Chris Fleming hosted the most recent edition of the Health Wonk Review at Health Affairs Blog, and it’s chock full of excellent articles. One that particularly caught my attention came from one of our all-time favorite bloggers – Joe Paduda of Managed Care Matters. Joe writes about the 9% increase in health insurance premiums that is expected for 2012, and finds a flaw in the argument that health care costs are the primary driving factor for health insurance premiums. Joe notes that health care costs increased less than 2% in 2010 (medical trend data here) and that the increases in health insurance premiums didn’t seem to be tied to an increase in medical costs.
I have nothing but respect for Joe’s work and the fact that his articles always reference factual data, and I’m inclined to believe that there is more than a grain of truth in his article. However, I think it’s a bit more complicated than “… nothing (except the ACA’s medical loss ratio requirements) preventing insurers from increasing premiums as they see fit.“
The ACA’s medical loss ratio requirement is a pretty big “except”. The rules kicked in this year, with insurers required to spend at least 80% (for individual and small group plans) or 85% (for large group plans) of premiums on medical expenses. (Interestingly enough, the data that Joe referenced that indicated medical trend in 2010 was 1.7% included a graph that showed insurers spending a minimum of 85% of premiums on medical expenses in the five years from 2006 to 2010.)
The ACA rules regarding the MLR requirements basically brought all insurers up to snuff in terms of making sure that premiums are being spent primarily on medical care. To make the math very simple, let’s say that an insurance carrier takes in $100 in premiums this year. If we assume an increase of 9% next year, they will bring in $109 in premiums (again, this is obviously over-simplifying everything, but stay with me). This year, at least 80% of that $100 had to be spent on medical costs: at least $80. Next year, at least 80% of the $109 will have to be spent on medical costs: $87.20 (that’s assuming that we’re looking at individual or small group. For large group carriers, the numbers would be $85 and $92.65).
In our hypothetical, easy math world, premiums increase by $9 and medical spending increases by $7.20. That only leaves $1.80 for additional administrative costs and profits. I would say that the MLR rules are a very effective tool for preventing insurance carriers from raising rates without an increase in medical expenses. Ideally, I’d like to see MLR-style rules that cap profits and administrative costs in the rest of the healthcare industry as well, rather than just focusing on health insurance carriers.
So what gives? I did some hunting around and found data from the Health Research Institute (registration required) that shows medical trend for 2010 being “much lower than expected” at 7.5%. They predict an increase to 8.5% in 2012, up from 8% this year. These numbers are much more in line with the rise in health insurance premiums that we’ve seen over the past few years. I have no explanation for why the data from the two sources is so dramatically different in terms of medical trend in 2010, but if the trend was really closer to 7.5% rather than 1.7%, the health insurance premium increases would be a lot easier to understand.
In addition to the MLR rules, some states (including Colorado) have implemented strict review processes for rate hikes. The ACA now calls for insurers who propose a rate hike of 10% or more to justify their request to state or federal reviewers. But we’ve already seen here in Colorado that even with a robust review process in place, double digit rate hikes can be justified by healthcare cost data.
Joe also points out that the sharp uptick in the percentage of Americans who are covered by high deductible health insurance plans could be a significant factor in keeping health care costs down (although how much they are down is apparently not entirely clear). Many people who opt for high deductible HSA-qualified plans are doing so because the premiums are lower than those of more comprehensive, lower-deductible plans. They are trying to save money on premiums, but don’t necessarily have additional money lying around that they can use to fund an HSA. The high out-of-pocket exposure on these plans – combined with an economy that has been reeling from the recession for the last few years – means that there are probably a lot of people putting off medical care because they can’t afford to pay for it, even though they technically have insurance. I agree that this is probably keeping health care costs lower than they would be if everyone had comprehensive health insurance with a low deductible. The Health Research Institute data the I referenced above also includes some discussion about the impact of the recession on medical trend (starting on page 10) and it’s an interesting read.
