Health Care Cost Inflation Appears to Slow, but Statistics Can Be Misleading

By Staff Report

May. 18, 2009

Health care actuarial firm Milliman reported Monday, May 18, in its annual medical index that health care costs would increase at 7.4 percent in 2009, marking the third straight year of declines in health care inflation.

Good news, right?

Take a closer look: The percentage growth may be the smallest in three years, but the total dollar increase for a family of four—at $1,162—is the largest in that same period, thanks to the cumulative effects of all these annual health care cost increases. Year after year the cost being measured against grows, even if the percentage increases don’t.

Such is the fuzzy nature of health care costs.

In 2006, health care costs grew at 9.6 percent, the highest since Milliman established its index five years ago. But back then it was 9.6 percent of $12,214—the amount in 2005 a family of four spent on medical care. And the increase was $1,168.

Three years later, inflation may be down but the total dollar increase is just about the same: 7.4 percent of $15,609 (the average amount a family of four spent on medical care last year) totals about $16,770—an increase of $1,161.

Health care inflation may be lower by nearly two percentage points in 2009, but the total year-to-year increase is about the same. That means, next year, even if inflation continues to slow, total cost increases could be larger than a few years back when inflation was near double digits.

That’s particularly bad news for employees, as they are shouldering more and more of the cost.

Three years ago, when costs were increasing by 9.6 percent, employers shouldered most of the burden. Costs went up, but they went up less for employees, who saw the amount coming out of their paycheck to pay for health care costs increase 5.4 percent.

Today, the trend has reversed.

According to Milliman’s data, employer costs in 2009 will rise 5.4 percent; employees, meanwhile, will see nearly a 15 percent increase in the amount of money that comes out of their paycheck to pay for health care. Then add another 5.4 percent increase in the amount employees pay out of pocket (and already taxed) for other health care expenses.

Put it this way: A family of four making $50,000 would spend 8 percent or $4,000 of wages to pay for health care premiums alone. Factor in actually seeing doctors, taking medicines and receiving health care, and the costs continue to rise.

The latest data on health care costs is a reminder of how fuzzy math can be. What’s clear is that in a recession—against a backdrop of layoffs and pay cuts—these increases are hurting more than they used to. And the pain may get worse even if the economy gets better.

As Milliman suggested in its report, it is easier to lay someone off or cut their salary than make broad changes to the design of health benefits, which typically occur only once a year. In other words, Milliman’s report says that employers will likely make changes to reduce the cost they are paying for benefits even after the recession subsides.

The great hope in 2009 is health care reform—a sentiment supported nearly unanimously by employers, health care providers, insurance companies and other constituents. The details of reform, however, are as uncertain as the future. Health reform may bring more health care to people, but, as Milliman suggests, it is likely to cost just the same, no matter how one slices it.

—Jeremy Smerd

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