News & Events

Pay may be hot issue, but other factors push harder on health costs

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By Megan Woolhouse
Globe Staff / March 13, 2011

Blue Cross Blue Shield of Massachusetts has captured the public’s attention, although not the way it would have liked, as reports of millions paid to the insurer’s former chief executive and hefty stipends paid to board members sparked outrage.

The outcry grew big enough to force Blue Cross board members to vote to suspend their own payments and to lead the insurer to make promises to curb excessive payouts to executives. There’s just one problem: Those steps will do little to fix soaring health care costs.

“I have the same outrage,’’ Stuart H. Altman, a national health policy professor at Brandeis University, said about Blue Cross’s payments. But, “We need to put executive pay and board salaries in perspective. It is not the major force, or even close to the major force, in driving up health care costs.’’

US health care spending hit $2.5 trillion in 2009, increasing by about $600 billion from 2004, according to the Centers for Medicare and Medicaid Services. Nearly two-thirds of the increase was driven by rising costs in three areas: hospitals, which accounted for 33 percent of the increase; doctors, which accounted for 19 percent; and prescription drugs, which accounted for 10 percent.

Administrative costs, which would include payments to board members, accounted for about 5 percent of overall health care cost increases. Altman said Massachusetts health insurers spend about 10 percent on administrative costs, lower than the national average, which is typically 15 to 20 percent.

In a report last year, Attorney General Martha Coakley concluded that price increases by providers accounted for 90 percent of the growth in Massachusetts health care costs between 2006 and 2009. The report also found that prices varied widely, but the highest prices were charged by the biggest providers with market power to push insurers to pay more. Insurers, in turn, passed at least some of the those costs to consumers.

Health care costs are growing much faster than the economy and wages, the report warned.

“Such increases, if unchecked,’’ the report said, “threaten the financial stability of individuals and businesses, and the future viability of our gains in health care access.’’

Under the state’s universal health care law, about 98 percent of Massachusetts residents have insurance. Blue Cross is the state’s largest insurer, insuring more than 3 million residents.

Health care providers and insurers have long clashed over who was responsible for rising health care costs, leaving Massachusetts employers to deal with double-digit premium increases. Many firms criticized Blue Cross and other insurers for the relentless increases that crimp hiring by raising the costs of adding workers.

But it is the compensation issue that has provoked populist anger, as workers struggle with stagnant wages and rising health insurance costs.

Blue Cross chief executive Andrew Dreyfus said consumers, in many ways, have a right to be mad.

“I recognize that the public was angry, outraged in some ways, over the size of my predecessor’s severance and retirement package. I get it,’’ Dreyfus said in an interview with Globe reporters and editors. “I get why people are so outraged, and I want a new beginning and a new era.’’

Yet Dreyfus said he is concerned that the focus on executive and director pay will distract insurers, providers, and policy makers from addressing factors driving health care costs higher. Those factors range from an aging population to increases in obesity to expensive tests, drugs, and treatments that cure diseases and prolong lives.

“If you had a dozen health economists sitting in this room and you asked them what’s driving health care [costs], you know executive and board compensation wouldn’t be at the top of the list,’’ he said. “It would be chronic illness and prices of hospitals and doctors and medical advances and discoveries and technology.’’

Blue Cross and other insurers are adopting new payment systems aimed at controlling costs by putting providers on a budget, and giving them incentives to keep patients healthy. Last January, Dreyfus wrote a letter to hospitals and health care providers asking them to participate in a pilot program of this system, known as “global payment.’’

Alan Sager, director of the Health Reform Program at Boston University’s School of Public Health, said politicians and the public have often found a villain on which to blame rising costs, ultimately avoiding tougher measures to keep costs down, such as putting greater emphasis on primary and preventive care.

Sager said similar public outrage was directed at drug companies, beginning in the mid-1990s. The anger was legitimate — the cost of drugs doubled every five years between 1994 and 2004 — but it abated as cheaper generic drugs became more available, he said. But overall health care costs continued to rise rapidly.

So far, he said, reforms have failed to address, or only chipped away at, root causes of runaway costs. “We don’t solve any one problem, we just move onto new ones,’’ Sager said. “That’s one of the reasons health care is such a mess.’’

Megan Woolhouse can be reached at
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