What's Causing Steep Premium Increases?

After several years of more modest increases, 2011 brought companies and consumers sharply higher health insurance premium increases—and questions about the factors behind the increased rates.

A September 2011 Kaiser Family Foundation study showed the average annual premium for family coverage through an employer grew to $15,073 in 2011. That’s 9 percent higher than the same premium in 2010, and a dramatic contrast to the preceding several years, when premium increases of 3 percent to 5 percent were common. The overall trajectory, however, has always been up. The cost of family coverage has nearly doubled since 2001, though wages have increased by just 34 percent.

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Companies that self-insure and rely on stop-gap policies to cover unexpected expenses saw rate hikes of similar percentages. Those increases were typically similar to those levied on fully insured companies in percentage terms, but less in absolute terms, as stop-gap coverage is typically much less expensive than a full insurance plan for all a firm’s employees.

The reasons behind the dramatic increase are many and complex. They include industry consolidation, global market pressures, medical costs, Medicare and Medicaid reimbursement rates, and the known and unknown effects of the federal health care reform law, which has begun to take effect but is not yet fully in place.

A consolidating industry

“In the insurance world there has been a lot of consolidation, and there aren’t a lot of independent carriers,” says Jim Williams, president of Lockard & Williams, a third-party administrator for employee benefits based in Pascagoula, Miss.

“Companies that are toward the top of the food chain dominate the market,” he says.

Williams is right, according to the American Medical Association, which reports there were 400 corporate mergers between insurance providers in the dozen years leading up to 2009. In a growing number of states, a single insurer provides the majority of private health insurance coverage. Insurers in these states might feel less competitive pressure to keep rates lower, particularly for small companies, which often lack the resources to self-insure.

Global market pressures

Of course, premiums aren’t the only income source insurance companies have. These corporations have other significant investments, and “they’re not making as much money on their overall portfolios,” says Tony Steuer, a life insurance analyst and financial educator based in Alameda, Calif. “They have to invest in relatively safe vehicles, and those have been paying really poorly.”

Highly rated bonds, including Treasury bills, municipal debt, as well as other offerings pegged to either the Fed Funds rate or LIBOR (the European equivalent), historically have offered low returns in years.

Economic upheaval among Euro-zone member countries also has hurt insurance companies with global investments. Some companies, for instance, have purchased Greek or Italian debt, which offered premiums over bonds issued by more stable countries but are now in danger of default.

Insurance firms have rolling bond portfolios, “so they do have some older Treasuries at higher rates, which helps when the newer bonds are paying so little,” Steuer says.

No one knows when better yields will be available, however, and insurance companies pad that uncertainty with premium money.

Medicine: Ever more expensive

Ask a health insurance company why premiums are going up, and they’ll say that it’s simple: Medical costs are also on the rise.

It’s a fair point, says Sandy Walters, executive vice president and senior consultant at Kelly & Associates Insurance Group Inc., a brokerage, product distributor, and third-party administrator based in Baltimore. “Technology in phones and computers gets cheaper as the industry gets more mature. Medicine is different. In medicine, technology drives costs up, even as the industry gets more mature. Procedures are more expensive because they use more technology,” he says—and they use more technology because patients demand the quick, accurate diagnoses and treatments they think technology offers.

Once patients have high-tech procedures, they often require medication to maintain the results, as with bypass patients who then need cholesterol-lowering and blood pressure medication for the rest of their lives.

“We’re prescribing more drugs,” Walters says, adding that those drugs are more expensive. “It isn’t unusual for drugs to cost $5,000 a month—for one prescription. Top plan utilizers might spend $50,000 a year on drugs.”

Procedures are also more expensive because hospitals have raised their prices.

“Hospitals have really been ratcheting up their costs, especially on replacement body parts” such as artificial knees and hips, says Fred Hunt, who is active past president of the Society of Professional Benefit Administrators in Chevy Case, Md. “I’ve heard anecdotal stories and seen bills from members, and markups might be as much as 1,000 percent. They’re doing it because they can. It’s a quick rip-off, like when a restaurant buys a bottle of wine at one price and sells it to you at another.”

A night in the hospital, Hunt adds, might have once cost $1,800. Now it could be as much as $5,000, “When third-party administrators ask, hospitals give a lot of double talk and a lot of non-answers.”

Hospitals also play a complicated game of shifting costs, subsidizing uncompensated care, and charging different patients—and benefit plans—different prices for the same services. Patients with one type of insurance pay one price, patients with a second insurance type pay another, cash patients pay a third price, and patients with government-funded health care pay close to nothing at all.

By reducing or eliminating provider payments for Medicare and Medicaid patients, the federal government has pushed back costs onto the insurance market, Williams says, forcing hospitals to bill insured and cash patients more to cover the costs of treatment that government reimbursement ignores.

“They’ve expanded eligibility for those programs at the same time to deal with the uninsured problem. That’s supposed to balance health care reform on paper, but really the insured are subsidizing the uninsured or those in government programs. Doctors can refuse to see Medicare and Medicaid patients, but they run the risk that those programs will remove their eligibility,” Williams says.