While I was in Washington, D.C., recently, a lawmaker told me she found it “shocking” that rate increases for insurance premiums would exceed the rate of medical inflation. Not far away, at the Department of Health and Human Services, regulators were busy trying to define the new health care law’s “unreasonable” rate increase standard. HHS has suggested that any increase that exceeds medical inflation might be “unreasonable.”
The Bureau of Labor Statistics today reported that, through November, the annual increase in the Consumer Price Index for medical care is 3.4 percent. Shouldn’t we be shocked when insurance premiums increase at a far higher rate than that? Aren’t rates that exceed medical inflation unreasonable?
The answer is, No. The CPI-M measures only the increase in the price of medical services from year to year—doctor’s fees, hospital charges, and so on. It doesn’t at all account for changes in use by the members of a specific employer’s health plan.
Let’s take for example the Imaginary Ad Agency (“IAA”), with a workforce of 100 using employer-funded health coverage. They all pay $400 per month in health insurance premiums. But those hundred people don’t all cost the same. Fifty of them are age 40 and older; their average health care costs are $600 a month. Fifty of them are age 39 and younger, a statistically less costly population when it comes to health care; their average health care costs are only $200 a month.
The next year, what has happened to many small- and medium-sized businesses, happens to IAA: the bad economy hits hard. Reluctantly, IAA lets go 20 of its most recent hires—the less experienced copywriters, junior ad managers, and so on. The 20 who leave are all on the younger side; the older employees—with more experience, more contacts, and more seniority—stay on.
So that leaves IAA with a workforce of 80, except that now only 30 of them are under the age of 39. Only 30 of them average $200 a month in health care costs; the other 50 still spend an average of $600 on health care. So, what’s IAA’s health insurance premium that next year? $450 a month—an increase of 12.5%. And that’s before we take into account any increase for medical inflation.
Once IAA factors in 3.4 percent for medical inflation, premiums would have to rise 15.9 percent just to support the same health coverage as the previous year. Shocking? Unreasonable?
Before HHS defines what constitutes an “unreasonable” premium rate increase, it needs to take a close look at why mid-sized businesses experience increases that outpace medical inflation, even—especially—during these tough times. I think then the shock will wear off, and reason will prevail.
As always …..very informational !
Thanks
You have made an inadvertent argument for socializing medicine and doing away with insurance. Everybody pays one way or another, but currently the amount paid is based on arbitrary factors that no individual has much control over. There must be a better way than paying $1000 a month and hoping that I don’t actually use it.
Thanks to Dave Oliker for getting out there on some very important issues. Although Dave’s example is a very simple one, the concept is understandable. My only issue is that many employers (and Broker’s) are not able to see the true utilization of a group drilled down as Dave does in his example (and groups of less than 50 can’t see any data). For many groups of over 50, and I believe even for the group of 100 in Dave’s example, rates are not simply a matter of premium versus claims and costs. Groups of this size are usually not “fully credible” and that means the rate is a combination of actuarial “book rates” which are derived from a complicated process of trend, forecasting, census data, medical inflation, eye of newt (just kidding here) and so on and their actual claims.
In my opinion, employer groups are reasonable people and would not complain nearly as much if the data was as clear as Dave’s example. I think this kind of disclosure is needed in the industry.
Thanks for doing this Dave. I hope this kind of open communication continues. We need solutions and inviting open dialogue where folks can share their thoughts is a great big step in the right direction.
In this example, the rate increase for the Imaginary Ad Agency (“IAA”) would be much higher than 15.9%. You can’t simply add the percentage increases together because they actually compound.
In your example, the average premium goes from $400 to $450 based on the census changes alone. The 3.4% increase for medical inflation would be applied to the rate of $450 per employee, making the new rate $515.30, an overall increase of 28.8%!
Good point Brian. I thought about including the affect that compounding would have on the total premium increase, but decided to leave it out in the interest of keeping the example as simple as possible while making the main point that many factors other than medical cost inflation affect health insurance premiums.
I understand the math! Very informative. Statistacally that means there are other organizations out there that have the top 20% of their staff leave due to retirement, death or phasing out of their position. So this company is left with a younger staff, and according to your example, less costly health coverage. I just have not seen any client of mine receive a decrease, nay a less that 13% increase in the past five years. So How does this unfair CPI – medical unfairly relate to my small and emerging businesses?
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Dave,
Our MVP NH health plan rates have come within $90 dollars of doubling over the last 2 years.
Yours is a good example of how factors other than the year-to-year increase in health care costs affect health insurance rates.
Hello, Mr. Oliker.
Thank you for this post.
I was wondering if you might talk about about the very significant changes for federal employees with MVP. I know we’re feeling a little beat up over the two year pay freezes but that is manageable. As for MVP, my bi-monthly High-Plan cost has gone down a few dollars (something I assumed was a result of the new legislation), but I now have to pay a $250/per person deductible for non-generic medicine (I have three family members requiring non-generic medicine so that’s $750 to get us started for the year) and then all of the copays for medicine and office visits increased. We’re regular, hard-working people and now I’m facing – conservatively – close to $1500 in increased costs for health care through MVP. Are we being punished by MVP for the new health care law?
C. Laube
Thanks for the comment. We’re a not-for-profit health plan and our purpose is not to punish our members for public policy decisions, it’s to do everything we can to keep the total cost of health insurance within reach of as many people as possible. That’s the goal of the changes you’ve seen in your MVP coverage this year. All health care costs increase year-over-year. Prescription drug costs have been increasing by about 14 percent per year. We understand that this deductible for brand name prescriptions represents a change for you and for many other members. The point of the deductible is to address the steady year-over-year increase in the cost of prescription drugs by encouraging members to seek generic alternatives wherever possible. New generic alternatives are introduced regularly and they almost always represent a cost savings over name brands. Our hope is that the deductible will be an incentive for members to seek out potential new generic alternatives. We have to balance all our members’ health care needs in the face of rising costs. Sometimes that results in higher out-of-pocket costs for some members when we have to ask them to share more of the actual cost of their care, to keep overall premiums as affordable as possible.
After all, we’re all in this health care system together.
Dave
Thank you for your reply. I appreciate your speedy response and your willingness to blog with your customers.
Unfortunately for us, we have tried all (and I mean ALL) the generics (for acid reflux & anxiety) and the alternatives to the brand names are almost completely ineffective.
And I hate to complain at all because we have always been pleased with MVP and the services you provide. I’m frustrated because when I crunch the numbers I foresee a $1500 to $2000 increase in our medical expenses this year specifically because of MVP’s 2011 changes. This is by far the largest increase in the seven years we’ve been insured by MVP and I’m trying to understand why. And specifically, why now? We’re hurting as it is. And I’ve never batted an eye at MVP rate increases because I do understand that medical expenses increase and have always been pleased with MVP.
I can’t help but feel that this is a direct result of impending legislative changes that have or will occur. And the insured feels the pain while the insurer feels virtually nothing in hard times.
Respectfully,
Cliff
As I routinely pass through Schenectady at night, I can’t help but notice that almost every light is on in MVP’s office building. Maybe I am being naive, but isn’t energy one of the highest overhead costs for any business?
If employees are working during these hours I will happily put my foot in my mouth. Otherwise I find it “shocking and unreasonable” to keep every light on, every single night, in light of recent rate increases.
Actually our building is very energy efficient with sensors that shutdown lighting and automatically reduce heating and cooling at times when those parts of the building are not in use. We also have quite a few employees who do work at night.