» Why Does Health Insurance Get More Expensive?

July 21, 2021

Business Strategies, Healthcare Innovation, Healthcare Spending, Self-Funding

America’s healthcare system gets wide discussion. Study after study finds that it’s expensive and underperforms comparable systems.

When we say that American healthcare is expensive and growing increasingly so year after year, we need to understand why.

Why Does Health Insurance Get More Expensive?

We assume health insurance will be more expensive every year. Financial teams anticipate increases, human resource teams work with broker consultants to minimize those increases, and businesses determine whether to absorb the cost increases, pass them on to employees, or some mix of the two.

For the majority of small to mid-sized businesses, this cycle persists year after year. All the while, it yields increasingly worse results.

So why do insurance premiums increase year after year?

The Annual Renewal Merry-Go-Round

Through the plan year, employees see their doctor, fill prescriptions, and receive services such as injections, therapy, or surgeries. Most care is delivered reactively, after an injury or incident and the employee wants treatment as a response.

Unfortunately, employees are under-incentivized to work with a Primary Care Team or Primary Care Physician, which has been shown to reduce total cost of care and improve outcomes. Instead, employees overuse prescription drugs and reactive procedures and surgeries.

This inefficient spending leads to higher claims, which the carriers then translate into an 8%, 10%, or higher renewal and higher premiums next year.

With the cost increase, the employer may choose some method of cost-shifting, such as absorbing the cost increase, passing it along to employees, and reducing benefits via higher deductibles or other plan changes.

While shifting costs may address the premium increase, it actually exacerbates the underlying problem. When their plan covers less and costs more, employees are less likely to seek out preventative and proactive care and treatment. Then when they first present and seek care, they are less healthy and more expensive to treat.

Thus we have a vicious cycle year after year.

Expensive Healthcare plus More Care

With our system focused on reactively delivering care, dubbed “sick care” nowadays, we find that healthcare is getting more expensive to deliver.

A study out of the University of Washington and UCLA published in 2017 looked at healthcare spending between 1996 and 2013. The authors found that of the $933 billion increase in overall spending during that time period, 23% was attributed to population growth, 11% was associated with an aging population, and a whopping 50% was attributable to increases in the price and severity of services delivered.

Health insurance premiums increase as employees age and headcount increases (though this wouldn’t increase the per employee per year or PEPY cost), and as employees consume more expensive and higher severity services.

The Boiling Frog Conundrum

If I told you your rent would be twice as expensive in 10 years, you’d likely move or take some other action to address the cost increase.

Yet, many small and mid-sized businesses face this exact issue when it comes to their health insurance premiums.

“Our broker negotiated our renewal from 12% to 7%”

Well, according to the Law of 72, your premiums will double in 10 years.

A slightly less worse increase is not “cost savings,” no matter how we try to spin it. And this is not low volatility either.

Small and mid-sized companies understand the issues associated with rising health insurance premiums. And they know that a breaking point will come soon.

Consider that the average annual employee premium rose nearly 48% from 2010 to 2020 ($5,049 in 2010 and $7,470 in 2020, according to the Kaiser Family Foundation), while the median household income only rose 18% across that same time span (From $57,904 in 2010 to $68,703 in 2020 according to the Federal Reserve Bank of St. Louis).

And when we compare those numbers relatively, we see that premiums rose from 8.7% of median household income in 2010 to 10.8% in 2020. This can’t continue increasing forever, and small to mid-sized employers feel the pain this causes.

How to Reduce the Cost of Employer Health Plans

Combining the factors above, it becomes clear that for employers looking to spend less on their health plan, they must combine the following:

Integrated primary care
Transparent claims and utilization data to identify cost drivers
Smart plan design to incent preventative care and get people to see their doctor
Accept that consistently rising health insurance prices are unsustainable

To help small to mid-sized businesses better manage their health plan spending and improve employee health, we have brought together solutions to upend the health insurance status quo and deliver real results for employers and employees.