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- Medical Price Inflation: Medical price inflation represents the increase in the price of medical service, treatments and supplies. It is similar to the consumer price index (CPI) compiled by the bureau of Labor Statistics.
- Leveraging: Leveraging accounts for plan cost increases higher than the medical inflation rates, because the medical plan keeps the same deductible and co-payments each year. To illustrate leveraging, assume that a claim of $1,000 is submitted with a $400 deductible. For simplicity, assume that the plan coinsurance is 100%, the plan would pay $600 ($1,000 less $400). If in the next year, the cost for the same service increase 10 percent to $1,100, and the plan deductible remained the same; the plan would pay $700 ($1,100 less $400). The claim increased 10 percent: however, the cost to the plan sponsor increased 17 percent ($700 less 600, divided by 600) as a result of the leveraged effect.
- Cost-Shifting: Cost-shifting occurs when one party pays the expense previously incurred by another. For example, when government programs, such as Medicare, reduce their reimbursement rate, providers generally compensate for the loss of revenue by raising their prices, thus shifting the cost to the private sector. Other examples of cost-shifting includes the increased cost of medical care for the insured population to compensate for the loss of revenue from the uninsured and the increase in physician fees to accommodate the significant increase in medical malpractice insurance.
- Utilization: Utilization represents the frequency of claims incurred by a medical plan. Factors that contribute to growing utilization include increased availability of benefits (e.g., incentives to utilize managed care programs), improved access to providers, increased medical need for services with an aging population, improved detection and diagnostic methods, and increased medical awareness for preventive services. For example, an aging workforce generally results in increase utilization of medical service because they require more medical attention, more expensive forms of treatment and a greater need for costly prescription medication and drug therapy programs.
- Government-Mandated Benefits and Other Legislative Changes: When legislative and regulatory changes require plans to cover services that were not covered previously or to establish new procedures, those changes add to the future claim cost of employee health plans. Legislative compliance and its associated administrative costs also add to the financial burden of the plan sponsor. Examples of recent and pending regulation and legislation that may affect future plan increases included: the electronic data interchange (EDI) requirements of the Health Insurance Portability and Accountability Act (HIPAA), privacy and security regulation, the claims and appeals regulations issued by the Department of Labor (DOL), the Patient’s Bill of Rights (PBOR) and the decisions by the Equal Employment Opportunity Commission (EEOC) on contraceptive coverage.
- Technology Changes and Their Effect on the Complexity of Care: Technological changes included the introduction of new medical equipment, medical procedures, treatment therapies and medications. Increases in the complexity of care are often the direct result of enhancements in technology.
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