As employees participate in open enrollment for their company’s health insurance enrollment next year, it’s clear they should make a point of participating in their employer’s enrollment information meetings, not merely pick last year’s coverage. Partly because of the implementation of President Obama’s health care overhaul plan, U.S. workers are expected to pay average premiums of $2,200 in 2011 – an increase of 12.5 percent, the biggest in four years, according to human resources consulting firm Hewitt Associates.
Increases in health care premiums are certain to continue increasing in coming years at double-digit rates, with inflation further exacerbated by the entry of 32 million uninsured Americans into the healthcare system. This will speed the transformation of insurers from underwriters of medical risk to managers of medical risk, a process inevitably accompanied by higher prices.
Annual healthcare inflation — and hence baseline premiums — have been rising 8-12 percent annually for two decades, and there is no reason to expect this to change anytime soon. It could actually increase as provisions of healthcare reform – such as the mandated removal of pre-existing conditions – become law. Some of these provisions, such as the elimination of a dollar amount of health benefits in a given year and the fact that children can now stay on a parent’s health plan until age 26, help explain the likely spike in health insurance premiums next year.
Rate increases are already highly regulated in most states, which focus on preventing “excess” profiteering by insurance carriers. And there is still a competitive advantage in being a low-price leader in health care underwriting. Nonetheless, rates typically rise in response to medical claims experience and the increased cost of underwriting risk. Underwriters have no choice but to increase premiums to maintain margins.
Why is there on-going runaway healthcare inflation? Unfortunately, the U.S. healthcare system simply can’t seem to get its act together. One reason is that the U.S. essentially has a fee-for-service healthcare system, which means that doctors and other healthcare providers are compensated based on the number of procedures they do, not on the results of their treatment. This contributes to enormous inefficiencies and mistakes. For example, studies have shown that about one in five medications administered at hospital bedsides are done so in error.
Yet another problem is “moral hazard,” or the concept that people insulated from certain risk behave differently than they would if fully exposed to that risk. Have you ever noticed that people are very hesitant to make claims on their automobile and property insurance? Rarely do the costs of minor fender benders result in an insurance claim. Why? Because people fear that claims on their auto policies, for example, will result in either premium increases or the cancellation of their policies. So they pay the cost of minor accidents out of their own pockets.
This isn’t the case at all in the health insurance world. Americans could take much better care of themselves – they could watch what they eat, think twice about smoking or drinking heavily and make a commitment to exercise more. Too many do not, however, which is why a third of our population is obese. Unlike the case with auto insurance, a very high percentage of healthcare expenses become insurance claims because few people lose their health insurance because of high claims.
Theoretically, employer-based health insurance plans could tackle this problem by simply increasing out-of-pocket co-payments. But this opens the door to two conundrums. One is that higher co-payments would prod some people to forgo necessary treatment at the early stage of a disease, such as diabetes, which is much less expensive to treat in its early stages. The other problem is that higher out-of-pocket expenses tend to push the healthiest people out of the insurance pool, and these people are needed to help lower overall costs.
There is some good news. Even before healthcare reform became law, healthcare insurers started to make the transition from underwriters of medical risk to managers of medical risk. Simply underwriting risk means insurers manage patient utilization of healthcare, negotiate prices with healthcare purveyors and pay the claims. In managing healthcare risk, insurers or huge healthcare consumers take things a giant step forward and proactively work to lower healthcare expenses. Some big companies, including Safeway and Pitney Bowes, are taking matter into their own hands by building internal risk management programs.
Pitney Bowes, for instance, incentivizes employees to see their doctor at least once a year, believing this will ultimately result in lower employee healthcare expenses. In fact, a far higher percentage of Pitney Bowes employees do schedule annual doctor visits, and Pitney Bowe’s healthcare inflation rate is markedly lower than the overall U.S. average.
In addition, health care reform now requires that health insurers maintain a minimum medical loss ratio (MLR), or the ratio of medical expenses to total insurance premiums. Insurers that fail to achieve a minimum MLR – 85 percent for a large group and 80 percent for a small group – will soon have to provide a refund to policy holders reflecting the difference between what they actually spent and the mandated minimum.
