After several years of more modest increases, 2011 brought companies and consumers sharply higher health insurance premium increases—and questions about the factors behind the increased rates.

A September 2011 Kaiser Family Foundation study showed the average annual premium for family coverage through an employer grew to $15,073 in 2011. That’s 9 percent higher than the same premium in 2010, and a dramatic contrast to the preceding several years, when premium increases of 3 percent to 5 percent were common. The overall trajectory, however, has always been up. The cost of family coverage has nearly doubled since 2001, though wages have increased by just 34 percent.

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Companies that self-insure and rely on stop-gap policies to cover unexpected expenses saw rate hikes of similar percentages. Those increases were typically similar to those levied on fully insured companies in percentage terms, but less in absolute terms, as stop-gap coverage is typically much less expensive than a full insurance plan for all a firm’s employees.

The reasons behind the dramatic increase are many and complex. They include industry consolidation, global market pressures, medical costs, Medicare and Medicaid reimbursement rates, and the known and unknown effects of the federal health care reform law, which has begun to take effect but is not yet fully in place.

A consolidating industry

“In the insurance world there has been a lot of consolidation, and there aren’t a lot of independent carriers,” says Jim Williams, president of Lockard & Williams, a third-party administrator for employee benefits based in Pascagoula, Miss.

“Companies that are toward the top of the food chain dominate the market,” he says.

Williams is right, according to the American Medical Association, which reports there were 400 corporate mergers between insurance providers in the dozen years leading up to 2009. In a growing number of states, a single insurer provides the majority of private health insurance coverage. Insurers in these states might feel less competitive pressure to keep rates lower, particularly for small companies, which often lack the resources to self-insure.

Global market pressures

Of course, premiums aren’t the only income source insurance companies have. These corporations have other significant investments, and “they’re not making as much money on their overall portfolios,” says Tony Steuer, a life insurance analyst and financial educator based in Alameda, Calif. “They have to invest in relatively safe vehicles, and those have been paying really poorly.”

Highly rated bonds, including Treasury bills, municipal debt, as well as other offerings pegged to either the Fed Funds rate or LIBOR (the European equivalent), historically have offered low returns in years.

Economic upheaval among Euro-zone member countries also has hurt insurance companies with global investments. Some companies, for instance, have purchased Greek or Italian debt, which offered premiums over bonds issued by more stable countries but are now in danger of default.

Insurance firms have rolling bond portfolios, “so they do have some older Treasuries at higher rates, which helps when the newer bonds are paying so little,” Steuer says.

No one knows when better yields will be available, however, and insurance companies pad that uncertainty with premium money.

Medicine: Ever more expensive

Ask a health insurance company why premiums are going up, and they’ll say that it’s simple: Medical costs are also on the rise.

It’s a fair point, says Sandy Walters, executive vice president and senior consultant at Kelly & Associates Insurance Group Inc., a brokerage, product distributor, and third-party administrator based in Baltimore. “Technology in phones and computers gets cheaper as the industry gets more mature. Medicine is different. In medicine, technology drives costs up, even as the industry gets more mature. Procedures are more expensive because they use more technology,” he says—and they use more technology because patients demand the quick, accurate diagnoses and treatments they think technology offers.

Once patients have high-tech procedures, they often require medication to maintain the results, as with bypass patients who then need cholesterol-lowering and blood pressure medication for the rest of their lives.

“We’re prescribing more drugs,” Walters says, adding that those drugs are more expensive. “It isn’t unusual for drugs to cost $5,000 a month—for one prescription. Top plan utilizers might spend $50,000 a year on drugs.”

Procedures are also more expensive because hospitals have raised their prices.

“Hospitals have really been ratcheting up their costs, especially on replacement body parts” such as artificial knees and hips, says Fred Hunt, who is active past president of the Society of Professional Benefit Administrators in Chevy Case, Md. “I’ve heard anecdotal stories and seen bills from members, and markups might be as much as 1,000 percent. They’re doing it because they can. It’s a quick rip-off, like when a restaurant buys a bottle of wine at one price and sells it to you at another.”

A night in the hospital, Hunt adds, might have once cost $1,800. Now it could be as much as $5,000, “When third-party administrators ask, hospitals give a lot of double talk and a lot of non-answers.”

Hospitals also play a complicated game of shifting costs, subsidizing uncompensated care, and charging different patients—and benefit plans—different prices for the same services. Patients with one type of insurance pay one price, patients with a second insurance type pay another, cash patients pay a third price, and patients with government-funded health care pay close to nothing at all.

