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3 Major Health Insurance Cost Drivers

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According to the Centers for Medicare & Medicaid Services (CMS), the total expenditure on health care in America in 1970 was $74.1 billion, while the total expenditure on health care in 2019 was $3.8 trillion — a whopping 51.35 times as expensive. Said differently, health care is 17.7% of the gross domestic product (GDP) of the United States.

If you look at the consumer price index over the past 10 years (2011-2019), you will find that the average rate of inflation over that period was 1.75%. One could argue that this is a reasonable rate of inflation. But according to the Kaiser Family Foundation (KFF) annual study, health insurance is a different story. The average cost of health insurance in 2015 was $15,545, and the KFF reports that in 2020 the average cost is now $21,342. That’s an increase of 37%, or an average of 7.4% each year.

Your individual health insurance and employee benefits customers just might ask you about this.

Causes of Dramatic increases

The obvious question: What causes health insurance to rise 422% faster than the rate of inflation? Many people will get a long-winded explanation of how today’s insurance policies are much more comprehensive than they were years ago. Therefore, any comparison is flawed at the onset. That may be partially true, but small-business owners do not want to hear that, because that is not relevant to their current cost crunch.

Some people will argue that technology, research, and development of new and more effective health care drives cost increases. Certainly, these things make some difference, but they are a necessary and expected element, as they are in any other field.

Unfortunately for all of us, the three main drivers of the increased cost of health insurance over time are much more basic and therefore will require a major change of thinking and behavior if we are to see any impact.

1: Older Employees

The Bureau of Labor Statistics reports that the median age of a U.S. employee in 1999 was 39. In 2019, the median age is up to 42. While three years may not seem like much, there is an “additive” impact in the rising cost of health insurance. Let us dive a little deeper into this by looking at the community standard pricing of a typical plan offered by Blue Cross Blue Shield of Illinois. One of the bronze plans, which is the least expensive plan in its category for a small business to choose and carries a hefty $6,900 annual deductible per person, has a cost increase between age 39 ($445.88) and age 42 ($460.02) of 3.17%. That increase is just for age; it does not include any other factors that also affect rising costs.

There is a saying in the employee benefits world: “Your group isn’t getting any younger.” It is said when brokers are attempting to explain the annual cost increase to an already struggling employer group. This saying is not just tongue-in-cheek; it is clearly affecting small businesses throughout the country.

2: General Health

The federal Centers for Disease Control and Prevention has published some incredible numbers lately, but possibly none as jarring as these: 40% of the population of the United States is overweight to the point that it affects their general health, and about half of the population suffers from at least one chronic condition that will drive an almost unbelievable 85% of health care costs. Take a moment to let that sink in. We are sick, and we are making ourselves sicker.

What many people struggle to understand is that the cost of health insurance is a function of the cost of and demand for health care. Those two concepts often get twisted into one. The difference is this: Health care is the act of being treated by a doctor, hospital, clinic or pharmacy and all that goes along with it. Health insurance is the institutional pooling of dollars to offset financial risk and the mechanism that pays the bills for the vast majority of U.S. health care. To have enough money to pay the health care claims of its policyholders and to make a profit as a business, health insurance companies must charge a rate that is, basically, a math equation. If the cost of health care continues to rise, then the cost of health insurance must rise accordingly.

It is a given that the cost of health care is affected by many things. The cost of health insurance is driven by the fact that Americans are overweight and chronically ill and therefore driving the demand for health insurance. So it can also be said that “Your group isn’t getting any healthier either.”

3: Lack of Consumerism

It seems like we have been talking about this for decades. There is a glaring lack of consumerism in health insurance. It comes on two levels: (a) the purchase of the product, and (b) the nature of the health care delivery system.

According to the KFF, 49% of Americans are covered by health insurance provided by their employer. There may be plan choices offered to employees, but the buying decisions relative to the provider, plan options, and the other major cost drivers are not made by the consumer, aka the employee. Instead, these decisions are made by the employer. In fact, most small businesses hesitate to involve the employees in the health insurance shopping process for fear of establishing untenable expectations. As a result, the employees are basically insulated from the true cost impact of their health insurance.

Similarly, the health care delivery system does not work on the basic “supply and demand” model that drives most economic engines. Instead, health care is a triangle, which causes many problems. The insured (employee) needs care, the doctor provides the care, the insurance company pays the doctor and the insured pays the insurance company. Negotiations regarding cost happen between the doctors and the insurance company — with no involvement whatever by the insured. Arguably, the insurance company and the doctor are driven by their own best interests — the best interests of the insured (e.g., lower cost) are not represented adequately.

What Can Be Done?

It is not all doom and gloom here. These statistics also have an upside. Most importantly, if only half of us are sick, that means that half of us are healthy. If 40% of us are overweight, that means 60% of us are not. A small business can explore the strategy of a health reimbursement arrangement (HRA) to reduce the overall cost of health insurance, give themselves a potential break, and give employees a similar break.

The basic layout of an HRA is this: The employer offers a plan with higher financial exposures to the employees (higher deductibles, higher copayments, higher maximum out-of-pocket risk) and by doing so lowers the cost of the health insurance. Then the employer establishes an HRA, a tax-preferred method of reimbursing the employees a portion of their expenditures on an as-incurred basis.

The employees are protected from the high financial risk if they become sick or hurt and in need of care. The employer has a potential savings for every “healthy” employee. Call it leverage, call it partial self-insurance, call it a temporary fix. Call it what you want, but if employers can get some relief from the rapidly rising cost of health insurance, then we add to the sustainability of their benefit programs.

Worth noting: HRAs do not work for every group. A full analysis of risk and reward is necessary to determine if this strategy is right for your group. Make sure that you work with a qualified broker/partner to determine if it is appropriate. Some groups end up spending more than they would have otherwise; there are risks involved with health reimbursement arrangements.

Marcus NewmanMarcus Newman, RHU, CBC, is vice president, employee benefits at GCG Financial, an Alera Group Company, a provider of employee benefits, risk management and wealth management products and services.

(Image: Adobe Stock)


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