Beyond the Myths: Finding Benefit Design Solutions That Address the True Costs of High Healthcare Use

Published Online: July 01, 2008
Vincent J. Willey, PharmD; Frank Kopenski, ASA, MAAA; and Grant D. Lawless, MD, RPh

Chronic and severe health problems place an enormous financial burden on individuals, employers, and health plan providers, requiring all to make tough decisions about healthcare. Specialty pharmaceuticals are increasingly attractive treatment options, but employers need tangible ways to incorporate these medications into benefit plans. Benefit managers can take a proactive role in addressing cost and compliance issues, using evidence-based data about true patient costs to develop policies that encourage employees to seek appropriate care. Achieving savings in direct and indirect costs will require more than shifting coverage, which can lead to nonadherence and increase costs elsewhere.

(Am J Manag Care. 2008;14:S252-S263)

Chronic and severe health problems are important concerns for younger and older insured individuals. The financial burden on health plan providers and healthcare users may force them to make difficult decisions. Decisions about premium amounts and out-of-pocket (OOP) limits can have serious effects on the bottom line for employers and their employees. More importantly, benefit plan structure can influence when and whether employees seek treatment and their adherence to therapeutic recommendations. Not far down the line, these choices can affect employment status, productivity, and the quality of life during a person’s most fruitful years.

Specialty medications exist for diseases such as cancer, rheumatoid arthritis (RA), and multiple sclerosis (MS) that have the potential to modify or stop the course of disease, but these drugs are expensive and have no generic alternatives. They have become the focus of many discussions about cost sharing. The dearth of studies on cost sharing for patients who need specialty pharmacy medications means that these discussions often occur in a vacuum.

In today’s healthcare environment, costs continue to rise faster than the average person’s income. Some employers mistakenly believe that simply increasing the level of cost sharing between the company and its employees can help control costs because it promotes personal responsibility through exposing employees fairly to the true costs of healthcare.

Is this really the case? At what point does cost sharing become a barrier to appropriate care? What about so-called “high utilizers”—those individuals in the system who have severe, multiple, or chronic illnesses, are still working, and consume ≥$10,000 per year in healthcare resources? Finding solutions to the challenges health plan designers must tackle requires careful analyses of multiple factors affecting employers and employees. These include clinical outcomes, quality-of-life issues, and economic costs and benefits. Temporary solutions that focus only on shifting costs to patients may backfire.

We looked at complementary use, copayment, design, and OOP data from employers and managed care providers. The first half of this article considers costs associated with the treatment of severely ill employees; the second half examines how healthcare benefit changes can affect these individuals. The article also explores recent research to provide employers with concrete data on the realities of today’s healthcare expenditures and offers new insights into benefit design solutions that can protect employers and employees, now and in the future.

Costs of Treatment for Severely Ill Employees
In 2006, the Kaiser Family Foundation found that a small percentage of the population accumulates the majority of healthcare costs.1 Overall healthcare costs for patients who have chronic illnesses such as diabetes, asthma, and heart disease are higher than costs for those in the general population without chronic conditions.2-5 When severely ill individuals experience financial problems related to their medical bills, they are 4 to 5 times more likely to delay—or altogether avoid—medical care, compared with individuals who can afford their healthcare.6

Research Conducted to Help Employers
To date, there has been little practical research regarding the expense of high healthcare utilizers or, more importantly, the effects of benefit design on overall health status. To help employers understand costs more completely, Willey et al carried out an intensive research project that involved examining the overall profile of commercially insured individuals with chronic and severe illnesses and the costs associated with their healthcare.7 Using administrative claims data, the study analyzed the total economic burden—including medical spending by the plan and by the patient— across 3 study groups, beginning with the date of an individual’s first enrollment in the health plan to the date of initial disenrollment. The objective of the analysis was to consider the effects of policy changes related to OOP healthcare spending—particularly specialty pharmacy costs—on employees with severe and chronic conditions and on their employers.

