Rising Premiums Do Not Square With Costs

Merrill Goozner

First posted 9/28/11 on Gooz News

The press releases flew from various House committees yesterday afternoon (which double as Republican Party campaign offices). The charge: rising health care premiums are due to “Obamacare.” The latest Kaiser Family Foundation employer survey of health care insurance costs, which was reported on the front page of all this morning’s newspapers, showed premiums rose 9 percent this year, substantially more than the 3 percent they went up last year.

Yet the surveyors reported only 1.5 percentage points or 17 percent of the increase could be tied to health care reform (for covering kids up to age 26, for instance, which is one of the few provisions of the reform law that have gone into effect). The Wall Street Journal quoted a stock analyst, who got to the heart of the story:

Insurers “have been conservative in their pricing, so they have overshot to some degree,” said Matthew Borsch, an analyst at Goldman Sachs. “You’ve seen that reflected in strong earnings they’ve been reporting.”

Drew Altman, head of KFF, suggested lower than expected utilization (by individuals trying to protect recession-ravaged household budgets — individual payments rose only 3.3 percent) and higher health care prices may also have accounted for some of the higher premiums. While both of those phenomena are happening, they would tend to offset each other. And that’s reflected in the overall expenditure numbers.

The total number of people insured last year actually went up from the year before, according to the Census Bureau, by one million persons to 256 million. But there was a shift. More were on Medicare and Medicaid, and fewer on private health insurance. The number of employers offering health insurance has dropped from nearly 70 percent two years ago to barely above 60 percent this year.

That shift is reflected in the composition of total health care expenditures by the public and private sectors, according to the Centers for Medicare and Medicaid Services, where the public sector is now well over 50 percent. Total private insurance payments will rise just 3.4 percent in 2011, according to CMS’s projections, down from the 4.6 percent increase in 2010. Medicare’s increases were no different: projected to rise 3.4 percent this year after a 4.6 percent increase in 2010. The biggest increases have come in Medicaid expenditures, which are projected to rise 5.9 percent this year on top of a 7.2 percent increase in 2010. It’s not hard to figure out why that is happening. People without jobs and in need of health care have to turn to Medicaid.

All of those increases combined cover total health care costs that rose just 4 percent in both years.

So what do we have? The private insurance industry is covering fewer people and facing just a 4 percent increase in costs. Yet  it is raising premiums 9 percent. No wonder profits are rising smartly.

2 thoughts on “Rising Premiums Do Not Square With Costs

  1. The last 2 years with Kaiser’s study seem to be outliers when compared to other similar studies.

    First employer costs rose more than 3% last year no matter what their survey said. As someone in the industry I know ZERO ermployers of any size that had 3% increases or close to it in 2010.

    Mercer showed 6.4% in 2010 with 5.4% this year adjusted down from a pure 7.1% based on benefit changes.The prior years were also in the low 6% range.

    Kaiser’s number in the 3 years prior to 2010 were in the 5-6% range similar to Mercer’s survey over that period (2007-09).

    For this year’s survey Kaiser changed their assumptions compared to the prior years surveys on the composition of the employer universe based on DOL numbers. This might skew their results rather significantly even with statistical adjustments:

    – In the 2010 survey the last 2 categories (1000+ employee firms) had 26,042 firms.
    – In 2011 that number had dropped 63% to 10,042.
    – The 50-999 categories dropped 36,000 year over year

    We maintain a well tested large employer database which was created using 5500 data, D&B, One Source and several other private insurer databases with 16,500 firms over 1000 lives.
    In the 100-999 category we have 86,000 firms.

    It looks like they overadjusted these totals and that could skew their premium increases 2-3% alone since larger employers will likely have lower cost increases due to self insurance et al than fully insured groups under 50 or 100 lives.

    Also saying that adding 2.3 young adults as well as no copay preventive care is part of medical inflation is misleading. Are these new costs or just showing up in a new accounting columns?

    Many of those young people may had coverage elsewhere that was more expensive and anyone in a form without wellness plans – ie smaller ones – had out of pocket expenses for checkups, kids physicals,shots etc. In 2011 they show in premiums not in the form of expenses paid directly by the consumer

    Other data points that raise a flag:
    – Medicare Advantage rates going down 4% for 2012
    – Federal plan covering 8 million workers (the largest employer in the nation) increased 3.2% with no major benefit changes will adding the age 26 and preventive as well.

    In the end you conclusion on the insurers “running up the score” makes the most sense and here is what Wendell Potter said today in his column:

    “What seems clear is that insurers decided last year to charge their customers considerably more than necessary this year to be able to meet Wall Street’s profit expectations; insurance companies are also concerned that such increases will be more difficult once health care reform is fully implemented in 2014.”

  2. The more I look at the Kaiser results the less that dog hunts for me.

    I found the PWC study from May as well which is dead on with Mercer:

    “Employer costs, however, will only go up 7 percent on average. “The medical trend does not take into account changes in benefit design, such as changes in cost-sharing,” the report said. “Typically these changes reduce the trend by 1.5 to 2 percentage points” by shifting more costs onto workers and their families.:

    So 5-5.5% post benefit changes not 9%. Mercer has 5.4%

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