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Issue #3-2 | August 22, 2012

Medical cost trend report—implications on value

Medical Cost Trend: Behind the Numbers 2013, recently released by the PwC Health Research Institute (HRI), offers critical insight into near-term growth in healthcare expenditures across broad industry segments. Several of the report’s findings have significant implications for healthcare practice value. Here is a synopsis of the report for healthcare finance professionals and analysts:

  • Trend toward increasing employees’ share of health expenses. More employers are increasing the cost borne by employees for their healthcare through increased premium shares, co-pays, and deductibles. Analysis: Increased employee cost shares place pressure on providers to collect higher co-pays and deductibles from patients. This can affect bad-debt experience while weakening the correlation between historic cashflow and forecasted cashflow.
  • Medical cost trend remains static. In 2013, the medical cost trend used to determine health insurance premiums is expected to match 2012’s reduced level at 7.5%. However, considering the increase in the employee’s cost share, HRI forecasts the premium increase from this element to be 5.5%. Analysis: This is one of the most frequently missed factors in understanding health insurance premium increases. While some may focus on the 5.5%, providers and appraisers should focus on the shift to self-pay business and the bad-debt risk described above.
  • Medical supply and equipment costs are abating. Hospitals are gaining leverage over medical supply and equipment costs incurred as a result of physician-hospital consolidation. Analysis: Analysts should gain more insight into forecasting supply and equipment costs as a function of revenue. This can be critical in ambulatory surgery center valuation, for example. If there is support for decreasing costs, it may make sense to forecast such costs on a per case basis rather than a percentage of historic net revenue.
  • Price transparency exerts pressure. Price transparency—the degree to which consumers can assess their actual cost of care and in some cases choose providers based on price–is gaining popularity in some areas. If insurers actively market the idea to consumers, it can have some impact on high cost providers. Analysis: Analysts—including damages analysts—should assess the status of such initiatives in a given market area. The result of transparency is not always downward pressure on prices in the near term. In Massachusetts, two reports from the state attorney general exposing provider contracting practices and relative prices among hospitals and physicians actually led to a price explosion as poorly paid providers demanded and received increases. The near-term impact was to move lower-priced providers higher and lock in higher prices for those providers that already had them.
  • Utilization is expected to increase in 2013. As the effects of the long-term recession gradually wear off and delayed healthcare or discretionary spending on such services as cosmetic surgery rebounds, utilization of such services will experience an uptick. Analysis: Industry segments that are more sensitive to patient out-of-pocket spending decisions might see better results in 2013.

To download the complete Medical Cost Trend: Behind the Numbers 2013 report, click here now.

Study points to rise in self-insurance in response to
federal healthcare reform

In its July 2012 issue brief, Small Employers and Self-Insured Health Benefits: Too Small to Succeed?, the Center for Studying Health System Change confirms that more small employers are evaluating the feasibility of self-insurance in response to the healthcare reform legislation, among other factors. One motivation for small employers may be that through a combination of the existing ERISA statute and the new reform legislation, self-insured plans are exempt from many reform provisions, including the new excise tax on insurance, community rating rules, and mandates for essential health benefits.

A significant aspect of federal healthcare reform is its focus on the small group (where most small businesses obtain health insurance) and individual markets. The legislation effectively “merges” the two markets into a single market in an effort to reduce individual premiums. In Massachusetts, where a merger of the small group and individual markets as well as rating rules were first implemented, the premiums charged to small business exploded. As a result, two major modifications to the Massachusetts reform were made in 2010 and again in 2012. Both of these changes contained provisions designed to permit small businesses some of the advantages allowed to larger businesses that self-insure.

The  2010 modification partially repealed the prohibition against small businesses acting through trade associations for self-insuring or to obtain the lower rates and better benefits of the large group market. The other change occurred just this summer when new state legislation expanded the government’s ability to stabilize spikes in premiums in the merged small group/individual market. The 2012 legislation also requires that so-called “tiered” insurance products that charge consumers higher co-pays and deductibles for using “high cost” providers contain a premium discount of at least 14% when compared to the insurer’s actuarially similar plan without such high cost provider provisions.


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Business Valuation Resources, LLC
1000 SW Broadway, Suite 1200, Portland, OR 97205
(503) 291-7963 | editor@bvhealthcarenews.com
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