Researchers defined severely ill employees as those with 2 or more of the following diagnoses: cancers of the breast, lung, or gastrointestinal tract; non-Hodgkin’s lymphoma; chronic kidney disease (CKD); RA; MS; or hepatitis C. They defined chronically ill employees as those having reported 2 or more diagnoses of at least 1 of the following conditions: diabetes mellitus, coronary heart disease, chronic obstructive pulmonary disease, cerebrovascular accident, or asthma.

Healthcare Spending for the Severely Ill. While the severely ill constituted a small percentage of the study population (0.8%), their cumulative health plan spending was almost 10-fold higher than that of general plan participants. Payments for medical services accounted for most of the healthcare costs (75%) of the severely ill, and their hospitalization costs were about double their pharmacy costs. The severely ill constituted a unique cohort in this study because more than half of their pharmacy expenses were covered under the medical benefit. This was a net positive for the patient; OOP spending for medications would have been 5 times greater if they had been expensed under the pharmacy benefit. Close to 70% of the study’s severely ill patients were primary beneficiaries of the policy and remained active employees some or all of the time. Severely ill employees tended to be older than those employees who were chronically ill or in the general population, and the aforementioned oncology diagnoses (cancers of the breast, lung, and gastrointestinal tract; and non-Hodgkin’s lymphoma) accounted for about half of the conditions identified in this cohort. The researchers found that diabetes mellitus was the most common chronic disease diagnosis (Table 1).



Table 2 details health plan and patient costs by study group for medical services rendered, and it allocates costs for hospitalization, ambulatory, and pharmacy expenditures. Pharmacy expenses are categorized according to whether they were paid under the medical benefit or the pharmacy benefit. Table 2 shows that medical costs become progressively higher than pharmacy costs in absolute and relative dollars when moving from Group D of the plan population to Group A (the severely ill cohort). The mean value for total annualized costs in the severely ill cohort ($29,273) is more than 3 times higher than that observed in the chronic disease group (Group B; $8225) and 9 times higher than that in the overall plan population (Group C; $3075). Current trends demonstrate that severely ill patients incur greater annualized costs, reflected in their accelerating OOP obligations. The growing burden on patients to meet OOP requirements could quickly become overwhelming, leading to catastrophe when they cannot meet OOP obligations. Increasing OOP expenses for the small number of very sick individuals would not necessarily curb their use of healthcare resources or treatment behavior; most have few or no discretionary healthcare choices (eg, they do or do not need chemotherapy).



The threshold for annualized health plan medical and pharmacy costs in the top 10% of the severely ill population is $5968. For those responsible for the top 2.5% of plan spending, the threshold is $16,031. Medical costs are 3 to 5 times greater than pharmacy costs for all groups, and hospitalization costs represent 50% of expenditures categorized under medical services. Figure 1 shows that medical costs are much higher than pharmacy costs across the board, including inpatient, office, and retail pharmacy costs.



Comorbid Conditions. Figure 2 illustrates that as patients’ medical conditions overlap, medical costs exceed pharmacy costs and the gap between the two widens in correlation to the number of concomitant medical conditions. Cumulative healthcare costs go from an average of $21,491 per patient with 1 severe condition to $64,237 per patient with ≥4 severe conditions; corresponding pharmacy costs are $5781 per patient with 1 condition to $10,589 per patient with ≥4, reflecting greater acceleration in medical costs versus pharmacy costs. The absolute cost for medical services for patients who have multiple severe conditions can be 4 to 7 times greater than for patients with 1 condition. Severely ill employees may incur additional expenses, such as disability or salary, while absent.



Biologic Medications. Although costs for biologic medications and pharmacy medications overall are significant, they are not the primary cost drivers for severely ill individuals. Biologics represent 6.6% of costs paid by the health plan for all patients—less than one third of overall pharmacy costs. Less than half of patients in the top 2.5% spending bracket used biologic medications. Severely ill individuals spend an average of $2000 OOP annually on medications, which is ~4 times as much as general health plan participants spend; the top 2.5% of severely ill healthcare users spend about double that amount (Table 3).

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