Originally created 12/31/01

Rising health care costs encourage innovation

Rebecca Martin agreed to be a guinea pig to save her business $48,000 a year in health insurance costs.

Co-owner of A&I Travel Services Inc. in Memphis, Tenn., she opted for a new health care plan for her and 25 workers because the one she had been using was raising rates 18 percent.

"There was huge savings so I figured it was worth it," said Ms. Martin.

The new Web-based plan has only been in effect for a month, so neither she nor her employees are ready to pass judgment. But they were ready for a change, as are a growing number of company owners and workers hit by a third straight year of premium hikes in 2001. Yet more increases are expected in 2002.

According to the Segal Company, premiums for a health maintenance organization with a prescription drug plan jumped 14.1 percent in 2001 this year and will increase 12.8 percent in the next year.

Premiums for less restrictive preferred provider organizations increased 10.4 percent this year and are anticipated to advance 14 percent in 2002.

The consistent surge in premiums has forced employers to shift premium costs to employees while also requiring them to pay more for drugs, doctors and hospitals.

"I think we have entered an era where consumers will have more choices and options but they also will be doing more cost sharing going forward," said Michael McCallister, president and chief executive officer of Humana Inc., a Louisville, Ky. based insurer.

Humana has launched several pilot programs, including the one now used by Rebecca Martin's travel services company.

Called Emphesys, it attempts to cut costs by eliminating paper and processing all information on the web. The plan also tiers prices for drugs, doctors and hospitals. Specialists are more than primary care doctors and in-network hospitals are less expensive than those outside the plan.

Humana also is launching a "consumer-driven" plan that sets a fixed amount for health care spending by a participant. After that is used up, a more traditional form of coverage with a deductible kicks in. The amount of the fund and of the deductible are scaled according to the size of the premium.

The most dramatic increase in health care costs has been in pharmaceutical expenses, which rose 15.2 percent this year and are projected to rise 19.4 percent next year, according to Segal. The jump stems mostly from increased use of drugs, rather than price hikes.

Still, outrage over drug prices reached a crescendo this year with consumer groups filing class action suits against drug companies over the cost of medicines.

Most of the suits allege big pharmaceutical firms with patented drugs are colluding with competitors who produce cheaper generics to hold generics off the market.

"The costs of drugs just keeps going up and million of people can't afford the expense," said Kim Schellenberger, director of the Boston-based Prescription Access Litigation Project, a coalition of 65 consumer groups in 30 states.

Her group has filed lawsuits over six drugs. The Federal Trade Commission and attorneys general in 15 states have filed similar lawsuits.

In some instances, however, big drug companies and the generic firms are in court over patent rights.

Drug companies have been adding new patents on drugs to extend their monopolies and prevent generic competition, prompting several lawsuits that now are now reaching or approaching trial.

A suit pitting AstraZeneca PLC against four generic manufacturers reached trial in December. The generics are challenging late-listed patents on Prilosec, an ulcer medication that was the world's best selling drug last year.

"The patents give the drug companies a monopoly and that's why people hate the industry," said Uwe Reinhardt, a professor of economics and public affairs at Princeton University.

"This is an industry that contributes such value to our society. Still, people don't like them," he said.

The industry has long maintained patents are necessary to recoup development costs, so more life saving medicines can be discovered. But the industry's high profits infuriate activists who say the companies abuse their monopolies.

The pharmaceutical industry's average pre-tax profit margin of 19.1 percent is second only to the electronics industry's 19.2 percent, according to Media General Financial Services.

Drug companies have reacted to mounting pressure.

Earlier this year, Merck & Co, Bristol-Myers Squibb, Abbott Laboratories and GlaxoSmithKline all lowered the prices of their AIDS medicines in Africa.

GlaxoSmithKline and Novartis launched programs to discount medicines for senior citizens who can't afford them. Other companies are expected to follow suit, because Congress is expected to try to enact a Medicare drug benefit which would likely require discounts from the pharmaceutical industry.


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