Why Is Health Insurance So Expensive?
Demographics. The population is aging. As people reach middle age, they tend to require more medical care. According to recent studies, a 64 year-old uses nearly $4,500 more per year in health care services than an 18 year-old, and there will be a 40% increase in the 55-69 year old population by 2013.
Medical Technology. New developments have revolutionized the health care industry, giving us earlier diagnosis and better outcomes. However, state-of-the-art technology comes at a price. While new technology has enhanced the quality of life for many people, research shows that it is responsible for almost half the total increase in health care costs over the past 30 years.
Consumer Demand. Americans are heavy consumers of medical services. We want access to advertised drugs and services, as well as a wide choice of providers. A recent study by PriceWaterhouseCooper concluded that increased consumer demand accounts for approximately 15% of the annual premium increases.
Prescription Drugs. Prescription medication represents the fastest growing health care expense in our country today, and costs are projected to grow 20-30% each year over the next several years. New drugs have been developed to better treat conditions that would have been untreatable in the past. In many cases, these new drugs replace older, less expensive medications.
Developing these new drugs takes time and money, as does obtaining regulatory approval to market the drugs. In fact, bringing a single drug from the laboratory to the local pharmacy may take 15 years and cost up to $400 million. Most research and testing costs are passed on to consumers.
Government Regulation. Both federal and state governments periodically develop new rules, regulations and laws. Although typically well intentioned, each new mandate that is enacted puts a strain on the cost of health care. Most recently, the Health Insurance Portability and Accountability Act (HIPPA) has forced health insurers and providers to spend millions of dollars to revise computer systems and operating procedures in order to comply with this legislation.
Treating the Uninsured. More than 40 million Americans do not have health insurance. However, this does not mean most of them do not receive care when needed. Doctors and hospitals treat a large number of uninsured patients who simply cannot pay their medical bills. These uncollectible costs are shifted to insured patients, creating a “vicious circle” of increased health care costs and decreased coverage for those who cannot afford the higher rates and premiums. According to the Institute of Medicine, in 2003 it cost the U.S. over $100 billion in uncompensated care.
Is There Relief in Sight?Given all the reasons for increasing health care costs, it's no wonder that health insurance premiums are increasing as well. However, there is an interesting dynamic taking place in today's health insurance environment that may be good new for employers.
Over the last five years, health insurance premiums on average have increased 77% overall. This increase has been more than 2.8 times the rate of medical inflation. However, 2003 marked the first time since 1997 when health insurance premium increases were below the rate of medical inflation. This “inflationary deceleration,” along with the recent economic expansion, is creating a catalyst for a positive change in the health insurance marketplace.
This change should be a sign that health insurance premium increases will mitigate or that premiums may, in fact, renew at lower than current levels. The time is the right for employers to review their employee health insurance benefits and take a close look at not only the cost, but at how the plan is funded.