With recent health care reform, why are health insurance rates still increasing?
Last December, Regence Blue Shield, Washington’s largest Insurer, announced an average rate increase on their individual health insurance plans of just over 16%. I have had many clients ask if they are just padding their “profit”. However, as I pointed out in a previous article, here in Washington, Regence Blue Shield, Premera Blue Cross, and Group Health are all Non-Profit by Washington State Law.
So, what’s driving the increases?
Simply put, health care premiums are mostly driven by health care costs. So the problem is not only insurance company profits, as some allege, but rather those costs which insurance companies negotiate and pay to doctors and other care providers. Here in Washington State, there aren’t even profits to cut!
So, at least here in Washington the best way to cut the cost of premiums is to cut the underlying cost of medical care. However, right now there is very little actually being done by anyone, including the recently passed health care legislation, to actually do that.
Cost and utilization
There is a direct link between utilization of health care, and increases in your insurance premiums.
Health care costs are comprised of a couple of things. One is unit costs. What does it cost for an X-ray? What does it cost for a doctor office visit? What does it cost for a prescription? Those all increase. The other component of it is utilization. How often does a member get a prescription filled? How often do they go to the doctor?
Especially in this challenging economic environment, people are worried about losing their employer sponsored health care, or not being able to afford the premiums themselves.
Thus, the past two years have seen a huge increase in utilization of care and preventative health, as people prepare for the possibility of not having it at some point.
Unfortunately, the cost of medical care has been increasing faster than almost any other part of the economy. Doctors and other care providers it seems, are not feeling the pinch of a slowing economy. And, consumers here in Washington are paying that price.
Insurance Company Costs
Insurance companies need to balance the amount they bring in each month in premiums, versus the amount they pay out to doctors, hospitals and other medical care providers in claims. When they pay out more than they collect in premiums, you can guess what is going to happen to your insurance rates.
In addition, insurance company administrative costs are still too high. Premera Blue Cross for example, points to their 10% administrative costs as being appropriate (That figure meets the new Insurance Reform Law mandates by the way). Thus, for every dollar of insurance premium you spend with Premera, 10% goes to getting the dollars spread to the right places. However, don’t think our Government program, Medicare is any better. Though they point to administrative costs of even below 10%, Medicare does not take into account the additional administrative costs that are borne by the Insurance Companies which provide the “supplements” to cover the holes in straight Medicare. Taken together, the true administrative cost of administering Medicare is much, much higher than our government wants to admit.
Again, keep in mind that in Washington State, insurance companies based here are not “For-Profit”. Thus, Washington consumers do save perhaps 1-3% in profit margin. You can see then, that cutting out this profit nationwide, won’t do much to get at the root cause of the cost increases.
What can be done?
One recent study estimated that 30 percent of the increase in health care spending over the past 20 years can be attributed to the soaring rate of obesity, a condition that now accounts for nearly a tenth of all spending on health care. 10 percent! That’s way more than the vilified insurance company profits of 3%. So why don’t we focus on that?
Reforming our own habits, and the amounts charged by doctors and other medical care providers is politically even more difficult than reforming health insurance companies. The reality is that as long as we ignore the real drivers of health costs, we will continue to see insurance rates rise. It’s far easier to pick on large insurance conglomerates than tell people how to eat, and what they can charge for medical services in a free market economy.
And this is precisely why health spending (and insurance rates) will continue to rise regardless of any political legislation or mandates. Mandating that everyone have insurance has been hard enough, imagine how popular would it be if the government mandated dinner.
