If Health Spending is Increasing Slower, Why Are Premiums Rising Faster?
- The rate of increase in private health spending has dropped significantly since the financial crisis hit in 2008, although government programs like Medicare and Medicaid have continued along their unsustainable path.
- However, administrative costs and private premiums began to increase immediately upon President Obama’s enacting the Patient Protection and Affordable Care Act (PPACA).
- PPACA has reduced choice and competition in health insurance; small businesses are dropping coverage; but the surviving insurers are booking record profits.
- The repeal of Obamacare will immediately restore choice and competition in health insurance – even before it is replaced with a superior reform.
A funny thing happened on the way to the so-called health reform promised in the Patient Protection and Affordable Care Act (PPACA), signed by President Obama on March 23, 2010: Although the cost of health care has increased at a slower rate than in previous years, premiums for health insurance and the share of premiums used for purposes other than paying claims have been increasing faster than in previous years.
That’s not exactly what President Obama promised, is it? In fact, it is the opposite of what he promised. What is going wrong?
The crisis of 2008, which resulted in a significant jump in unemployment, meant that the number of Americans with private coverage dropped. As a result, the overall rate of private health spending has decreased. As shown in Table 1, the annual rate of increase in spending by private health insurance was 7.8 percent in 2007. It has dropped by more than two thirds to an annual increase of just 2.4 percent in 2010, according to data analysed by the federal government’s Centers for Medicare and Medicaid Services (CMS).1
Of course, Medicare (the federal single-payer health plan for seniors) and Medicaid (the joint state-federal complex of plans for the poor) have continued along their unsustainable course, also shown in Table 1. Nevertheless, the tightening of private health spending has led to an overall reduction of the rate of increase in U.S. health spending to 3.9 percent in 2010, versus 7.6 percent in 2007. The Altarum Institute estimates that aggregate annual health spending for 2011 increased by a still reasonable 4.5 percent from 2010.2
One would reasonable expect that, in such an environment, private health insurers would be in the doldrums, suffering from a loss of beneficiaries, and competing like mad for the smaller pool of still employed Americans.
That’s how they responded when the crisis hit in 2008 and 2009, before PPACA (or Obamacare) was passed. Furthermore, health insurers became significantly more efficient at their business processes. McKinsey and Company describes the dramatic reduction in the rate of increase of health spending as “…the longest stretch of continuous deceleration since 1960. The recession appears to have contributed to this slowdown, marking the first time in five decades that an economic downturn has had an immediate and measurable effect on healthcare spending growth.”3
McKinsey’s analysis concludes that of the various categories of health spending, spending on “health administration and insurance” increased the least – just 1.6 percent annually – during the period 2006 through 2009. The next lowest category was outpatient care, which increased by only 3 percent annually over the period.4 The CMS data shows that the “net cost of health insurance” (that is, the share of health insurance that does not pay for medical claims) shrank by an average of about 2 percent annually in 2008 and 2009, also shown in Table 1.
But this came to screeching halt, followed by a fast U-turn, when PPACA was signed. Although the rate of increase of private health spending is still low, premiums are rising fast, which makes coverage less affordable for working Americans and their employers. The “net cost of health insurance” jumped by 8.4 percent in 2010, as PPACA began to overwhelm the U.S. health system.5 CMS’ analysts conclude that “for the first time in seven years, growth in total private health insurance premiums exceeded growth in total benefits” in 2010.6 The increase in the “net cost of health insurance” was higher than any other component of health spending.7
Even many experts did not fully appreciate this unintended (or, perhaps, more accurately labelled “unadvertised”) consequence of Obamacare. Last June, the credit-rating firm Weiss Ratings observed that medical-claims costs for 2010 were muted, and that “insurers will have a much harder time justifying large premium rate increases, and consumers and employers should get some relief.”8
If only it were true. On the contrary, premium growth is accelerating. The Milliman Medical Index (MMI) for 2011 reported total health costs (including the administrative load of insurance) for a family of four covered by a PPO of $19,393, a 7.3 percent increase over 2010.9 The Kaiser Family Foundation’s latest survey of employer-based health benefits reported a significant increase of 9.5 percent from 2010 to 2011, much higher than in previous years, as shown in Table 1.10 Furthermore, this is for plans that usually have higher deductibles than in previous years: 31 percent of beneficiaries had deductibles over $1,000, versus only 12 percent in 2007.11 These premiums are increasingly unaffordable for many small businesses: Table 1 shows that the proportion of small firms offering health benefits dropped from 69 percent to 60 percent just from 2010 to 2011.12
There are two primary reasons for the fact that Obamacare has caused premiums to spiral out of control for American families and businesses, despite tame increases in health costs. The first is static and the second is dynamic.
First, some of the law’s anti-competitive so-called “consumer protections” took effect in September, 2010, especially eliminating pre-existing exclusions for children, coverage of preventive health services, and extending dependent coverage for young adults up to age 26 on their parents’ plans.
