The Commonwealth Fund Blog

Understanding the Rise in Health Insurance Premiums

September 30, 2011

Tags: health insurance premiums Affordable Care Act health insurance

By Jon Gabel, senior fellow at NORC at the University of Chicago, Roland McDevitt, director, Health Research, Towers Watson, and Ryan Lore, senior associate, Towers Watson

Employer-based health insurance premiums have spiked unexpectedly, according to the latest Kaiser Family Foundation/Health Research and Educational Trust (KFF/HRET) Employer Health Benefits Survey. Premiums rose 8 percent for single coverage and 9 percent for family coverage from 2010 to 2011, up from 3 percent for 2009–2010.

While such spikes are not out of step with premium trends over the last decade, some are attributing the latest increase to the cost of the 2010 insurance reforms included in the Affordable Care Act, along with the “usual suspects” like technology, overall inflation, and an aging population. But a new analysis we’ve conducted attributes only 1.8 percentage points of the 8 percent to 9 percent rise in premiums to the insurance reforms. Moreover, this marginal increase as a result of the reforms also means that families have better coverage that protects them from catastrophic health care costs as well as lower out-of-pocket costs for preventive services like colonoscopies and mammograms. It’s logical that improvements in the quality of the product would increase the cost of premiums and lower out-of-pocket costs to some degree.

The 2010 insurance reforms expanded financial protections to Americans with group or individual health insurance and included:

  1. designated preventive services must be provided with no cost-sharing; 
  2. young adults can be covered under parent’s policies to age 26; 
  3. a ban on rescissions; 
  4. a phasing out of annual limits of less than $750,000; 
  5. a ban on lifetime benefits; and 
  6. a ban on preexisting condition exclusions for children.

The $64,000 question is how much do these new benefits affect premiums? With funding from The Commonwealth Fund, we conducted actuarial modeling to calculate the cost of benefit improvements. Our principal databases were the 2010 KFF/HRET Employer Health Benefits Survey and medical claims data from MarketScan. In this blog post, we highlight findings from the project. We will feature more detailed data on our methods and calculations in a forthcoming issue brief.

Measuring the Financial Impact of the Reforms
We estimate that insurance reforms, which will affect about 97 percent of people with employer-based coverage, increased the premiums of group insurance by 1.8 percent (Table 1). The provision having the largest impact on health insurance premiums is coverage for adult children (0.9 percent). The ban on limits on lifetime maximum benefits will increase premiums by 0.5 percent and affect about 39 million employees who are policyholders. Requiring employers to offer select preventive services without cost-sharing will increase premiums by 0.4 percent.

Table 1: The Effect of 2010 Insurance Reforms on Plan Premiums, Group Insurance

Reform provision

 

 Group market (72.5 million policy holders)

 
 
 
 

 

 Number of policyholders affected by each reform (in millions)

Percent of policyholders affected by each reform Additional plan premium per policyholder Percent change in plan premium
Preventive services paid 100% by plan

 17.4

24%

$36

0.4%

Adult dependents eligible to age 26

 66.0

91%

 $80

 0.9%

Ban on lifetime benefit maximums

 38.5

53%

 $51

 0.5%

Ban on annual benefit maximums <$750,000

 *

*

 *

 *

Ban on preexisting condition exclusions for children

 *

*

 *

 *

Rescissions of coverage

 *

*

 *

 *

Total affected policyholders

 70.3

97%

   
Average effect on premiums  

 $167

 1.8%

* Affordable Care Act provisions that had no material effect on premiums, according to our research.
Sources: Authors calculations from KFF/HRET 2010 Employer Health Benefits Survey and Actuarial Model.

Two factors explain why reforms have a comparatively small effect on premiums. First, most employers are already in compliance with the reforms. Annual benefit maximums, exclusion of coverage for children’s preexisting conditions on children, and rescissions of coverage affected relatively few plan enrollees before the reform was enacted. Likewise, although about 45 percent of employees in the group market are enrolled in plan with a lifetime benefit maximum, the difference in cost between a plan with a $3 million lifetime maximum and no limit is very small—simply because so few individuals ever exceed the $3 million figure.

