Rising health insurance costs are a
mystery to many people. Questions like: what causes premiums to
increase? Why do premiums increase at rates higher than the general rate of
inflation? Why do my premiums increase when I don’t use many healthcare
services? To answer these questions it’s important to have an understanding of
the factors that impact health insurance premiums. Price, utilization, intensity,
selection, and leveraging. Let’s start with price. Price or the cost of health
care services is a main driver of health insurance premiums. Price includes what
insurers pay out in benefits on behalf of their members to hospitals, physicians,
and other healthcare providers for services and prescription drugs. As costs
for health care services rise, so do premiums, and ultimately the price
everyone must pay for health insurance, even those who don’t use many healthcare
services. Let’s use a simple analogy to explain how price affects health
insurance premiums. We’ve all gone out for dinner with a group of people and
shared in the expense of the meal by splitting the bill equally. Each person
in the group orders different menu items at various prices. If the group splits
the bill evenly, the people ordering the most expensive meals pay less than the
value of their dinner that people who eat lightly will pay more than the value
of their meal, and the selection or action of any one person in the group
will affect the amount everyone pays. For example, Susan’s meal costs $10 David’s
meal costs $15 Chris’s meal costs $20 John’s meal costs $25 katie’s meal costs
$30. The total cost of the food adds up to $100 divided equally each person will
pay $20. Let’s take it one step further What happens when the restaurant needs
to raise its price for food items due to inflation or supply costs? That cost must
eventually be passed on to their customers. If menu prices increased by 5%
the total cost of the five meals becomes $105. Each person must pay $21 of the
total bill regardless of what each individual ordered. Each person is
responsible for an equal share of the total bill. The same principle holds true
when it comes to increases in health insurance. A group of people that are insured under
the same health insurance plan require different medical services all at
varying prices. For example $188 for an office visit with lab tests $3560 for
an inpatient hospital stay for a newborn after delivery 1273 dollars for an emergency room visit
$225 for a thirty-day brand-name prescription, and so on. Regardless of the charges for the
services each person receives, the entire group will be subject to the overall
cost. If there is an increase in health care costs or the charges for those
services, health insurance premiums will be impacted. Utilization is the number of
health care products and services provided. Think of it as the volume
factor. More doctors office visits more tests or treatments and more
prescription drugs are just a few examples of the increasing volume of
services in health care. In addition, people are living longer and require
more health care services than ever before. All these factors drive utilization for
the volume of services upward as the use of health care services increases health
insurance premiums rise, and ultimately so does the price everyone must pay for
health insurance. Let’s use the group dining analogy again to describe how
this works. An increase in utilization is represented when David adds a $5
dessert to his meal he’s receiving an additional food item which increases the
total cost of the food for the group to $110. Only David receives the benefit of
the dessert, but the entire group shares in the cost. Each person’s portion of the
bill has increased $1 to $22. This principle also applies to health
insurance premiums. Some people require more medical services than others. The total number of services delivered
to the entire group may increase from year to year.
For illustrative purposes let’s say a group of people had 800 doctor’s office
visits last year. This year the number of visits for that same group of people
increases to 1,000 office visits. Their utilization increased causing an
increase in the amount of benefits paid, which contributes to rising health
insurance premiums for everyone, not just those who went to the doctor more.
