Health insurance premiums appear headed for another bump upward as insurers and employers negotiate rates for next year.

With medical costs rising and HMOs trying to improve narrow profit margins, Watson Wyatt Worldwide, a benefits consulting firm, is projecting increases nationally of 5 percent to 7 percent in HMO premiums, 7 percent to 11 percent in looser managed-care plans and 12 percent to 15 percent in indemnity plans.

Mark Hopkins, health care practice leader in Watson Wyatt's Washington office, said he expects the Baltimore-Washington market to track the national projections. Those projections are also in line with forecasts for the local market from other benefits consultants, health economists, insurance brokers and the HMOs themselves.

Although similar boosts were forecast last year, the average increase was just over 3 percent, according to several studies. But that's not likely to happen again, experts said.

"In 1997, HMOs asked for 5 percent increases or higher, then backed down to preserve market share," Hopkins said. "We don't foresee that level of flexibility this year."

Brad Braden, an economist with the Office of the Actuary at the federal Health Care Financing Administration, agreed.

"There are changes in costs and changes in the marketplace that will allow insurers to raise premiums at a higher rate," he said. HCFA is projecting a 7.9 percent premium increase.

The insurers themselves are planning for increases in that range in Baltimore-Washington, for both themselves and competitors.

Gregg Prussing, mid-Atlantic director of sales for Prudential HealthCare, said he was expecting increases of 5 percent to 7 percent for larger employers, 10 percent to 13 percent for the smaller ones.

Bill Hudock, vice president for underwriting and pricing for the Maryland and District of Columbia Blue Cross and Blue Shield plans, said that after a year of increases in the "low to mid-single digits," he believes "we're looking at a continuation, with a slight uptick."

6% to 8% anticipated

Katie Kelly, vice president for sales and marketing for United HealthCare of the Mid-Atlantic, said her company was expecting medical cost increases of 6 percent to 8 percent, and would be seeking premium increases to match.

David Kelly, executive vice president of Kelly & Associates Insurance Group Inc., a Hunt Valley insurance broker, said, "I'm telling my clients: 'If you see a rate increase of 7 percent, that's not bad; that's the trend.' "

MA Some point to the huge Federal Employees Health Benefits pro-

gram as a leading indicator of where premiums are headed.

This month, the FEHBP announced an average premium increase of 10.2 percent to go into effect Jan. 1, after a boost of 8.5 percent a year earlier.

Many private employers follow the FEHBP schedule of enrolling in November for the year beginning in January, but not all have concluded rate negotiations.

While HMOs may set a target for average rate increases, the actual amount for an individual employer is determined by claims experience and the demographics of the work force.

'Bracket creep'

Kelly said what looks like a large premium increase is sometimes an example of "bracket creep" as the work force ages.

A sharp turn upward in premiums for private employers would end several years of relatively modest premium increases -- in the 2 percent range for 1995, 1996 and 1997 and 3.3 percent for 1998, according to data from actuarial consultants Milliman and Robertson.

Paul B. Ginsberg, an economist who is president of the Center for Studying Health System Change in Washington, is skeptical of forecasts of escalating premiums. He said surveys early in the premium cycle often represent "hopes or fears, rather than what actually happened."

Examination of indicators of medical expense, he said, shows that "costs are still pretty docile," especially compared with double-digit health inflation in the late 1980s and early 1990s.

According to the Bureau of Labor Statistics, the cost of medical care as measured by the Consumer Price Index rose 3.5 percent in the 12 months ended Aug. 31, compared with 2.6 percent in the previous 12 months.

In the Washington-Baltimore market, for the 12 months ended July 31, the health cost increase is 2.8 percent.

If premium increases do hit 7 percent, Ginsberg said, "it's likely to be for restoration of health plan margins, rather than being driven by health care cost increases."

But even Ginsberg sees reasons why this might be the year that premiums move upward more sharply. A "backlash against managed care," he said, has produced a market shift to plans that allow patients more choice, but don't manage care as stringently as do pure HMOs.

And he joins other health-cost watchers in pointing to the development of expensive new technologies and prescription drugs. Surveys he cited show double-digit increases in spending for drugs for three years in a row, compared with increases for doctors and hospitals in the 2 percent to 3 percent range.

Paul Fronstin, a health economist at the Employee Benefit Research Institute in Washington, said drug companies' relatively new practice of marketing directly to consumers has helped drive up the use of expensive medications.

For example, he said, he frequently sees advertisements for Claritin, a popular prescription allergy medicine that is more expensive than over-the-counter antihistamines.

Hudock said Blue Cross is expecting its spending on drugs next year to increase 18 percent to 25 percent, based both on more use and higher prices.

Hopkins said another factor contributing to medical inflation is // the aging of the population. "A baby boomer is turning 50 every eight seconds for the next 10 years," he said.

Also, he added, consolidation among hospitals and other health providers is allowing them to "build market leverage so they can dictate price," a change from the past few years when HMOs aggressively cut rates and negotiated discounts.

But HMOs are fighting back. A few years ago, HMOs kept rates low to avoid losing market share to competitors, Hopkins said, but now they are negotiating more aggressively for higher premium increases.

"Some of them -- with their bottom lines falling below where they want them to be -- are getting tougher," said Bev Putnam, an associate in the Baltimore office of William M. Mercer Inc., another benefits consultant.

"Some HMOs are still willing to bend [to keep a customer], but some just dig their heels in and say, 'This is our rate.' "

'We're playing catch-up'

Alan J. Silverstone, regional president for Prudential, said that, while medical costs may not be increasing quite as fast as premiums for next year, "if you look at our overall cost structure over the last few years, we're playing catch-up here."

Publicly traded managed-care companies reported an average profit margin of just 1.1 percent for the most recent reporting period, according to Pulse, an industry newsletter.

Insurers, for their part, say employers are getting tougher, too. "Our margins are low, but the employer is not interested in whether we make money," said Blue Cross' Hudock.

Despite higher premiums, relatively few employers are dropping plans because of price, consultants and brokers say.

Rather, Putnam said, employers have generally responded by offering a greater choice of plans, changing the benefit level, increasing patient co-payments and increasing employees' share of the premium.

Dealing with retirees

Some also have eliminated benefits for retirees, or shifted retirees into lower-cost managed-care plans, she said.

A Mercer survey of employers published in January showed that many employers staying in the same plan experienced premium increases of 4 percent (lower in HMOs).

But, the survey found, changes in choices of plans or benefits held the overall increase in total health plan costs to 0.2 percent.

"Employers are looking for any way possible to keep costs in check," Putnam said.

Pub Date: 9/27/98