Many have been led to believe that the primary reasons for the high cost of health insurance premiums are exorbitant insurance company profits and CEO salaries. Some have even asserted that a typical health insurance carrier “clears 70 cents” of every dollar spent on health insurance. To this end, the Patient Protection and Affordable Care Act (PPACA) includes new Medical Loss Ratio (MLR) requirements for health insurance companies, with the HealthCare.gov website proclaiming that the new rules will ensure that consumers will get their “money’s worth on health insurance.”
However, the reality is much different. PricewaterhouseCoopers calculated insurance industry profits to be closer to three cents per dollar of premium, and nationally the truth is that 86 cents of every health insurance premium dollar spent by consumers and employers goes to cover the cost of doctors, hospital care, drugs and other medical services. In the Vancouver-Portland area, the percentage is closer to 90 cents of every dollar, primarily due to significant efforts by our local insurance carriers to reign in administrative overhead, and the fact that several of the carriers operate as nonprofits.
One of the main reasons health insurance premiums are rising is because the underlying cost of medical care is increasing. The primary driver of health insurance premiums is the cost of care, and unfortunately, health care costs are higher again this year and are expected to continue to increase for the foreseeable future. The Centers for Medicare and Medicaid Services (CMS) project that total health spending will increase more than 80 percent through the end of this decade.
So, while it is true that the cost of care is increasing, and health insurance carriers do return most of each premium dollar in claims, consumers, employers, the government and the insurance industry are still responsible for a big part of the unaffordable premium dilemma facing us today. We the consumers are responsible for the demand side of the equation and the reality that we do not take care of ourselves, as evidenced by the recent statistics on obesity in America.
When we do require care, we demand access to care when we want it and how we want it, regardless of the cost. The insurance industry and employers, although not intentionally, combined to create a system where the consumer is shielded from the true cost of care by insurance plans and HMO’s that revolve around co-payments for everything. Consumers have come to believe that an office call is only worth $25, when the true value is roughly $250 to $500 or more, and that a prescription drug costing $1,000 should only cost $50.
The result is that consumers have no incentive to shop, based on the actual cost of care, like they do for any other item on which they spend money. Even if a similar drug costs only $250, the consumer’s co-payment is still $50.
The federal government is equally responsible, because the true cost of the Medicare and Medicaid is hidden in a premium cost shift to the private sector. Our elected representatives are unwilling or unable to collect the tax revenues required to support the cost of care provided by these programs, so they pay the providers of care less than what the care actually costs, so providers are forced to increase their fees to those with insurance to cover the difference. Some studies have shown that if these federal government programs paid the actual cost of care, insurance premiums could decrease as much as 25-30 percent.
Health insurance is becoming unaffordable for more consumers each day, and unless we recognize the part we all play in the upward trend in the cost of care, and change our behavior accordingly, the future cost outlook is dismal. Individuals need to assume responsibility for their health, and when personal decisions lead to health care that would otherwise be unnecessary, they possibly even need to pay more. Insurance plans need to stop insulating consumers from the cost of health care, commonly referred to as transparency, and catastrophic protection needs to be combined with preventive care coverage. The federal government needs to also be transparent and pay the real cost of care, not relying on the rest of us to cover their deficit.
Greg Seifert is the president and CEO of Vancouver-based Biggs Insurance Services.
