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.

The reason 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.

Industry Consolidation and Global Market Pressure – In the insurance world there has been a lot of consolidation, and there are not a lot of independent carriers. The American Medical Association reports there were 400 corporate mergers between insurance providers in the 12 years preceding 2009.  In a growing number of states, a single insurer provides the majority of private health insurance coverage. Premiums are not the only income source for insurance companies. They have other significant investments and they are not making as much money on their overall portfolios. They have to invest in relatively safe vehicles and those have been paying poorly. Highly rated bonds, including Treasury bills, municipal debt, as well as other offerings pegged to either the Federal Funds Rate or LIBOR (the European equivalent), historically have offered low returns. 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. No one knows when better yields will be available, however, and insurance companies pad that uncertainty with premium money.

Medical Costs and Health Care Reform – Ask a health insurance company why premiums are going up, and they will say that it’s simple, medical costs are also on the rise.

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 and they use more technology because patients demand the quick, accurate diagnosis 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. More drugs are being prescribed and those drugs are more expensive. It isn’t unusual for drugs to cost $5,000 per 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 of body parts such as artificial knees and hips. Markups might be as much as 1,000 percent. A night in the hospital might have once cost $1,800; now it could be as much as $5,000. 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, forcing hospitals to bill insured and cash patients more to cover the costs of treatment that government reimbursement ignores. They have 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.  

PPACA means new costs for insurance companies. They will have to offer coverage on parents’ policies for students up to age 26, guarantee policy issuance despite pre-existing health conditions, and provide fully funded wellness benefits. Insurers know the cost is going up, and they are going to get the increases in while they can. According the the Agency for Health Care Research, 1 percent of the population generates 22 percent of costs, and 5 percent generates 50 percent of costs. White, non-Hispanic women in poor health, the elderly, and users of publicly funded health care are the most expensive populations. That worries insurance companies. To prepare for the possibility that their new plan members will be expensive, they pad their uncertainties.

Unfortunately, health insurance costs won’t be coming down anytime soon, perhaps not until we learn to make some medicine irrelevant by taking better care of ourselves in a preventative way. Historically, it’s been a tough prescription to follow.