What's Really Driving The Increase in Premiums?
The high and rising cost of health care in the United States is an all-encompassing and growing concern to individuals, employers and the government. Yet most don't understand what drives health care premiums.
Despite the common belief that costs increase due to excess insurer profits, the aging of America and the high cost of medical malpractice, these factors have little if any impact on health care premiums. The key drivers of health care premium increases are advances in medical technology and increases in its use, excess price inflation for medical services, cost-shifting, the high cost of regulatory compliance and patient lifestyles (e.g., physical inactivity and increase in obesity).
In 2006, the U.S. spent more on health care than any other developed country in the world. Although the rate has slowed in recent years, the cost of health care services and premiums continues to rise. Though still a factor, prescription drugs contribute less significantly due to the use of generic medications.
Health care costs are rising faster than the overall economy, wages and general consumer prices. Rising health care costs turn directly into rising health insurance premiums. For every premium dollar received, 87 cents is spent on providing medical services to members: physician services, hospital costs (inpatient and outpatient costs), drugs and other medical services. Another 10 percent goes to compliance, claims processing and other administrative costs. Only three percent represents insurers' profits.
With medical care costs accounting for the bulk of health insurance premiums, it's critical to understand the factors that drive the cost increases. In a study of rising health care costs conducted by PriceWaterhouseCoopers in 2008 the three major factors driving the increase in underlying medical prices are general inflation, health care price increases above inflation and increased utilization.
Medical technology used more often drives costs higher. Newer technologies are generally more expensive than the older technologies they replace. The availability of more advanced, superior technologies and diagnostic tests can produce better results for some patients, but they can also be used inappropriately.
The high cost of health care regulation of health facilities, health professionals, health insurance, drugs and medical devices and the cost of the medical tort system, which includes the costs of defensive medicine. The annual net cost of this regulation exceeds annual consumer expenditures on gasoline and oil in the United States and is twice the size of the annual output of the motion picutre and sound recording industries.
Cost-shifting to private payers due to underpayments in Medicaid and Medicare and non-reimbursed costs increases private health insurance plans.
Obesity and lifestyles are believed to contribute to many chronic ailments, including diabetes, high blood pressure, high cholesterol levels, cancer, arthritis, and heart failure. The rate of new cases of diabetes has soared by about 90 percent in the past decade. The percentage of Americans with three or more chronic illnesses rose even more sharply over the past decade.
For meaningful healthcare reform to occur, policymakers will need a clear and accurate understanding of the real (vs. perceived) factors that are actually driving the cost increases.
Despite the common belief that costs increase due to excess insurer profits, the aging of America and the high cost of medical malpractice, these factors have little if any impact on health care premiums. The key drivers of health care premium increases are advances in medical technology and increases in its use, excess price inflation for medical services, cost-shifting, the high cost of regulatory compliance and patient lifestyles (e.g., physical inactivity and increase in obesity).
In 2006, the U.S. spent more on health care than any other developed country in the world. Although the rate has slowed in recent years, the cost of health care services and premiums continues to rise. Though still a factor, prescription drugs contribute less significantly due to the use of generic medications.
Health care costs are rising faster than the overall economy, wages and general consumer prices. Rising health care costs turn directly into rising health insurance premiums. For every premium dollar received, 87 cents is spent on providing medical services to members: physician services, hospital costs (inpatient and outpatient costs), drugs and other medical services. Another 10 percent goes to compliance, claims processing and other administrative costs. Only three percent represents insurers' profits.
With medical care costs accounting for the bulk of health insurance premiums, it's critical to understand the factors that drive the cost increases. In a study of rising health care costs conducted by PriceWaterhouseCoopers in 2008 the three major factors driving the increase in underlying medical prices are general inflation, health care price increases above inflation and increased utilization.
Medical technology used more often drives costs higher. Newer technologies are generally more expensive than the older technologies they replace. The availability of more advanced, superior technologies and diagnostic tests can produce better results for some patients, but they can also be used inappropriately.
The high cost of health care regulation of health facilities, health professionals, health insurance, drugs and medical devices and the cost of the medical tort system, which includes the costs of defensive medicine. The annual net cost of this regulation exceeds annual consumer expenditures on gasoline and oil in the United States and is twice the size of the annual output of the motion picutre and sound recording industries.
Cost-shifting to private payers due to underpayments in Medicaid and Medicare and non-reimbursed costs increases private health insurance plans.
Obesity and lifestyles are believed to contribute to many chronic ailments, including diabetes, high blood pressure, high cholesterol levels, cancer, arthritis, and heart failure. The rate of new cases of diabetes has soared by about 90 percent in the past decade. The percentage of Americans with three or more chronic illnesses rose even more sharply over the past decade.
For meaningful healthcare reform to occur, policymakers will need a clear and accurate understanding of the real (vs. perceived) factors that are actually driving the cost increases.
