: Both Eastman and Accurate are struggling to cope. They’re increasing the share of health costs borne by employees, a nationwide trend that has exploded in recent years. As a result, many workers face still higher annual deductibles and co-payments on prescription drugs. For some, that may mean forgoing their prescriptions.
JANIE WHITTIMORE: Employees a lot of times go without buying their prescriptions now because they have a drug that is going to cost them $50 and they only have $50 in their pocket, and they’re not going to spend it on their prescription.
SUSAN DENTZER: Whittimore says Accurate may be at the point of requiring workers to pay half the costs of their monthly premiums. That could add up to more than $3,000 a year for employees with families. Paying half the cost is a far cry from several decades ago, when the company paid the full cost of insurance. Janie worries that some workers will have no choice but to drop the coverage. That, too, is a nationwide trend, and it may be one reason why the ranks of the uninsured are rising by about one million persons a year.
JOHN SHEILS: The real problem here is that when we see these new technologies come aboard, and we start consuming these new health services, the cost of insurance goes up. And it goes up in a way where some people can’t afford to pay the premium anymore, and we get more and more people uninsured.
SUSAN DENTZER: Since many companies recognize the pitfalls of shifting costs to workers, some are redoubling their efforts to attack health care costs head- on. For example, Rob Johnson says Eastman is pairing up with local hospitals and physicians to find more cost-effective ways to deliver medical care.
ROB JOHNSON: We have already been working some on kind of a best process, or what’s the best way to take care of people after they have a heart attack. How can we get them rehabbed, how can we ensure that they’re taking the medications that they need to take and get them back to work as efficiently and effectively as we can?
SUSAN DENTZER: Improving the delivery of health care services is important, says John Sheils, but it won’t necessarily slow the rapid increase in costs as medical technology advances.
JOHN SHEILS: We expect all of these miracles of modern medicines to come to us without us paying any more for it. And that really doesn’t make any sense. If it’s going to do more for you over time, it’s reasonable to expect that health care costs will grow somewhat faster than normal price increases.
SUSAN DENTZER: But just how much faster health care costs can grow without creating serious problems for companies like accurate and their workers is the unanswered question that lies ahead.