Health Insurance premiums are one of those topics that some folks get very passionate about. The health premiums continue to rise every year to some degree and for many families really put a crimp on their budgets. There are plenty of myths floated out there by both sides of the argument on health insurance premiums. Currently a lot is being said about the expected rise in premiums on January 1st when the Affordable Care Act kicks in. At that time many are expecting sticker shock.
Health insurance premiums are a function of various components. There are the costs to provide the health care itself, profit for the insurance company, and insurance company overhead expenses. The healthcare expenses historically rise year over year, often faster than general inflation. There are many reasons for these to rise. Of course overhead also tends to rise as insurance companies give increases in compensation to their employees and their other costs of running a business increase each year. Most insurance companies have done a lot to squeeze costs out of overhead which has cut compensation to agents and to some employees both.
Healthcare expenses paid by insurance carriers, are made up of several components. These components are controlled by physicians, hospitals, and other service providers which take significant work for the insurer to manage. Of course at any one carrier they can also be devastated by utilization outside the expected levels, which either hurt their profits or cause losses which are then made up by premium increases. Also, included in healthcare cost increases each year are planned rate increases to larger providers with strong control in a market. The cost of new technology also plays a part in rising costs. In some cases new technology costs are carved out of payment schemes already in place and end up paid on a high percentage of charges, those charges being set by the provider. Thus when the new technology comes out and earns providers top dollar for that care which is sometimes coupled with overutilization that increases overall costs more. When this happens healthcare costs spiral and it is hard to check those new costs and bring them into control.
The lifecycle of negotiated rates for new technology overall can allow several years to go by before the bulk of new high cost services are brought into check. There are so many reasons for that, but the way contracts are negotiated it is hard to shorten that lifecycle without compromise on other payment levels which takes time to negotiate. Unlike a lease or other contract where the goods and/or services are well defined and can’t easily be changed without modifying the contract, in healthcare new technology comes out all the time and does not fit neatly into the healthcare provider billing codes adopted for use on a national basis. When this happens default provisions in the contract come into play, and most often it is a discount off charges, which again are set by the providers.
Thus a provider can set a charge that is ultra profitable for the new technology. The timeline for inclusion of new technology into new codes is usually one or more years in most cases. Codes are always reviewed and changed. When the new technology results in coding changes then it takes a bit of time for the carriers to update fee schedules to include the new codes. Of course with the advent of the current Medicare payment scheme where there are a few components that determine the payment of each care code, a new code can easily be priced for all carriers.
So, healthcare costs driven in a large part by new technology (including new prescriptions) tend to push up the cost of care every year. Add in the other components where costs are driven up for more traditional reasons it then becomes hard to keep costs from driving up premiums each year. In a quick add on response, although some may feel the executives walk with excessive bonuses, most are actually not too far off from what similar level executives at similarly large organizations are paid. This is a decision by the board’s executive compensation committee and usually set in conjunction with consulting firms that help monitor senior executive compensation at many of the fortune five hundred companies.
As mentioned before the introduction of Affordable Care Act will lead to premium increases in 2014. These increases are primarily for the individual and small group market and will come as a result of increasing the amount of benefits that all plans must cover. Many of the benefits are only beneficial to a few but everyone will now pay for those benefits regardless.
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