The law has also expanded the definition of MLR to include money spent on health and wellness management programs, incentivizing insurers to proactively manage medical risk more effectively to better adhere to the newly mandated minimums.
The U.S. has a gigantic and long-standing healthcare problem, and a few rays of hope should not suggest that our nation will work its way out of the woods. These are a start, however, and it is crystal clear that the problem of how to manage risk in the healthcare system must be tackled immediately, and as wisely and aggressively as possible.
Stephen Krupa is one of the founders and a managing member of Psilos Group, a New York-based venture capital firm that invests in healthcare services, healthcare information technology and medical technology companies geared toward improving the quality and productivity of the healthcare economy. Psilos has more than $580 million under management in three funds.
One big problem that I don’t see discussed is the mess of our current pricing scheme. Not only are the providers compensated for doing procedures, but it is almost impossible to get a price on care. Knowing the cost is key to making decisions. Even those on high deductible plans (such as myself) have to wait for the provider and the insurance to go through a dance to determine the price. Not only does a single visit generate multiple items (CPT codes) but there are an array of prices depending on who you. Worse still, both providers and insurance companies keep these prices secret.
We need to deal with this and force the prices to be made public. Also we need to force the simplification of the pricing scheme. Maybe a second reform (in addition to mandatory openess of pricing.. by law) is to go towards fair pricing (one price for a given service) or at least one price per insurer. Since the insurers are the ones who often mandate prices to the providers via contracts, maybe they should be required to make the pricing available.
“Annual healthcare inflation — and hence baseline premiums — have been rising 8-12 percent annually for two decades, and there is no reason to expect this to change anytime soon.”
So I have to ask, what value is the insurance industry giving us? Skimming off the top is not a value.
“Rate increases are already highly regulated in most states”
Really? Certainly not my state where BCBS gets what it wants when it wants.
“of President Obama’s health care overhaul plan, U.S. workers are expected to pay average premiums of $2,200 in 2011 – an increase of 12.5 percent, the biggest in four years,”
If they were this high, or higher 4 years ago, what made them so high then? Certainly my practice saw increases of 26% in premiums within that last 5 years. It sounds to me like insurance companies now blame increases entirely on the ACA, when they were imposing similar rate increases in the recent past.
We have had health insurance in this country for a long while. The obesity epidemic is fairly new. I dont see much linkage. Look at Mexico.
“The profits being reported are obscene, as are the salaries of the CEOs of these thieves.”
Bill is it safe to assume you object to the dollar amount a very few companies make and not the rate at which they make it? Since profit margin in insurance is substantially lower then most other industries I can’t imagine why you would object to the rate.
Then the question is would you sleep better at night if the profit made by the top 10 was divided up amoungst 100 companies instead? I would bet if the top 100 companies shared 120% of the profit the top 10 do today you would never say a word about it. i.e. your ok with the money going to profit you just don’t like the concentration.
Is it right to villify 10,000+ companies becasue you take issue with 10? 10 health insurers are making low margin big dollar profits, that is far different then accusing the other 9990+ companies from raping the public
Health insurers are indeed raping the people and businesses of this country. The profits being reported are obscene, as are the salaries of the CEOs of these thieves.
> Rate increases are already highly regulated in most
> states, which focus on preventing “excess”
> profiteering by insurance carriers
What can this possibly mean when insurers are made to take on undefinable annual risk and undefinable lifetime risk? How does one price that? It is impossible, so how can anyone say that an apparent profit is a real profit? And how shall an insurer build reserves against undefinable risk and at the same time either maintain a minimum MLR or refund the premiums? Oh yes, they’ll try. Maybe the unlucky will be bailed out like AIG.
> In managing healthcare risk, insurers or huge
> healthcare consumers take things a giant step
> forward and proactively work to lower healthcare
So who sees a bright future for risk management given recent experience with disease management?