The many drivers of healthcare premiums
What is really driving increasing healthcare costs? Several causal factors contribute to the overall cost of health insurance:
There are many specific reasons why premium rates change year to year. These reasons can be grouped generally into five major categories:
1. Premium True-up: Correction (upward or downward) needed to current premium rates in order to align new rates with actual claims and other revenue needs
2. Benefit Cost Trend: Incorporation of changes to reflect the cost of the benefits in the future
a. Unit Cost Trend (provider payment rate changes)
i. Medical Inflation (price changes for a fixed market basket of medical services)
ii. Net Impact of Provider Contracts (difference between change in provider payment rates and medical inflation)
b. Utilization Trend (change in number of services used)
c. Mix/Intensity of Services Trend (change in composition of services used by consumers)
d. Cost-sharing Leverage (change in impact over time of fixed dollar copays and deductibles on benefit costs)
3. Member Changes: Recognition of changes in the characteristics of members covered in the future period to which the new premium rates apply (e.g., age and gender mix), compared with those members covered currently (types of changes for which there is no differentiation in the premium rates themselves)
4. Plan Changes: Reflection of the impact of changes in benefit design or provisions
5. Insurer/Administrator Retention Changes: Inclusion of needed or desired adjustment to the insurer retention component of premium rates (principally health plan administrative costs, taxes, and profits)
There may be other causes or components that can be identified, but these five categories capture the primary reasons for premium rate changes. Within these five categories, the first and second (premium true-up and benefit cost trend) are typically the primary drivers of year-to-year premium rate increases. As a component of benefit cost trend, medical inflation is usually one of the most important contributors. However, it is not the only component of benefit cost trend, and benefit cost trend is but one of the five major causes of premium rate increases.
This list was excerpted from the recent paper by Jon Shreve, “The difficulty of legislating premium rate increases.”
I believe a careful analysis of the data will reveal that two very big culprits in driving premiums higher at rates that continue to amaze are utilization and the mix/intensity of services. Too many people are expecting too much from their insurance, and advertising by both pharmaceutical companies as well as providers is exacerbating this trend. Almost any one who is mildly and jutifiably depressed due to a life event that anyone alive will go through at some time or another is prescribed anti-depressants. Knees hurt, hips hurt, can’t run, just replace them. Tired of getting up at night to go potty? We have a drug that can fix that. Having difficulty sleeping? A sleep study may be in the cards for you and on and on. Many of these ailments are just part of normal living or getting older. If you don’t want to live with them should the remedy be funded by insurance to the same extent as we would fund treatment for congestive heart failure or breast cancer? Problem is that patients and their providers want insurance plans to cover anything that is on their health care wish list. I am not saying that a full menu should not be avaialble, but maybe we should not cover the deserts and appetizers the same way we do the entrees. Until we begin to make these kinds of choices I’m afraid bending the cost curve is not going to happen.