Health insurance companies responsible for only 5% of premium increases

Read the headline again. Then, think about the written and spoken attacks on health care insurance companies from Congress, pundits and directly from the president. This industry is a convenient and popular target for the left, just like oil and banking firms with their $3 gas and $2 ATM fees.

I’m sick of the attacks. Certainly, health care insurance companies have the duty to serve customers and members well and treat them fairly, but they also have the right to root out fraud at every level – just like the president wants to do more of – and make reasonable profits.

Health care insurance companies are responsible for about 5 percent of premium increases, the remainder of increases – 95 cents of every dollar – can be directly attributed to increased costs at the provider level. Providers include hospitals, physicians and other health care professionals.

Makes you wonder why the president and members of Congress get on TV and continually bash the evil insurance companies, and ignore 95 percent or more of the cost equation. Or maybe we already know? During the past decade, the left has selectively targeted certain industries including big oil, big bank and the evil health care insurance companies in favor of the working man.

It’s part of the playbook. Create class warfare between individuals and some grand corporate identity which “makes billions” and is run by a few nameless elites making $100 million each pulling our collective strings while deciding who lives and who dies. Pure deception, and Americans fall for it.

Of course, that picture does not include the thousands and thousands of people – friends and neighbors – who actually work for these grand corporate identities.

Placing blame on the hospitals, doctors, nurses and other health care professionals is a third rail for politicians since those are the people we – as health care consumers – work with during times of need. Attacking them would be politically stupid, attacking a corporation in an “ivory” tower is safe.

Before we get to the data, I want to make it clear I am not blaming hospitals and health care providers, nor am I suggesting they are screwing people to line their own pockets, I’m just pointing out the political posturing by Democrats (some Republicans) and the president as they twist your perspective to suit their agenda.

There is no single cause for the escalating costs of health care, yet the majority of medical care cost increases, and thus higher premiums, can be directly tied to the escalating costs of prescription drugs, hospital stays, new technology and physician visits.

For reference, I’m using Department of Health and Human Services data from the National Health Expenditure Web tables (Table 12). The overview page is located here, and includes the following description.

The National Health Expenditure Accounts (NHEA) are the official estimates of total health care spending in the United States. Dating back to 1960, the NHEA measures annual U.S. expenditures for health care goods and services, public health activities, program administration, the net cost of private insurance, and research and other investment related to health care. The data are presented by type of service, sources of funding, and by sponsors.

The original PDF of the Web tables is located here, as noted the numbers I will reference are on Table 12, or page 15 of 17.

Where do our health care premiums go?

Between 2003 and 2008 private health insurance premiums collected increased from $604.6 billion to $783 billion, and average increase of 5.3 percent per year. In 2008, the breakdown of expenditures was as follows.

In other words, about 12 cents of every premium paid dollar went to health insurance companies in the form of administration and profit. In a 2009 report by the Congressional Budget Office entitled Key Issues in Analyzing Major Health Insurance Proposals [PDF, page 45, Table 1-4], the numbers are slightly different. They indicate the administration and net cost of private health insurance at between 7 and 10 percent depending on how you calculate.

What is the percentage change of the increases for each expense category?

As noted, the total premiums increased about 5.3 percent per year, but each expense category did not increase at the same rate, some actually decreased. Again, I look at the bottom right corner of Table 12 (page 45) in the Department of Health and Human Services data. I’ve transcribed the original and provide you with the average annual percent change from the previous year.

Since the average increase between 2003 and 2008 for the net cost of private health insurance was about 2.2 percent, I’ll use 2006 data for the next set of calculations.

For premium increases, what is the percentage breakdown among expenses?

Using the same data, we can calculate the percentage breakdown for each category expense. Between 2005 and 2006, total premiums increased $36.6 billion, of that increase, only $1.8 billion (5 percent) is attributed to the net cost of private health insurance.

So where should we be focusing our efforts?

Insurance companies and employers are stepping up. The employer-contributed health insurance plan my family is enrolled in offers us a $200 discount per year towards our out-of-pocket premiums if we simply take a survey each year, and new this year is a $900 discount per year if we both participate in free biometric screening to test body mass index, LDL colesterol, blood sugar and blood pressure. After the tests, we’re provided with improvement goals and the tools to help us lead healthier lives. We’re even provided with opportunities for credit towards next year’s premiums by participating in wellness programs offered this year.

As noted, there is no single cause for increased health care costs and insurance premiums. We must consider the following, none of which are actually helped by demonizing health insurance companies. By no means is this an all-inclusive list.

  • We must take a look at the regional variation of health care costs and learn from hospitals, physicians, health care professionals and insurance companies who are improving service and quality while keeping cost increases lower.
  • We need to review health care cost trends and what drives the increases. Why is there such a discrepancy of costs within states like Massachusetts? Costs and prices may vary from practice to practice, hospital to hospital, within the same area while there is little difference in the quality of care.
  • We need to look at hospital consolidation and see if those partnerships provide leverage for care centers to demand higher payments from private health insurance companies, Medicare and Medicaid.
  • We must look at the high cost of prescription medications, including new formulas on the market. What drives those costs? Are we willing to reduce the potential profit margins in exchange for a less enthusiastic research and development effort from big pharma? The certainly have done their share to improve the lives of millions … you’ve got to admit that.

Finally – and probably most important – we need to remember two additional facts. First, there has been a huge increase in the number of imaging scans, joint replacement, transplants and use of cholesterol-lowering drugs in the last 15 years. Treatment volumes have greatly increased, resulting in higher costs. It does not help that we’re already short on doctors and other health care professionals. These are all good things … improving lives … but it costs money.

Second is the rise of diabetes and obesity in the United States. There are huge economic and health issues to deal with when it is expected more than 100 million Americans will be obese within the next decade and one of every five health care dollars will be used to treat obesity and diabetes by 2018.

Do insurance companies need to do a better job at controlling costs and improving results? Certainly, but we must take the time to stop political posturing and deal with the other 95 percent of the equation.

Disclaimer: The author works for an insurance company within the information technology and business support areas. He speaks for himself, and not for any insurance company.

5 replies
  1. Dimsdale
    Dimsdale says:

    There is no percentage in blaming doctors, nurses and hospitals.  They can't generate sympathies for patients or ire against doctors.  But insurance companies are easy, as they are like lawyers: everyone hates them except the one they have, thus explaining why s0me 80% of respondents actually like the health care they presently have.


    It is the same reason that when city and town layoffs are required to balance a budget, they go after police, fire and teachers.  Nobody cares if the managers and assistants get laid off, so no sympathy.


    When do people start to realize they are just being played as pawns?

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