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Insurance Rates are Up! Why?

Recent headlines call out:  Health insurance rates soar in CaliforniaBlue Shield Refuses to Delay Rate Hikes, and CA Can’t Block Staggering Health Insurance Rate Hikes.  These came out in response to announced rate hikes by 4 of the largest California health insurers, Anthem Blue Cross, Aetna, PacifiCare  and Blue Shield.  Although the hikes apply largely to individual health insurance policies, employees covered by large group policies are facing higher costs and diminished benefits as well.  What’s going on?  Won’t the Patient Protection and Affordable Care Act, once implemented, put a stop to this?

To answer those questions, it helps to know how the business of health insurance works.  Put simply, a health insurer agrees, usually on a yearly basis, to pay all or a portion of the medical expenses specified in a health insurance policy.  Insurers must gauge a year in advance what their cost of health care coverage will be.  The most significant factors used to do this are:

      • -  the forecasted cost of medical services
      • -  the health demographic of probable policy holders
      • -  the number and cost of the newest medical procedures and drugs
      • -  the anticipated usage rate of the health care services available
      • -  administrative costs
      • -  the number and type of medical treatments that will be covered by the policy

To ensure that this calculation results in equitable premium costs to the consumer, every state appoints or elects state insurance commissioners or directors who oversee the conduct of insurance companies.  Last year, CA’s insurance commissioner uncovered a 25% rate hike calculation error, proving that insurance commissioners have a vital role to play.  CA’s current commissioner is Dave Jones who, when Blue Shield, Aetna, Well Point/Anthem Blue Cross and United Health/PacifiCare announced those hefty health insurance rate hikes, asked them to postpone their price jumps pending his review.  However, the fact that so many individual insurers, as well as well as large group employer plan providers, see serious rate hikes in the coming year suggests that their prognostications have validity; and that possibly even higher health insurance premiums are in our future.  Why?

Among the factors listed,  payments to doctors and hospitals are the most elemental of the costs contributing to insurance rates.  Medical providers must constantly upgrade their equipment in keeping with advances in medical technology.   It’s one key reason health care costs increase each year.   Moreover, under The Health Information Technology for Economic and Clinical Health Act (HITECH), passed in 2009, doctors have until 2015 to have the equipment and procedures in place to keep electronic medical records of all their patients and the ability to share these with other care givers electronically.  This is, admittedly, a good thing; but the estimated average cost, at $30,000 per physician, to implement such a  system and the $9,000 annual cost to maintain it must be passed on to consumers as a cost of staying in business.

Starting this year, the Accountable Care Act calls for insurance companies to add new medical benefits to their policies, another factor responsible for raising consumer costs.   Moreover, the insurance companies cannot charge the people who would use these services any more than they charge any other premium holder.  For example, policies that go into effect this year must cover policy holders’ children up to the age of 26 without extra charge to that policy holder.  Children with pre-existing conditions, likewise, must be covered without extra charge.  Are these good things?  They certainly are if you are the parent of children under the age of 26 or one with pre-existing conditions.  Moreover, whether a 26 year old ‘child’ can pay for his own insurance or not won’t be considered if they can be covered, ‘free’, under their parents’ premiums!  Unfortunately, the cost for this extra coverage must be factored into rates that everyone must pay.

Another Accountable Care Act mandate that can be considered beneficial,  but also contributes to this year’s rise in rates, requires insurers to cover over 30 types of  preventive medical treatment without cost to the patient receiving the treatment.  Without co-payments or deductible considerations,  more people are expected to take advantage of these benefits, adding even more to the total cost.

Looking at just these contributing factors, one can see why health insurance rates are up.  But here’s the kicker:  When insurance rates become too expensive, healthy people are the most likely to drop coverage and stop insurance coverage altogether; while unhealthy, high users of medical services will stay insured.  This lowers the health demographic; and, with fewer healthy people contributing to the total premium pool, raises the cost of total coverage still more.

With more Accountable Care Act benefits scheduled for implementation in the years ahead, this pattern of rising health insurance rates will be repeated unless something is done to change it.

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