Health Insurance Premiums Mirror Healthcare Costs

A couple of recent Denver Post articles about health insurance rate increases caught my attention this morning, and I felt that they needed a bit more discussion.  Over the past couple years, Colorado has taken a much more proactive and transparent position in terms of the rate review process, and we’ve written about it several times.  Although rate increases on health insurance policies are frustrating when they continue to far outpace inflation, they’re being driven largely by the increases in the cost of healthcare.  But most of us are very insulated from the cost of our healthcare.  Since the bills go to our health insurance carriers, many people don’t really know how much it costs to have any sort of significant medical treatment.  We know how much our health insurance costs though, and when the price goes up, we feel it.  Even though the price increase is directly linked to the increases in healthcare spending, we’re much more likely to focus on the health insurance premiums, since those are the bills we pay ourselves (this is especially true for people who buy their own individual health insurance, without assistance from an employer).

So this Denver Post article about Colorado rejecting proposed “infuriating” rate increases generated some not-unexpected responses of a sort of “stick it to em!” nature.  A follow-up Post article describes $1000 and $2000 deductibles as “very high” and when describing policies with $5000 deductibles, the article goes so far as to question “is that even insurance anymore, if you’re paying the first $5000?”  Comments like that make it hard to have rational discussions regarding healthcare costs and/or health insurance premiums.

We all need healthcare, or at least access to healthcare.  And while our average incomes have been largely flat or dropping over the past several years, the cost of healthcare has been increasing dramatically.  The blame can be placed in numerous areas, as there are many people and corporations earning an awful lot of money from healthcare, and there are also a lot of people who are over-utilizing healthcare (it’s hard to blame much of that on the patients though, since most of us don’t have enough medical knowledge to know what we need or don’t need – we rely on doctors and hospitals to tell us what needs to be done and generally go along with that, even if might end up being excessive care).  One way or another, the cost of healthcare is becoming overwhelming.  And that translates directly into ever-increasing health insurance premiums.

Health insurance carriers have to collect enough money to cover the cost of claims and then also pay their administrative expenses and show some profit for shareholders, or else they go out of business.  And for nearly two years now, medical loss ratio (MLR) rules have been in effect, limiting administrative expenses to no more than 20% of collected premiums (15% for large group plans).  So when we see large rate increases, we can be pretty sure that they are a direct reflection of large cost of care increases, derived in turn from a combination of increased utilization and increased procedure costs.  Anyway you look at it, healthcare is getting more expensive.

The problem is perspective.  $5000 (referencing that deductible that makes some people wonder if such a policy is even insurance) is still a huge sum of money to most families.  But it’s a relatively small sum of money in terms of what it will buy in the current American healthcare system.  When my mother fell off the roof she was repairing and broke her femur a couple years ago, the bill came to $50,000.  All that was compromised was her leg.  Imagine if she had landed on her head.  My father’s rare autoimmune disease has racked up millions of dollars in bills over the past 11 years – without health insurance my parents would have been bankrupted many times over.  NICU care for a friend’s premature baby was over $250,000, and many preemies run up far higher bills than that.

Healthcare is expensive.  Crazy expensive.  Very few American families have enough money to pay for their own care without health insurance.  But since bills rack up so quickly, especially when serious illnesses or injuries occur, health insurance is an expensive product.  And as the cost of care climbs, so does the cost of health insurance.  In an effort to keep premiums more reasonable than they would otherwise be, deductibles have climbed quite a bit in recent years.  A $5000 deductible is very reasonable when compared with the potential cost of care that a person or family might need in any given year.  But even though it’s a tiny fraction of the potential medical bills a family might incur, it’s still a huge sum of money to most families.

So we have a bit of a perfect storm:  A product that most of us need (and will be mandated to purchase in just over a year), but that few of us particularly like (let’s face it, a new iPod is a lot more fun than a new health insurance policy).  Premiums and deductibles that continue to increase.  Out of pocket and premium costs that are reflective of healthcare costs but generally out of proportion to most families’ ability to afford them.  All of that gets people fired up.

And yet, health insurance carriers are not anywhere near the top of the profitability charts.  Not even close.  Cigna is much-maligned in the Post articles and comments, but their most recently reported financials show profits as 6% of revenues.  Compare that with the 50 most profitable companies, where profits range from 17% of revenues to almost 41% of revenues.  There are no health insurance carriers on that list, although there are quite a few medical and pharmaceutical companies.  Health insurance companies are not making anywhere near the sort of profits that many of Wall Street’s big players earn, but I think that might be a generally misunderstood fact.

So while I very much understand the frustration and anger that people feel when confronted by year after year of double digit premium increases, I would rather see more of an honest look at profits and earnings throughout the health care industry, rather than a disproportionate amount of ire heaped on health insurance carriers.