Linda J. Blumberg of the Urban Institute has summarized the official estimates of the consequences of these and other “consumer protections”. Although there is a wide range of estimates for each “protection” that came into force in 2010, the mid-point for the aggregate effect is a premium increase of about three percent.13
But in the longer term, the second – dynamic – effect, will be more pernicious and more difficult to estimate as Obamacare continues its roll-out. Choice and competition are disappearing fast from U.S. health insurance. Reports abound of health insurers retreating, especially from small-group markets. For example, New York’s Empire Blue Cross Blue Shield has decided to dramatically shrink, dropping over 20,000 small groups containing over 200,000 beneficiaries.14
Obviously, as insurers flee, those who remain will reap the benefits of reduced competition. According to an analysis by Bloomberg Government, average operating profit margins for four of the largest insurers (UnitedHealth Group, Aetna, Cigna, and Humana) increased to 8.24 percent in the 18 months after the law was signed, versus 6.88 percent in the 18 months before the law was signed. Quarterly earnings per share from continuing operations between the third quarters of 2008 and 2011 jumped 29 percent.15
In full defensive mode, President Obama’s Deputy Chief of Staff put out a press release stating that increases in premiums were due to insurers’ greed and that they had overestimated the amount of medical claims that they would have to pay in 2011.16 While the latter may be partially true, it is hardly plausible that there was a systemic actuarial failure in large insurers’ underwriting procedures for 2011. If the large carriers were all overpricing their policies, other insurers would have increased their offerings, not begun their withdrawal from health insurance.
Obviously, it is neither politically nor economically sustainable that large health plans can indefinitely raise their premiums in response to Obamacare’s decimation of their competitors. If President Obama’s faction regains control of the federal government, health insurers know that they will be sacrificed on the altar of the “public option” or “single-payer” government monopoly health care. That’s why their trade association still resists much of the law, and gave $86 million to the U.S. Chamber of Commerce to fund that organization’s opposition to it.17
If PPACA had not been passed, the recession would have been somewhat softened by moderate premium increases for health insurance. Obamacare rubs salt in the wounds of the American people – either unemployed or without a raise in four years – who are suffering premium increases driven by that misguided reform.
The good news? As soon as PPACA is thrown out by the U.S. Supreme Court or repealed by the next Congress and President, a good degree of competition and choice will return to health insurance – even before it is replaced with real reform that puts the American people – and not politicians – in charge of their health dollars.
John R. Graham
Director of Health Studies, Pacific Research Institute
San Francisco, CA
Twitter: johnrgrahamFacebook: www.facebook.com/pages/JFreeAmericanHealthCare
1 Anne B. Martin, David Lassman, Benjamin Washington, et al., “Growth in US Health Spending Remained Slow in 2010 ; Health Share of Gross Domestic Product Was Unchanged form 2009,” Health Affairs, Volume 31, Number 1 (2012), pp. 208-219.
2 Health Spending Growth Up In Early 2011 But Trending Toward Record Lows At Year’s End, press release (Ann Arbor, MI: Altarum Institute, January 13, 2012).
3 Jesse W. Bradford, David G. Knott, Edward H. Levine, and Rodney W. Zemmel, Accounting for the Cost of U.S. Health Care: Pre-Reform Trends and the Impact of the Recession (Washington, DC: McKinsey & Co., December 2011), p. 1.
4 Jesse W. Bradford, David G. Knott, Edward H. Levine, and Rodney W. Zemmel, Accounting for the Cost of U.S. Health Care: Pre-Reform Trends and the Impact of the Recession (Washington, DC: McKinsey & Co., December 2011), p. 4.
5 This figure includes private plans’ costs of administering Medicare Advantage, Medicaid managed care, and other government health programs for which they win contracts.
6 Anne B. Martin, David Lassman, Benjamin Washington, et al., “Growth in US Health Spending Remained Slow in 2010 ; Health Share of Gross Domestic Product Was Unchanged form 2009,” Health Affairs, Volume 31, Number 1 (2012), pp. 208-219.
7 The next highest component was Durable Medical Equipment (DME), which increased by 7.3 percent.
8 Gavin Magor, Insurer Medical Expense Growth Slows Dramatically (Jupiter, FL: Weiss Ratings, LLC, June 29, 2011).
9 Lorraine Mayne, Chris Girod, and Scott Weltz, 2011 Milliman Medical Index: Healthcare Costs For American Families Double In Less Than Nine Years (Salt Lake City, UT: Milliman, May 2011), pp. 1-5.
10 Gary Claxton, Matthew Rae, Nirmita Panchal, et al., Employer Health Benefits 2011 Annual Survey, publication #8225 (Menlo Park, CA: The Henry J. Kaiser Family Foundation; and Chicago, IL: Health Research & Educational Trust, September 27, 2011), p. 31.
11 Gary Claxton, Matthew Rae, Nirmita Panchal, et al., Employer Health Benefits 2011 Annual Survey, publication #8225 (Menlo Park, CA: The Henry J. Kaiser Family Foundation; and Chicago, IL: Health Research & Educational Trust, September 27, 2011), p. 101.
12 Gary Claxton, Matthew Rae, Nirmita Panchal, et al., Employer Health Benefits 2011 Annual Survey, publication #8225 (Menlo Park, CA: The Henry J. Kaiser Family Foundation; and Chicago, IL: Health Research & Educational Trust, September 27, 2011), p. 36.
13 Linda J. Blumberg, How Will the PPACA Impact Individual and Small Group Premiums in the Short and Long Term? (Washington, DC: The Urban Institute, July 2010), pp. 1-2.
14 Elizabeth MacBride, “Need to Buy Health Insurance? Good Luck?,” Crain’s New York Business (January 8, 2012). Available online at http://www.crainsnewyork.com/article/20120108/SMALLBIZ/301089987.
15 Sarah Frier, “Insurers Profit From Health Law They Fought Against,” Bloomberg.com (January 5, 2012). (Article cites original study which is available by subscription only.) NB: The insurers profits also include earnings from the increasing share of their business that comes from government programs like Medicare Advantage and Medicaid managed care.
16 Nancy-Ann DeParle, Health Insurance Premium Update, blog entry (Washington, DC: The White House, September 27, 2011).
17 Sarah Frier, “Insurers Profit From Health Law They Fought Against,” Bloomberg.com (January 5, 2012).