By reducing or eliminating provider payments for Medicare and Medicaid patients, the federal government has pushed back costs onto the insurance market, Williams says, forcing hospitals to bill insured and cash patients more to cover the costs of treatment that government reimbursement ignores.

“They’ve expanded eligibility for those programs at the same time to deal with the uninsured problem. That’s supposed to balance health care reform on paper, but really the insured are subsidizing the uninsured or those in government programs. Doctors can refuse to see Medicare and Medicaid patients, but they run the risk that those programs will remove their eligibility,” Williams says.

The Patient Protection and Affordable Care Act ultimately will force hospitals to adopt pricing transparency, which could drive costs down. In their view, that’s all the more reason to increase prices now.

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PPACA: The big question mark

Both insurers and hospitals are raising their rates in anticipation of fully implemented health care reform.

“About three years ago hospitals and doctors thought there would be single payer. They thought they’d better get their money while they can. They don’t know if the Feds are about to dictate their price, so if cost control shows up, they’ll be negotiating from a high point,” Hunt says.

A single-payer health care system isn’t an option right now, but a price increase still makes sense from hospitals’ point of view.

PPACA means new costs for insurance companies. They’ll have to offer coverage on parents’ policies for students up to age 26, guarantee policy issuance despite pre-existing health conditions, and provide fully funded wellness benefits.

“Insurers know the cost is going up, and they’re going to get the increases in while they can,” Lockard says.

Of course, insurance companies don’t know exactly how many students or patients with expensive pre-existing conditions will end up on their policy rolls, and there isn’t a good way for them to collect that information.

An individual company could have a very different experience than its industry peers, depending on whom it covers. According to Hunt, the Agency for Health Care Research recently said that 1 percent of the population generates 22 percent of costs, and 5 percent generates 50 percent of costs. White, non-Hispanic women in poor health, the elderly, and users of publicly funded health care are the most expensive populations.

“Get a few more of those and you increase costs by a lot,” Hunt says.

That worries insurance companies. To prepare for the possibility that their new plan members will be expensive, “they pad their uncertainties,” Steuer says.

New rules for medical loss ratios worry insurance companies even more than the uncertain medical expenses of a new population. Under PPACA rules, health care plans serving groups of fewer than 50 people must spend 80 percent of their premium dollars on claims, leaving 20 percent for administrative costs and profit. Plans that serve more than 50 people must spend 85 percent of premiums on claims, leaving just 15 percent for administration and profit. Plans that don’t spend the required proportion on claims must give that money back to policyholders.

From a consumer’s point of view, this sounds like a dream come true. From an insurance company’s perspective, however, it’s a nightmare. Right now, a carrier estimates its claims costs and sets rates for a given year. If it spends less than estimated, the company keeps the excess. If it spends more than its estimate, it adjusts rates up for next year. In this system, luck can only work in an insurance company’s favor.

Under the new law, by contrast, insurance companies with fewer claims than they estimated would give the extra money back, a rule that caps potential profits. But if an insurance company has a bad year, one in which there are more claims that it estimated, the law doesn’t automatically let the firm raise its rates in response. Each state must approve requested increases, with jumps of more than 10 percent automatically questioned.

Instead, the insurance company must make up the extra from the amount allotted to administrative costs and company profit. In this second system, luck can only work against an insurance company.

“It’s hard for me to believe that insurance companies will stay in the business,” Hunt says. “They may say thanks, but no thanks.”

Those who don’t want to stay in the U.S. health insurance market have other choices, some of them potentially more lucrative. Companies could offer supplemental insurance to Asians, for instance, tapping a market that Hunt says is larger than the U.S. health insurance market.

Some carriers are leaving the market already, Lockard says.

“It’s harder and harder to find availability, especially for individual policies,” he says. Other companies are technically still in the market, but persuading them to write policies is absurdly difficult.

“We have carriers now who have made it so difficult to get individual coverage that we don’t do that coverage anymore,” Lockard says. Even getting a quote is difficult, he says. “People sit here for an hour and a half answering questions just to hear a number, and then that number is much too high.”

Health insurance costs won’t be coming down anytime soon—perhaps not until we learn to make some medicine irrelevant by taking better care of ourselves.

“Having people take care of themselves in a preventative way is the answer,” Walters says.

Historically, that’s been a tough prescription to follow.

Ingrid Case is a freelance writer and editor in Minneapolis. She can be reached at ingrid.case@mindspring.com.

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