Do you find it baffling that health insurance costs in the United States are increasing at alarming rates, yet seemingly not anywhere else in the world? I find it baffling, especially since the actual costs of healthcare are not increasing even close to the rate of insurance costs.
So, why is this happening in the United States, but nowhere else?
In the United States, for the most part, we have abdicated responsibility for what healthcare services actually cost.
Yes, I said it. We have, for the most part, abdicated our responsibility to understand what health care costs.
I do this every day and it even happens to me. I go to the doctor, I pay my 20 bucks, and I think that that’s all it costs. It doesn’t. Doctor visits don’t cost $20. They cost $85 or $120 or even $250. Or, if you have complex medical needs, that visit could cost over $500.
However, many of us don’t see the actual cost of our doctor’s visit, or if we do, we shrug our shoulders and think, well insurance will cover that, and move on.
You are the Insurance Company
For every other service in life, we know the cost of something before we pay for it. However, our current health insurance system keeps both you as the employer, as well as your employees in the dark. We have no idea how much a health insurance service (i.e. doctor’s visit, lab tests, imaging, procedures, etc. – inpatient, or outpatient) will cost until weeks or months after that service is performed. Not only do we not know how much a procedure costs, neither does your insurance company. Ultimately, you are the insurance company; therefore, it’s in your best interest to know what your service costs. So, how did we get here?
This is one of the consequences of the Affordable Care Act. An insurance company must spend 80-85 cents on every dollar of claims. In theory, this makes sense since it’s important to control administrative costs and spend the bulk of the money on claims. However, what that ultimately means to an insurance company, which is a publicly traded company, is that the only way they can grow their revenue and their profit is to allow for the costs of claims to increase at will. Thus, the higher the claims cost, the higher their cut.
Most large insurance companies are for-profit entities and they owe that growth to their shareholders, which is reasonable since the point of business is to make money. And, not unlike other for-profit entities, insurance companies also have to plan their budgets and estimate what their claims will be. However, the lack of transparency in the insurance industry is very concerning.
For example, employers have no idea what their claims actually cost, despite knowing how much they pay in premiums. What they don’t know, however, is how many layers were added in between the provision of care and that final amount. It’s practically impossible to find these numbers out. Even if you are able to get through the red tape, once most employers receive the data, it’s impossible to make heads or tails of it.
This can be both particularly important and concerning for manufacturers and employers who have businesses that run on a slim margin. For example, I know a CFO whose company makes paper plates, and while he negotiates to the tenth of a cent on raw materials, he has no idea what their health insurance costs.
Why do Health Insurance Premiums Increase?
If you’re fully insured, you, as the employer, pay a premium to your insurance company. As the employee, you pay your share of the cost at the provider’s office and then health care plan pays their share. And, if you are like most people, you assume the insurance company will deliver the lowest price on those services. However, this is not what happens.
The process looks something like this:
Your case goes to underwriting and the team reviews the prior year and determines what ongoing conditions are present within your group. From that information, the insurance company decides how much risk they are willing to absorb, they negotiate the stop loss/pooling or reinsurance agreement and they decide what they are going to charge you in premium for all this.
Let’s discuss this a bit further at a high level. I will delve more deeply into each of these in future posts.
The premium you are charged needs to fund four buckets: claims, reinsurance/stop-loss, administration, and pooling. First, the claims bucket is an estimation of how much your group will spend on claims. Next is the reinsurance bucket. Insurance companies do not assume 100% of the risk for your group. They absorb X amount and then they pass that off to something called a reinsurer or a stop-loss carrier. If you are fully insured, that information is not visible to you. Next, is the administration bucket. It costs money to manage a plan, including administration of the plan rules, processing of claims, and ensuring responsive customer service.
Finally, there’s a pooling charge, which is an estimation of large claimants (a crap shoot for smaller groups), margin and profit. Typically, 6-8% of the total. Most for-profit entities have a revenue target each year, and insurance companies are no different. They look at their revenue target, claims, and administrative costs, then add their pooling charge. In theory, there’s no problem with any of this… unless, of course, if they guess wrong.
Here is why: Assume that your insurance company is projecting your claims to be $500,000. And, if you are a 100-life employer, you probably have about 100 members (employees and dependents) on your plan. If you only spend $350,000 of the $500,000 that the insurance company projected, you don’t get that $150,000 back. That overflow stays with the insurance company.
If you spend more than the $500,000 the insurance company projected, they have reinsurance. It’s not coming out of their pocket; it’s coming out of the pocket of the stop-loss. The stop-loss coverage that is built into your plan cost.
Understandably, the reinsurance might increase a little bit next year, but that cost is being passed back to the employer.
The result is that the carrier (insurance company) can forecast what they will make, plus they’re hedging their bets that your claims will be less than forecasted.
This is why it’s especially important for you to know what your claims cost so you can better negotiate your plan.
There is great disparity between healthcare costs and the cost of health insurance. Insurance companies are over-estimating your potential claims, but not refunding any of the premium back.
At Altiqe Consulting we help employers add control and predictability back into their healthcare spend, which results in lower health care costs for employers, less out of pocket for employees and access to higher quality care.