Dismal Scientist:Inflation That's Bad For Your Health
dismal.com
By Rakesh Shankar
04/24/01 12:00 PM ET
Health insurance premiums have been rising over the past two years, but the booming economy and tight labor market have shielded employees thus far from the brunt of this trend. This year, premiums are expected to swell to their highest point in over five years, with insured employees picking up more of the bill through reduced benefits, higher premiums, or higher co-pays.
dismal.com
Health insurance premiums are a key indicator of rising healthcare costs. With over 67% of all employers that offer health benefits passing on some healthcare costs to employees through employee contributions in 2000, health insurance costs affect the majority of Americans irrespective of utilization of health services.
The onset of managed care and the subsequent cost pressures on providers helped curb health care spending and cost increases in the mid-1990s. By 1999, however, premium costs started to rise again, as documented by a number of independent surveys. After years of subdued growth, premium costs for companies are slated to rise at a double-digit pace in 2001.
dismal.com
So why are premiums rising now? Part of the escalation can be explained as a function of a new insurance underwriting cycle. This refers to a common health insurance industry practice, whereby insurance companies undercut their own insurance premiums in order to expand market share. Eventually, when underwriting profits are spent by price competition, insurers raise premiums to restore profitability. Nearly three-quarters of the nation's HMOs reported underwriting losses from 1996 to 1998, and nearly half in 2000, indicating that insurance companies are now in the resurgent phase of the underwriting cycle, and premiums are likely to keep rising.
Apart from the underwriting cycle, insurance premiums are escalating because insurers are now spending more money for their beneficiaries' health--or, in insurance parlance, medical claims costs are rising. Medical claims costs are led by medical spending. The fundamental premise behind health insurance is to spread medical expenditure among the pool of beneficiaries. When the common health bill rises due to higher medical spending, insurers spread the cost around by raising individual premiums. Overall health spending is estimated to have grown 8.3% in 2000 and is slated to rise 8.6% in 2001, after growing an average of 5.3% annually over the past four years.
dismal.com
There are two ways for medical spending to rise: an increase in the unit costs for medical services and commodities, or a boost in overall consumption of individual units of medical services or commodities. Currently, we are seeing both costs and consumption for medical care mushroom.
On the cost end, prices have been rising for hospital services and prescription drugs since 1997, after an almost decade-long drop. Hospital prices in particular have risen sharply in response to falling government reimbursement, higher nursing and personnel costs, and greater consolidation leading to improved pricing power.
On the consumption end, the bulk of this spending hike is caused by increased use of pharmaceuticals. Growth in direct-to-consumer (DTC) advertising by drug companies is having a demonstrable effect on increased demand for higher-priced brand name drugs, while a proliferation in health insurers offering drug plans with low co-payments has increased demand and spending on pharmaceuticals. Over 75% of respondents to the latest Kaiser/HRET Employer Health Benefits Survey blamed higher spending on prescription drugs for raising costs. With spending unlikely to drop anytime in the near future--HCFA expects 17.4% and 16% growth in prescription drug spending in 2001 and 2002--medical claims costs will only drive insurance premium costs higher.
The confluence of rising healthcare costs, increased medical care spending, and the unfavorable direction of the insurance underwriting cycle, all of which is culminating in soaring insurance premiums, is being exacerbated by declining corporate profits and a weakening economy. Over the past two years, rising insurance premiums have been subsidized by robust corporate profits, in a bid by companies to keep employees in a tight labor market. Given that the economy is now sagging, employers will be less willing and able to absorb much more of the rising health costs. While it is unlikely that employers will exit the health insurance market altogether, employees will no doubt begin to face higher deductibles or co-payments for medical insurance in the near future. |
