Health Care Benefits & Compensation Management

Health Care Benefits & Compensation Management Eric Jacobson ericj@udel.edu

Factors affecting the total compensation mix Internal Factors External Factors Comp Mix Benefit Costs

Factors affecting the total compensation mix Internal Factors External Factors Comp Mix • Comp policy • Worth of job • Employee’s relative worth • Employer’s ability to pay Benefit Costs

Factors affecting the total compensation mix Internal Factors External Factors Comp Mix • Comp policy • Worth of job • Employee’s relative worth • Employer’s ability to pay • Conditions of labor mrkt • Area wage rates • Cost of living • Collective bargaining • Legal requirements Benefit Costs

The rising cost of health care • per capita health expenditures have increased 71% since 1992 • total health expenditures in 2002 accounted for 14.9% of of GDP, up from 13.3% in 2000 • premiums for er-sponsored health insurance increased 13.9% in 2003—3rd consecutive year of double digit increases • for employer-sponsored plans, 2003 premium costs: single workers - $3,383; $9,068 for family coverage

Premium increases will consume compensation raises ... • health insurance inflation is significantly higher than earnings and overall inflation (source: KFF)

If these trends continue, rapidly escalating health insurance costs will directly cut workers’ take-home pay • example: an employee’s total compensation is $40,000 in salary and $10,000 in employer-paid health insurance • employee’s company can afford raises in total compensation of no more than 3%, or $1,500 • if health insurance premiums rise by 15%, the premium increase consumes the entire raise; the employee brings home no additional pay

Whose Problem Is Health Care? by Daniel Gross, NY Times, Feb 8, 2004 In all major economies, paying for health care means a combination of public and private money. But in the United States, businesses pay a larger chunk than do their European and Asian counterparts. In Canada, the private sector spends 2.8 percent of gross domestic product on health care; in the United States, the private-sector figure is 7.7 percent… In 2002 alone, General Motors, which covers 1.2 million Americans, spent $4.5 billion on health care. Uwe Reinhardt, an economist at Princeton, has referred to General Motors, Ford and Daimler-Chrysler as "a social insurance system that sells cars to finance itself.” “It would be good for the U.S. economy to get U.S. corporations out of retiree health care." Large companies seem to be moving in that direction. Last year, only 36 percent of companies with 500 or more workers still offered a retiree medical plan to at least some retirees not yet eligible for Medicare, down from 50 percent in 1993.

“Medicine has changed, but Medicare had not,” George Bush, 12/8/03

Cost distribution of care (Working Americans) 1% of people % of Healthcare Expenditures 100% 80% % of Costs 30% total cost 60% 40% 20% 10% total cost 0% total cost 0% % of People 0% 20% 40% 60% 80% 100%  % of Membership 70% of people 20% of people

Controlling health care spending Expenditures = the product of 3 variables {Input prices} X {Input quantity / output quantity} X {Output Quantity} = Expenditures or Spending Source: Victor Fuchs “Who Shall Live”

Medication errors – Archives of Internal Medicine,Feb 9, 2004 Elderly U.S. patients are prescribed improper medications in about one out of every 12 physician visits, according to a CDC study published in the Archives of Internal Medicine. The study… found that elderly patients were prescribed improper medications about 8% of the time, or in an estimated 16.7 million physician visits. According to the study, physicians were more likely to prescribe improper medications when they prescribed more than one treatment.

The nation’s health dollar,CY 2000 Hospital and physician spending accounts for more than half of all health spending. Total Health Spending = $1.3 Trillion Note: Other spending includes dentist services, other professional services, home health, durable medical products, over-the-counter medicines and sundries, public health, research and construction. Source: CMS, Office of the Actuary, National Health Statistics Group.

Pharmaceutical industry basics • A single successful drug can earn more than $5 billion in a year, and make or break the company. • On average, the time from discovery to successful market introduction is more than 10 years, at a total cost of $800 million.

Among the largest & most profitable in the U.S. • Pfizer(5), Johnson & Johnson(8), and Merk(11) ranked in the top 11 ranked by 2002 market value; another seven appear in the top 44. • Return on equity of top 8: • GE 25.0% • Microsoft 15.5% • Exxon Mobil 20.9% • Wal-Mart 19% • Pfizer 42.6% • Citigroup 17.4% • Intel 3.6% • Johnson & Johnson 23.4% • Fortune 500 median 10.4%

New drugs cost more than old drugs Halvorson and Isham, Epidemic of Care: A Call for Safer, Better, and More Accountable Health Care, Jossey-Bass: 2003

April 2002 WSJ – Pharmaceuticals took a beating in 2002. Lower earnings in most industries, more generic rivals, pressure from MCOs and state governments, fewer blockbusters to replace expired patents.

Health Care Errors – Not a New Problem “…Serious and widespread quality problems exist throughout American medicine. These problems….occur in small and large communities alike, in all parts of the country, and with approximately equal frequency in managed care and fee-for-service systems of care. Very large numbers of Americans are harmed as a direct result….” IOM National Roundtable on Health Care Quality, 1998

Studies of Quality and Safety • More than 70 studies document poor quality of care (Schuster et al, 1998; 2000) • More than 30 studies document medication errors (IOM, 2000) • Large gaps between the care people should receive and the care they do receive • true for preventive, acute and chronic • across all health care settings • all age groups and geographic areas

Quality of Health Care Delivered to Adults in the US – 2003 RAND Study • Methods • Study of >6700 participants in 12 metropolitan areas • 439 indicators of quality for 30 conditions • Selected Findings: • 46% did not receive recommended care • 11% received potentially harmful care • Only 24% of diabetics received 3 or more glycosylated Hgb tests over two-year period • 65% of hypertensives receive recommended care • Only 45% of persons with MI receive beta-blockers McGlynn et al, N Engl J Med 2003; 348:2635-45

Studies of Errors AmongHospitalized Patients • New York State (1984 data) • 3.7% experience injury due to medical care • 13.6% of injuries are fatal • 58% of injuries are preventable • Colorado and Utah (1992 data) • 2.9% experience injury due to medical care • 6.6% of injuries are fatal • 53% of injuries are preventable

Studies of Errors Among Hospitalized Patients • Australia (1992 data) • 16.6% experience injury or longer stay due to medical care • 4.9% of injuries are fatal • 51% of injuries are preventable

Health Care Benefits & Compensation Management