What Makes An "Unreasonable" Group Health Insurance Rate?
What Makes An "Unreasonable" Group Health Insurance Rate
The rate of medical inflation is currently 3.4% -- and yet employers around the country are often seeing rates far in excess of that. Legislators and media alike accuse carriers of giving "unreasonable increases."Recently, the CEO of MVP Health Care, a New Hampshire and Vermont HMO, talked about the fact that insurance companies are often excoriated for increasing rates faster than the rate of medical inflation.He relates a story of being in Washington and having a lawmaker tell him that she found it "shocking" that rate increases for insurance premiums would exceed the rate of medical inflation. At the same time she was griping to him and not far away at the Department of Health and Human Services, regulators were busy trying to define the new health care law's "unreasonable" rate increase standard. HHS bureaucrats -- lacking any real world experience -- have suggested that any increase that exceeds medical inflation might be "unreasonable."Self-serving legislators all over the country, such as the woman he mentioned, decry the "greed" of carriers who are giving out 10-15% rate increases at a time when medical inflation is only 3.4%. And of course the only examples that are EVER reported by the media are the most egregious. News organizations drive readership with shocking numbers, so the larger increases are the ones that get all the attention.But Is It Always the Carriers' Fault?Before we run through some math to explain why increases are often larger without netting the carrier any more money, take a look at Massachusetts, where the big three carriers -- Blue Cross, Harvard and Tufts -- have between them earned virtually zero dollars of profit for the last three years combined. At the same time Partners Health Care, owners of Mass General Hospital and several other powerful providers racked up a $195 MILLION profit for their most recent fiscal year. So are the MA non-profit carriers greedy, or is the non-profit health care provider.Does that lack of earnings suggest that these carriers are inefficient? I don't think so -- these three carriers' average cost of managing claims averages about 10.5% between the three of them. Compare that to the new health care regulations requiring the rest of the industry to lower admin costs DOWN to either 15% or 20%. So there's a valid argument that Massachusetts insurers are neither inefficient nor greedy.Rates go up for a couple of reasons, the first of which is that every year America gets older, and older folks use more medical care. The Baby Boomer generation is aging... and until they exit the scene America's average age will continue to rise... that will help.But in the meantime let's look at an example. Assume a hypothetical company with 100 employees at an average health cost of $400/month. * 100 employees times $400 each equals $40,000 a month. * 50 are age 40 or older, with an average health system use of $600/month, $30,000 usage. * 50 are 39 or younger and use only $200/month each = $10,000 per month usage. * Total? $40,000 - we're assuming no administrative cost here to simplify the illustration.OK, that was the situation when the plan was renewed last year. During the year the company laid off 20 employees because of the economy. When they laid off employees, as most employers do, they laid off the most recently hired... which also are the youngest employees.So here's how the numbers shake out: * Medical inflation is 3.4%, so the under-40 crowd saw their claims cost go from $200 to $206.80 ... 3.4% increase, in line with medical inflation. * There are now only 30 of the younger group, so claims are 30 times $206.80 -- $6,204.00 * The 50 older guys also have a 3.4% increase, so their usage goes from $600 to $620.40 -- again, a 3.4% increase = $31,020 claims * Total claims = $37,224.40 per month. * Divided by 80 remaining employees = $465.30 claims per month per employee. * $465.30 divided by $400 = a 16.3% increase in rates. * And we haven't even allowed for the fact that each and every one of the remaining employees is a year older... and more likely to use incrementally more services.No smoke, no mirrors... the carrier is still collecting premiums equal to the claims the group incurs. What the large 16.3% rate increase represents is just the reality of a lousy economy and layoffs done the way they've always been done.So listen up, Legislators, Regulators: Before you point the finger in an attempt to buy votes with your righteous anger and certainly before you pass some misguided law that regulates the pricing of a product that you clearly don't understand, think twice. Do some research. Find out the truth.
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