What Is Causing the Spike in Premiums?
If the Affordable Care Act accounts for only 1.8 percentage points for the 8 percent to 9 percent rise in premiums, what is causing the spike? First, medical claims data from MarketScan, covering nearly 15 million enrollees, shows the per capita cost of health care services increasing at about 7 percent a year since 2008. Similarly, the Towers Watson/National Business Group on Health survey of employers reported a 7.6 percent increase in medical claims expenses in 2011 and 5.9 percent to 7.4 percent in each year since 2007. (Both MarketScan and NBGH data are limited to large employers.) The Mercer survey has reported rate increases in the 6 percent to 7 percent range through this period. Premium increases reported by KFF/HRET have been 5 percent or lower in each of these years.

We note three possible explanations for the spike in premiums. If we base our analysis on KFF premium trends and MarketScan medical claims data, the spike is consistent with catch-up pricing. Claims expenses have outpaced premium increases for the previous four years.

Second, any of these health care cost surveys is likely to have a sampling error of 1–2 percent in any given year. Consequently, we must be cautious in our interpretation of year-to-year trends.

A third explanation is that the protracted recession has sent many former workers onto COBRA coverage in the same plans provided to active employees. COBRA expenses per person are approximately 50 percent greater than those for active employees, because healthy ex-employees tend to decline coverage and sick ex-employees and their families take up COBRA. The net effect may be to make the risk pool sicker. Another possibility is that more young and healthy workers are opting out of employer-based coverage, leading to rising per capita expenses.

Coverage of adult children, however, should have no impact on the cost of single coverage. This may be one explanation for why single premiums increased 1 percentage point more than family premiums.

It is possible that all explanations are valid and contributing factors. But our research finds insurance reforms contributed less than 2 percentage points to the premium increase.




Post Comment Read or Post Comments

Stephen Schoenbaum of Josiah Macy Jr. Foundation says:
October 1, 2011

This blog by Gabel et al. is a very timely answer to an important question. My interpretation of both the blog and Francois de Brantes' comment is that the recently reported premium increases, which received considerable alarmed coverage in the media, are not really a "spike". Rather there is now another 2% per year increase in health coverage spending (about a quarter of the usual average increase) that is due to needed reforms, some of which may pay back over the years and others of which will do something that society needed to do both on an ethical basis and for the health of the U.S. population. The pressing need now is to "bend the curve". Although health care reform has set the stage for curve bending including efforts to develop delivery and payment reforms, more serious attention has to be paid to achieving long-term changes in the status quo of annual health care cost increase. It is essential to understand all the underlying causes - de Brantes points to one - and policy options for addressing them. This should have been the central agenda following passage of the reform law. It is getting late and the clock is still ticking.

Greg Burbridge of BH&R Management Services, Inc. says:
September 30, 2011

As an Ex-Hospital CFO and current consultant to the industry, I'm not surprised by any of this. In a document posted on my Website called "A Plan To Solve The United States Healthcare Crisis" I point out that as we've decreased hospital utilization over the years the hospitals have had no choice except to increase their prices because they have fewer units of service to spread their stand-by costs over. Until we as a nation understand that hospitals are a societal asset and need to be funded as such we’ll never solve our financial crisis. When you dial 911 you expect there to be a police and firefighters standing by waiting for your call. You then expect to be transported to a hospital that has also been standing by for your need. The problem is we use tax dollars to pay for the police and fire stand-by costs. But, we expect the next patient through the door to pay for the hospital’s stand-by costs. If we used tax dollars to pay for stand-by costs, then insurance dollars would only have to pay for the variable cost of care. If done properly, that should reduce insurance costs by 60% or more. Then even MSAs would allow the individual to pay for what they need when they need it.

Francois de Brantes of www.hcir.org says:
September 30, 2011

The single largest contributor to premium increase continues to be the price of services, mainly driven by large and continuous increases in hospital prices. And plans have been unwilling or incapable of tempering these price increases and simply passing them on as premium increases. Health plan contracting officers have consistently been reporting price increases by hospitals ranging from a low of 4% to a high of 10%. Recent work by Paul Ginsburg for the Center for Payment Reform shows that hospital consolidation in certain markets has contributed to demands for price increases at the higher end of the general range.
Employers, plans and states must continue to exert competitive pressure on hospitals by engaging in value-based purchasing efforts and creating tiering mechanisms to shift market share. Until these market-based solutions are implemented, nothing will stop hospitals from continuing to extract an unfair, unjustified and job-killing price from businesses and families.