Patients’ Rights and Health-Care Costs Are Expanding Together

What effect will the patients’ bill of rights, moving toward becoming law this fall, have on patients’ pocketbooks, medical costs in general and the vast health-care industry?

It will raise costs of health insurance and employer health plans--and ultimately force individual employees to directly pay more of the cost of their health insurance and medical care.

That’s the reality, say economists, physicians, investment analysts, hospital administrators and executives of health-care companies.

The patients’ bill of rights, ensuring patients the right to sue health maintenance organizations and to choose treatment by specialists, arrives at a time medical costs are rising sharply again.

Expenditures on doctors, hospitals, prescription drugs and health insurance are going up 8.6% this year, according to federal government estimates. By many private estimates, costs are going up by as much as 15% a year, particularly for drugs.

The right to sue HMOs for bad decisions on care means medical insurance companies will face liabilities for malpractice similar to those doctors and hospitals always have faced.

It will “add 5% to 10% to health insurance premiums, or $350 to $700 a year to the average health plan,” says Kenneth Abramowitz, health industry analyst at Carlyle Group, a private equity investment firm in New York.

Employers may well pass those costs along to employees in the form of higher co-payments for insurance, says Mark Hyde, chief executive of Lifeguard Co., a not-for-profit health maintenance organization based in San Jose. “That could be good news,” Hyde adds. “Perhaps by legislative change, we are moving toward a model in which consumers take more direct interest in the costs of their health care.”

Beyond the political rhetoric, the real story in the patients’ rights legislation is that it marks another stage in the evolution of medicine in America, a tremendously complex arrangement of treatments and remedies on which $1.4 trillion will be spent this year, 13.4% of all the goods and services in the U.S. economy.

Medicine is a growing industry. Within five years, the government estimates, medical expenditures will total 15% of the gross domestic product, and by 2010, $1 in every $6 spent in America will be for health care.

It is a changing business. As public opinion, and government regulation, of health care has shifted in recent years, some HMO and hospital companies have gained the favor of Wall Street.

Two such firms are United Health Group, a company with $21 billion in revenue based in Minnetonka, Minn., and WellPoint Health Networks, a firm with $9.2 billion in revenue based in Thousand Oaks. Both are able to pay hospitals and physician groups lower fees because they deliver big numbers of client patients. Both companies have built an infrastructure of information systems that allows them to offer a wide variety of health plans and services. Both earn high returns on investment.

Some other firms are trying to recover from difficulties. PacifiCare Health Systems Inc., a Santa Ana company with $11.5 billion in revenue, is in a “two-year turnaround process,” says Chief Executive Howard Phanstiel. PacifiCare is reducing its dependence on Medicare clients and moving away from so-called capitation contracts, in which it accepted lump sum payments to cover the medical needs of groups of patients.

In the case of capitation contracts, medical costs rose faster than PacifiCare had anticipated. In the case of Medicare, the government decided four years ago to limit how much it would reimburse health insurers for rising medical costs. The costs kept rising, but government payments didn’t, so PacifiCare’s profit shrank.

But why do costs rise? With all the efficiencies that were supposed to have been introduced to medicine in recent years, one would think costs would be going down. There are many reasons they have not.

In some cases, rising costs could represent money well spent. Experts cite the costs of new drugs and the increased use of drug treatments for illnesses as big reasons for higher overall medical costs.

Also, improved diagnostic techniques can alert individuals to incipient illnesses. That has led to greater use of procedures such as angioplasty to forestall heart blockages.

Both the drugs and the early diagnoses represent long-term savings in medicine--a drug treatment rather than invasive surgery, for example, or angioplasty rather than a heart attack and consequent lengthy treatments.

In hospitals, some of the efficiencies envisioned years ago have failed to materialize. Patients in hospitals today tend to be older and sicker.

“That means more nurses are needed, but there is a shortage of nurses in California,” says Blair Contratto, chief executive of Little Company of Mary Hospital in Torrance. So nurses must be hired from agencies on a more expensive per diem basis.

Physicians’ costs are going up, although doctors are not getting rich by any means, says Dr. Schumarry Chao, a clinical professor at USC and a consultant to MedImpact Health Services, a San Diego prescription benefits firm. “Doctors’ office expenses are rising and they can’t pass along those costs to HMOs or to government,” Chao says.

So after more than two decades of reform of U.S. medicine, a tug of war continues over how much will be spent on medical care and who will foot the bill.

What does the future look like?

We will see more individual choice in medical insurance plans, says professor Bradford Kirkman-Leff of Arizona State University. He cites Arizona’s practice of health coverage for state employees. “For a generic drug on the state’s formulary list, you have to make a $10 co-payment, but if you want the specific prescription drug it’s a $20 co-payment. And if you want a drug that is not on the state’s formulary the co--payment is $40.”

Analyst Abramowitz, who has covered the health-care field for decades, sees employers offering health insurance as they now offer 401(k) plans for retirement saving. “The annual cost of covering a family of four is about $7,000,” he says. In the future, employers will allow workers to choose how to spend that health insurance money.

“The employer will help employees make intelligent choices by offering plans from reputable insurers, with different prices and formulas. But the employee will decide how to buy their health coverage--including a premium for the right to sue if they want it,” Abramowitz says.

Thus the U.S. medical system evolves. In the old days, patients expected to be taken care of. Now they must take care.

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James Flanigan can be reached at jim.flanigan@latimes.com.

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Medical Bills

Medical costs are rising sharply again, after a brief period in the mid-1990s when managed-care plans reduced reimbursements to doctors and hospitals and the federal government cut back funding for Medicare. Medical-cost inflation is expected to continue rising for several years.

Annual rise in expenditures by employers and employees for medical coverage, including dentistry and prescription drugs.

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2000: 6.6%

Source: William M. Mercer Inc./Foster Higgins Health Care Survey--2001