The medical bill grows

Why Boeing is facing another year of ballooning health care expenditures

BY JUNU KIM

Consider a business program that had a line item whose cost had shown double-digit-percentage growth for three straight years. You'd think it was time to take a good look at why this cost was rising and what could be done to slow the growth. That condition reflects the current state of Boeing's health care expenditures, which are expected to reach $1.9 billion this year.

Boeing expects health care costs to jump about 15 percent in 2004 and possibly again in 2005, despite the company's programs to help mitigate this trend. This continued rise is affecting the health of the business. While health care coverage is seen as a key benefit offered to Boeing people, the increase in this expense is affecting the ability of the company to invest in its future.

"Health care costs are high and rising, which should be a concern to all of us—as individuals and as a company," said Boeing Chief Financial Officer Mike Sears. "To run a healthy business, we must provide quality medical benefits for our employees and control health care costs."

It's true that Boeing is not alone among companies grappling with growing health care costs in the United States. These costs are rising much faster than the Consumer Price Index for many reasons. Among the more notable ones:

• Rapid introduction of new technologies and prescription drugs. According to the Tufts Center for the Study of Drug Development, the average cost in 2000 to develop a new prescription drug was $802 million. If drug development costs had increased at the pace of inflation, the average cost would have risen from $231 million in 1987 dollars to $318 million in 2000 dollars. Although new technologies can help people live longer, they come at a cost. Health care economists note that the combination of doing more procedures (like bypass surgeries) and using new technologies (such as vascular stents) also is causing medical expenditures to rise.

• An aging population. With the oldest baby boomers now 57 years old, there will be a boost in the number of people who are entering a stage in life that generally has more health care needs. According to U.S. Census Bureau projections, the number of Americans age 55 and over has grown from 57.1 million in 1998 to 61.4 million in 2002.

• A rising incidence of chronic conditions. According to a recent study appearing in the Journal of the American Medical Association, the percentage of U.S. adults with diabetes grew from 5 percent in 1989 to 7 percent in 1999. Research from the American Diabetes Association found that the per-person medical expenditures in 2002 totaled $13,243 for people with diabetes and $2,560 for people without diabetes.

• Medical mistakes. A study released last month determined that a group of 18 medical injuries occurring during hospitalization may account for 2.4 million extra hospital days and $9.3 billion in excess charges in the United States annually. According to the study, conducted by the U.S. Agency for Healthcare Research and Quality and Johns Hopkins University, infections and the reopening of wounds are the costliest complications both in terms of the risk of death and money.

• A nursing shortage. Exacerbating both the cost and medical errors issues is a shortage of nurses. According to a study released by the Joint Commission on Accreditation of Healthcare Organizations in August 2002, there are 126,000 nursing positions unfilled in hospitals nationwide. Several studies have drawn a connection between the nursing shortage and patient care.

Because of these trends, Boeing faces the challenge of providing a competitive benefits package that includes high-quality, effective health care coverage, while managing health care costs. Among many initiatives, Boeing is leveraging the company's size and resources to lower the rate of increase over time through a variety of supplier management, quality and wellness/prevention initiatives. However, these efforts alone will not be enough to slow down the growth of health care costs to a manageable level. Indeed, the company has said that Boeing people must share in the medical costs, as well as help manage future costs by carefully considering their medical plan, doctor and hospital choices.

"The company provides medical benefits for those times when our employees and their families need it," said Michael Valliere, vice president, Compensation & Benefits. "They can have a significant impact in controlling these shared costs by becoming better informed health care consumers who carefully consider their medical plan, doctor and hospital choices. As direct consumers, our employees also will share a small portion of the premium costs at competitive levels."

Boeing is providing new Web-based decision support tools for wellness and quality "scorecard" data on doctors and hospitals (see Page 36 of the October 2003 issue of Boeing Frontiers). These moves are all part of maintaining a healthy business—with healthy people—that will be viable in both the short- and long-term future.

junu.kim@boeing.com