Intensity is the impact to overall cost when a product or service is replaced by
a more expensive one. In many cases new technologies new procedures and new
therapies can be more accurate or less invasive, and deliver a higher quality of
care to the patient, but these new health care services all come with an
increasing cost. As the use of more expensive services increases health
insurance premiums rise and ultimately so does the price everyone must pay for
health insurance. So how do more expensive products and services impact the overall cost in our dinner analogy? Let’s say the restaurant enhances their lobster entree to include a
six-ounce steak. Katie’s lobster entree is no longer available, and is now replaced
by a surf and turf entree. The new entree costs $5 more. The intensity
factor’s at play here because a less expensive item has been replaced with a
more expensive item. Now the total bill for the group is $115, and each person
will pay $23. In healthcare, the intensity of services such as advances in
technology, new diagnostics, and new, more expensive drug therapies are a leading
driver in escalating healthcare costs. For example, MRI’s with an average cost
of around $1,557 are increasingly used instead of, or in addition to less
expensive X-rays that cost an average of $90. The newer more expensive diagnostic
is replacing the old or adding another layer of testing. As health care services
and procedures become more expensive overall health care costs increase, and
the am ount of health insurance benefit dollars increase. We all pay for
these increases through increasing health insurance premiums. Health
insurance premiums are based largely on the average benefit expense for a group
of people. Selection impacts overall costs when
someone with lower than average benefit expenses leaves the group. The broader the
cross-section of people in the group, the lower the expenses for everyone, so the
risk can be spread across more people. When individuals that use fewer services
leave the group, premiums rise and ultimately so does the cost everyone
must pay for health insurance. If susan decides to drop out of the group and not
dine with them anymore, the total food bill goes down from $115
to $105, but since only four people remained to split the bill, each person
will now pay $26.25. This concept also applies to health insurance premiums. If
several people who rarely use their benefits leave the group, premiums will
go up for those people who remain in the group. Why? Because the risk is now spread
among the less diverse cross-section of people in the group. Each remaining
member will be expected to pay more in premiums to cover overall expenses. When
a member’s co-pay stays the same but health care costs increase, members
receive a richer benefit. The resulting increase in expense may be absorbed by
the employer or the health plan in the form of a higher premium, but not passed
on to the consumer with a raise in the copay. The impact is called leveraging.
Health plan members are often insulated from rising health care costs and don’t
feel the immediate impact of increasing costs. This is largely because most of us
are only responsible for our out of pocket expenses. Co-insurance co-payments
or deductibles amounts which are a small portion of our overall health care
expenses. Let’s use our dining analogy to
illustrate the leveraging impact. It’s sort of like having a discount coupon. A
popular one is buy one dinner at full price and get a second meal for $10. Over
time the restaurant may raise the price of their standard menu items, but the
value of the coupon remains the same, just $10 for the second dinner. When
prices increase, but customers still pay the same amount, the business needs to
recoup costs somewhere. The restaurant may need to add a little cost to other
menu items to compensate for redeemed coupons. The same principle applies when
it comes to health care costs. Someone has to absorb the cost increases. Let’s
look at the cost of prescription drugs as an example. In recent years, health
plan members co-payments have not kept pace proportionately with the true cost
of prescriptions. For example, if a prescription costs $50, and a member’s
copayment is $15, the benefit expense would be $35. The $35 is paid by the
health insurance plan as a benefit expense. What happens though when the
cost of the drug increases? In our example, the drug’s price increases by
30% to $65, but the members still pays $15 out of pocket. The benefit expense is
now $50. That’s a 42% benefit increase that has to be absorbed by the health
insurance plan or the employer sponsored plan. A 30% increase in price has a 42% effect on the amount of benefits paid. That’s a 12% leveraging
effect. Because of proportionality, the members co-payment has not kept pace
with the overall cost. The members percentage of the prescription costs
actually dropped from 30% to 23%. That’s the impact of
leveraging In the dinner analogy the price increase
was only five percent from $20, to $21 per person. As we’ve seen however, price is
only one part of the picture. When all the factors; price, utilization, intensity,
selection, and leveraging come into play, the total increase in the dinner bill is
31% from $20 per person to $26.25 per person. When it comes to health insurance
premiums, these combined factors produced much the same result. That’s why many
times premium increases are higher than the
general rate of inflation. So what can consumers do to help control rising
premiums? Here are a few suggestions. Track prices, choose generics over
brand-name drugs. Managed utilization, take an active role in your care. Work
with a primary care doctor to manage all of your health care needs. Monitor
intensity. Be cost conscious and know what treatments cost and whether
alternatives are available. Reduced disease risk. Take the time to
take care of yourself. Eat right, stay active, don’t smok,e stay up to date
on your preventive exams and procedures. When it comes to making a difference in
health care costs, your decisions count.