The annual Milliman Medical Index (MMI) reports total annual medical spending for a typical American family of four covered by an employer-sponsored preferred provider organization (PPO) program. The MMI represents the total cost of payments to healthcare providers, and excludes the non-medical administrative component of health plan premiums.
The total 2010 medical cost for a typical American family of four is $18,074.
This is an increase of 7.8%. This is the third year in a row that the annual rate of increase has been below 8%; however, the dollar increase of $1,303 is still the highest we have seen in the last 10 years and since the inception of this index.
Cost Implications of Healthcare Reform on Family of Four
While employers are making the immediate changes required to their benefit plans and adapting their longer-term benefit strategy to the new regulatory environment, healthcare costs continue to increase at rates exceeding most other costs of doing business. Debate continues on the extent to which the changes from healthcare reform have potential to bend the long-term cost curve; however, for the near term, the underlying drivers of increasing healthcare costs are not expected to immediately change.
Efforts to enforce insurance rate controls may have indirect impact on the growth in healthcare costs but still do not address the underlying cost of care. For now, the onus of control remains with insurers, who will attempt to put pressure of providers to lower costs to a level that approved premium rates can support. There may be more extensive shift in market dynamics in 2014, when the government takes on an even larger proportion of payment responsibility due to expansion in Medicaid, the creation of exchanges, and the availability of subsidies for certain lower-income individuals.
While underlying cost drivers as yet remain relatively unchanged, there are some changes that will have a predictable effect on cost. The most immediate changes, such as increasing dependent coverage up to age 26 and elimination of lifetime and annual benefit maximums, will cause a direct shift in costs from employees to employers. Other options that will be implemented later, such as federally-mandated state health exchange plans, require much deeper analysis before an employer can make an informed decision. Because the practical implementation of this new legislation has not yet been defined, many employers are choosing to delay changes to their benefit plans for future annual benefit cycles, although it is very possible that those changes could be dramatic.
Looking into the future for the “typical family of four” represented by this analysis, the cost implications of reform are unclear. Much depends on the underlying medical cost that is dissected in this report. When it comes to cost control, the status quo is not encouraging. If reform or some other factors can motivate a reduction in the underlying cost of care, it will have important implications for the future cost of care for American families.
By Don McCanne, MD
The Milliman Medical Index (MMI) is especially significant this year because it proves that the Patient Protection and Affordable Care Act (PPACA) is already a miserable failure even before the provisions of the act take place. The MMI for 2010 is $18,074. Let’s look at what that means under the PPACA.
It’s important to understand precisely what the MMI is. It is the average amount that is already being spent on actual health care for a typical family of four enrolled in an employer-sponsored Preferred Provider Organization (PPO) plan. It does not include any of the administrative expenses or profits of the private insurers.
Already there’s a problem. Since the MMI represents the amounts being paid by PPOs, the discounts for network physicians and hospitals and other products and services are already built in. The MMI represents a lower level of spending made possible by contracting payment rates with the physicians and hospitals that are included in the networks. That means that families for whom the spending is at MMI levels have lost their right of free choice of physicians and hospitals unless they are willing and able to pay significant financial penalties for obtaining care outside of the networks. The plans that will be available in the state insurance exchanges will be network-restricted managed care plans – mostly PPOs with some HMOs. Health care reform that takes away choice is not the reform that we wanted.
One of the most important measures in PPACA attempts to address the problem of high costs and the poor coverage of the plans currently available in the individual and small group markets. Individuals and small employers who are having problems finding adequate affordable plans will be able to buy plans in the insurance exchanges that theoretically have the same benefits and cost efficiencies of the large group market currently available to larger employers. If these exchanges actually work as intended, then the MMI will represent the average cost of health care for a family of four enrolled through the exchanges. This assumes that the insurers will cooperate and not continue to use deceptive innovations that have resulted in lower-value products in the individual insurance markets.
Assuming that the exchanges work as intended, keep in mind that the insurers offering individual and small group plans within the exchanges will be required to maintain a medical loss ratio of 80 percent. That is the amount that must be spent on actual health care – the amount that is represented by the MMI, minus the out-of-pocket expenses. They will keep 20 percent for their own administrative costs and profits (or even more if they are successful in their current efforts to shove some of their administrative costs into the medical loss ratio by reclassifying these administrative costs as “health care).
So let’s look at the numbers. The standard Silver plans offered by the exchanges will have an actuarial value of 70 percent. That means that the plans will pay an average of 70 percent of the costs and the other 30 percent will be paid out-of-pocket by individuals and families, partially offset by subsidies for those who qualify. Using the 2010 MMI, the plans will pay for a family of four an average of $12,652 (70 percent of $18,074). The twenty percent for administrative costs and profits will add another $3,163 ($12,652 is 80 percent of the premium) which means that the premium that the insurer will have to charge will be $15,815 ($12,652 plus $3,163). The out-of-pocket portion for the family will be $5,422 (30 percent of $18,074). The the total average cost for the family for both the premium and out-of-pocket expenses combined will be $21,237 ($15,815 plus $5,422).
These are averages. To determine what each family actually would pay is more difficult because of several variables, including sliding scale subsidies for the premiums, sliding scale subsidies for the out-of-pocket expenses, opt-out eligibility based on the level of household income, and out-of-pocket spending, especially for those whose incomes exceed the eligibility thresholds for the subsidies.
Nevertheless, let’s look at a family of four with an income at 400 percent of the federal poverty level – the threshold at which they qualify for neither the subsidies for premiums nor the subsidies for out-of-pocket costs. That income level is $88,200. That family would pay an average of $21,237, or 24 percent of their income, for health care, leaving them $66,963 for all of their other expenses. But since that
is average, those with greater health care needs would face even larger out-of-pocket costs, which could be staggering. Even if the plan is promoted as having a stop-loss, private insurers are infamous for leaving patients stuck with charges for non-covered services and out-of-network providers. The bottom line is that PPACA has not ensured that the hard-working American family is protected from financial hardship or even personal bankruptcy should significant medical needs arise.
There are those who say that health care reform is done; we now have PPACA. They say that although it will likely require some adjustments along the way, our task now is to make it work. To those individuals I can only say, step back and look at the confounded mess! It will never insure everyone. It will never make health care affordable for each and every individual and family. It will never control administrative waste as it continues to add on more and more administrative complexity.
We need to keep and build on some of the health system reforms in PPACA, such as the reinforcement of our primary care infrastructure. But we desperately need to dump the sick, fragmented financing system that wastes so much in resources and perpetuates the profound inequities and physical and financial suffering experienced in our system. We need to enact an improved Medicare for all, and do it ASAP!