IHP 620 Module 3 Milestone One Example

Milestone One: Why Granite Peak's Employee Health Plan Costs Keep Rising

[Student Name]

Southern New Hampshire University

IHP 620: Economic Principles of Healthcare

Module Three Milestone One

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Milestone One: Why Granite Peak's Employee Health Plan Costs Keep Rising

The final project for IHP 620 is an economic analysis of a decision facing a health care organization. For Granite Peak Health, that decision is how to respond to the steady growth of its self-insured employee health plan. This milestone describes the plan, breaks down why costs are rising, explains who ultimately pays and frames the problem so later milestones can compare responses.

The Plan

Granite Peak self-insures, meaning it pays employees' claims directly rather than buying insurance, and uses a third-party administrator. The plan covers about 9,800 employees and 11,200 dependents. Employees pay premiums averaging 18% of the total cost and face a $500 deductible. Care delivered inside Granite Peak's own facilities is paid at internal rates; care outside the system, about 38% of spending, is paid at rates negotiated by the administrator's network.

The Trend

Total plan cost rose from about $104 million four years ago to $142 million last year, an average annual increase of about 8%, compared with about 3% growth in Granite Peak's operating revenue. If the trend continues, plan costs will reach roughly $193 million in four years, consuming funds the system needs for wages and capital.

Breaking Down the Growth

Cost growth can come from higher prices per service, more services per person, a costlier mix of services or more people covered. An analysis of four years of claims shows that about half of the growth came from higher prices, mostly at outside hospitals and imaging centers; about a quarter from specialty drugs, especially for autoimmune conditions and cancer; about 15% from increased use per member; and about 10% from enrollment growth.

Table 1. Sources of Plan Cost Growth Over Four Years

Note. Composite analysis of plan claims data.

Why Prices Matter So Much

Cooper et al. (2019) analyzed claims from large commercial insurers and found that hospital prices for the privately insured vary enormously across and within regions, and that this price variation, rather than differences in the quantity of care, explains much of the variation in spending per privately insured person. Hospitals with market power charged substantially higher prices. Granite Peak's outside spending is concentrated at two hospitals in a neighboring city that face little local competition, and their prices for the same procedures run 40% to 90% above Granite Peak's internal rates.

The Specialty Drug Component

Specialty drugs account for only about 2% of prescriptions filled under the plan but about 41% of pharmacy spending, and their cost grew about 14% a year over the period. Most of the increase came from biologic drugs for rheumatoid arthritis, psoriasis and Crohn's disease, along with oral cancer drugs. Prices for these products are set by manufacturers with patent protection, and the plan has few tools beyond formulary placement and the rebates its pharmacy benefit manager negotiates. Biosimilar versions of several biologics have entered the market, but uptake in the plan has been slow because prescribers and patients are unfamiliar with them and rebate arrangements sometimes favor the original brand.

The Role of Supply

The 15% of growth from increased use is concentrated in imaging and outpatient procedures. Fisher et al. (2003) found that across U.S. regions, higher spending largely reflected more discretionary, supply-sensitive care, such as specialist visits and imaging, without better outcomes. Two new outside imaging centers opened near Granite Peak's largest campus during the period, and imaging use per member rose 19%.

Who Really Pays

It is tempting to see plan costs as the employer's problem. Baicker and Chandra (2006) examined how rising health insurance premiums affect workers and found that premium increases were largely passed on to employees through lower wage growth, with a 10% rise in premiums associated with roughly a 2.3% reduction in wages, and that rising premiums also shifted some workers toward part-time jobs without coverage. For Granite Peak, every dollar of plan growth is, over time, a dollar less for raises, which matters in a tight labor market for nurses and technicians.

Equity Within the Plan

Employees pay the same premium share regardless of wage, so the 18% contribution consumes a far larger portion of income for a food service worker earning $34,000 than for a physician. Claims data also show that lower-wage employees and their dependents use more emergency care and less primary care, suggesting access barriers. Any response to rising costs should be judged partly by how it affects these employees.

What the Problem Is Not

The decomposition shows that the problem is not mainly employees using too much care; utilization explains only about 15% of growth. Responses aimed only at discouraging use, such as a high deductible, would address a minor driver while shifting costs to employees. Prices at outside facilities and specialty drugs deserve more attention.

Problem Statement

Granite Peak's employee health plan costs are rising about 8% a year, more than twice as fast as revenue, driven mainly by high prices at outside facilities and specialty drug costs, with a smaller contribution from supply-sensitive utilization. Because premium growth ultimately reduces wages, the trend threatens both the system's finances and its ability to pay and retain staff.

Scope

The analysis will consider benefit design, network and pricing strategies and care management for the employee plan. It will not address Granite Peak's contracts with outside insurers for its patients, retiree benefits or pharmacy rebate negotiations handled by the pharmacy benefit manager, although it will note where those interact with the plan.

Questions for the Next Milestones

Which benefit designs could slow cost growth without harming employees' health or shifting costs to the lowest paid? Could steering care to Granite Peak's own facilities or to high-value outside providers address prices? What role might value-based insurance design and cost-effectiveness analysis play? And how could payment arrangements with outside providers share risk?

Conclusion

Granite Peak's rising plan costs are mainly a price and drug problem, not a problem of employees overusing care. Framed economically, the issue involves market power, supply-sensitive services and the fact that employees ultimately pay through their wages, and those features should shape the options the system considers.

References

Baicker, K., & Chandra, A. (2006). The labor market effects of rising health insurance premiums. Journal of Labor Economics, 24(3), 609-634. https://doi.org/10.1086/505049

Cooper, Z., Craig, S. V., Gaynor, M., & Van Reenen, J. (2019). The price ain't right? Hospital prices and health spending on the privately insured. The Quarterly Journal of Economics, 134(1), 51-107. https://doi.org/10.1093/qje/qjy020

Fisher, E. S., Wennberg, D. E., Stukel, T. A., Gottlieb, D. J., Lucas, F. L., & Pinder, É. L. (2003). The implications of regional variations in Medicare spending. Part 1: The content, quality, and accessibility of care. Annals of Internal Medicine, 138(4), 273-287. https://doi.org/10.7326/0003-4819-138-4-200302180-00006