No End in Sight for Escalating Prescription Drug Spending

Escalator

Prescription drug costs are rising more than 10% a year, which is twice the rate of medical costs increases according to an A.M. Best report. Retail prescription drug spending grew 12.2% in 2014 compared to 2.4% in 2013. Driving the rising costs are increased spending for new medications, such as specialty drugs for Hepatitis C; patents that expired, price increases for brand name drugs, and higher health plan enrollment due to the Affordable Care Act (ACA). Drug spending from private health insurance, Medicare, and Medicaid accelerated in 2014. These costs have affected insurers. Also consumers are paying more out-of-pocket costs.

The increase in drug costs has become divergent to other health care costs. In 2014, U.S. health care spending increased 5.3% to reach $9,523 per person. The cost growth was primarily due to major coverage expansion under the ACA, particularly for Medicaid and private health insurance. The share of the economy devoted to health care spending in 2014 was 18.1%, up from 17.5% in 2013.

The medical loss ratio (MLR) remained relatively flat from 2010 through 2013 in the low 80 percentages before a decline in the past two years to around 75%. But the MLR was more than 10 basis points higher in 2010 to 2015 when prescription drugs were included.

Health Carriers Are Thriving Under Stress

ViceGripThe health insurance industry has been going through a number of challenges including legislative and regulatory reform, demands from more price- and service-conscious consumers, fierce competition, shift of customer mix, and uncertain economic conditions in the United Stats and abroad. Yet the industry is thriving under stress, according to a report by Zacks Investment Research.

Big players, such as CIGNA, WellPoint, Humana, UnitedHealth, Molina Healthcare and others, have reported unfaltering growth in premium as well as fees and other income over the years. In the first quarter of 2014, these insurers had a combined 14% increase in revenues. So far, the carriers have handled some of the less onerous provisions of health care reform fairly well including MLR requirements, a ban on denial of coverage due to pre-existing ailments, dependent coverage up to the age of 26, and the annual rate review.

The question is how provisions of the law will affect the industry, such as those relating to insurance exchanges, the individual mandate, ICD-10 requirements, pre-existing conditions, Medicaid expansion, and an annual insurance industry assessment of $8 billion for 2014 with increasing annual amounts thereafter. Investor sentiment toward the reform this year and beyond will be the driving factor for managed care stocks.

Several health reform provisions are likely to increase insurers’ medical costs, such as the excise tax on medical devices, annual fees on prescription drug manufacturers, enhanced coverage requirements, and the prohibition of pre-existing condition exclusions. Also, the annual insurance industry assessment will increase insurers’ operating costs.

Confined to national boundaries until recently, the industry is flocking to international markets with fewer regulations, higher margins, greater demand, and lower competition. With a wide overseas presence, Cigna and Aetna view their international business as a positive differentiator and key driver of growth. Both companies intend to penetrate deeper into the emerging economies of Asia and the Middle East. In April 2014, Aetna bought U.K.-based InterGlobal, which offers private medical insurance to groups and individuals in the Middle East, Asia, Africa and Europe. UnitedHealth expanded its reach from Australia, the Middle East, and U.K. to Brazil with its buyout of AmilParticipacoes.

Data from Kaiser Family Foundation and the Congressional Budget Office indicates rapid growth in individual exchange markets, with approximately 22 million purchasing coverage online by 2016 and 24 million by 2023. The exchanges seem to have been well received. Moreover, 35% of new exchange insurers below age 35 led to a favorable mix. Insurers that were initially averse to participating on exchanges are planning to jump on the bandwagon for 2015 and beyond. However, with comparative shopping options and easy access to consumer information, the exchanges are likely to heighten competition among private insurers. For more information, visitwww.Zacks.com.

Have the MLR Rules Failed to Achieve Their Original Purpose?

Medical loss ratio laws were supposed to address the phenomenon of carriers raising health insurance rates while increasing their profits. The health care overhaul requires insurers to spend at least 80% or 85% of their premium dollars on medical care, limiting what they can spend on overhead and for profits. Companies must rebate their subscribers if they don’t make the mark.

Citing a study by the Commonwealth Fund, California Insurance Commissioner, Dave Jones said, “Some families and businesses received health insurance premium rebates this past summer because insurers failed to meet the medical loss ratio, but …at the same time some insurers increased their profits.” Among small-group and large-group insurers, the most common response to the MLR has been to shift administrative cost savings into profits and use those increased profits to pay rebates, according to the Commonwealth Fund. “Potentially, and we didn’t measure this, we’re speculating, that maybe they were doing this to subsidize those plans that offered an individual product,” said Michael McCue, report author and professor at the Department of Health Administration School of Allied Health Professions at Virginia Commonwealth University. “Maybe they were trying to offset those losses of the individual insurer.”

Individual-market insurers reduced administrative costs and profits despite increasing enrollment by almost a quarter of a million people in 2011, making consumers. Insurers in the individual market reduced overhead expenses by $560 million in 2011, which was more than those in the small- and large-group sectors. Plans that did not meet the medical loss ratio (MLR) paid customers about $394 million in rebates.

Large-group market insurers that did not meet the minimum medical loss ratio paid about $386 million in rebates and devoted more premium revenue to overhead costs. This group was able to boost its profits by $959 million.

Small-group market consumers received about $321 million in rebates. While administrative costs in this market did drop significantly, insurers chose to use the savings to increase their profits rather than passing them on to consumers in the form of lower premiums, according to the report.

Janet Trautwein, CEO of the National Association of Health Underwriters (NAHU) has said, “There isn’t clear evidence that the MLR requirements have lowered health insurance premiums. In the states that tried loss-ratio caps prior to the passage of national health reform, premiums and healthcare costs are not lower and healthcare quality is not better. Instead, these requirements have actually discouraged health plan investments in programs that generate long-term medical care cost savings and improve healthcare quality.”

“Less than 10% of Americans received a MLR rebate this year, but virtually all health insurance consumers, group and individual, use a licensed health insurance agent or broker every year to help obtain or service their coverage. H.R. 1206 will help protect consumers, who need experienced and knowledgeable insurance agents more than ever.”

“For American healthcare consumers, the choice should be simple. Removing agent and broker compensation from the MLR calculation saves an industry whose sole function and legal obligation is to protect health insurance consumers. American health insurance agents and brokers want to remain in business – for their clients, families and employees. America should want the same for them.”

Commissioner Jones said, “I have long pushed for the authority to reject excessive health insurance rate increases and this study provides further evidence of why this change in the law is long overdue in California. Health insurers and HMOs continue to impose double-digit premium increases each year and are making larger profits when selling to individuals and families even during these tough economic times.”

Last Updated 09/12/2019

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