University administrators are working to respond to the issues raised by spiraling costs of healthcare nationwide.

In a letter to the University community that ran in Almanac two weeks ago, President Judith Rodin mentioned that the University was looking at an increase of 13 percent in benefit costs. That increase is right in line with the national average, according to Professor Mark Pauly, chairman and director of the Health Care Systems Department. “Last year it was 8 percent,” he said of health insurance increases across the nation. Pauly, the Bendheim Professor and a professor of health care systems, business and public policy, insurance and risk management, and economics, said that this year the rate of increase nationwide is around 12 percent.

We asked Pauly, a national expert in the field, what’s behind the increases.

Three factors

Pauly attributed the spike this year to three factors:

The first, and the main driving force behind the hike, was prescription drug spending, which, he said, was close to 20 percent higher than the year before.

The second is that insurer profit margins have been increasing.

And the third is that hospitals, having offset rising costs for the past few years by monitoring doctor spending and hospital care, were passing along the full rate of increase in their costs this year.

“Hospitals have finally proved they weren’t getting enough money by going broke,” said Pauly, so now the rate of growth in hospital costs is much closer to average than they were.

On the bright side, the increase in prescription drug spending is for new, better drugs. “The drug companies are not charging more for the same drugs,” Pauly said. “Scientists have come up with some new products that some people think are better than the old ones.” And those new products are expensive. But people are demanding the new, improved drugs rather than the less expensive Advil for their osteoarthritis, he said.

There’s also the question of quantity. “A lot more people have been prescribed drugs for cholesterol,” Pauly said.

La Niña of insurance

The second issue, higher premiums to increase insurer profit margins, is a reaction to the late ’90s, when “almost all of them were losing money,” Pauly said. Now some of them are making a profit. There’s a cycle of cutting premiums, losing money and then raising premiums. Right now, we’re in the raising-premiums part of the underwriting cycle, “La Niña of insurance,” Pauly said. “Or is it El Niño? Which one’s worse?”

HMOs and other outside insurers have been hit most heavily by this cycle because they bear the risk. But Blue Cross and PennCare, which are self-insured by Penn, are not outside insurers and are therefore somewhat protected from the cycle. The costs of these two plans reflect the costs of servicing only Penn employees.

But, Pauly said, some of the fluctuations in health care costs will be self-correcting. He predicted that the underwriting cycle was probably near its end. And the rate of drug growth is slowing down. “One of the reasons it’s slowing down is a number of expensive, commonly used drugs are going off patent soon,” Pauly said. For example, generic versions of anti-cholesterol drugs will cost less.

One response to increased costs has been an increase in the size of copays, particularly for drugs, Pauly said. Nationwide, there’s a trend toward a triple tier copay. The brand name product that’s not on the insurer’s list of preferred drugs has the largest copay, perhaps. The brand-name product that is on the preferred list would require a smaller copay. And generic products would cost even less.

Penn, he said, can’t do much to change the situation. New technology provides benefits, but they come with a price. “Most people are unwilling to forgo the best and the latest.”