Mismatch Between Premium Inflation and Health Care Inflation

Today’s Managing Health Care Costs Indicator is $15,073

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Kaiser Family Foundation and the Health Research Education Trust (KFF/HRET) released their 2011 health insurance survey results – and the increase in premium inflation is disheartening.  KFF/HRET reports that overall health care premium costs have increased by 9%, to over $15 thousand for a family plan. This is despite reports of diminished health care demand – with fewer discretionary surgeries at hospitals.  It’s also despite a reduced fertility rate associated with the Great Recession. 

·        Health care premiums have more than doubled over the last 10 years.  Employers are paying 113% more for premiums than 10 years ago; employees are contributing 131% more.

·        31% of employees have at least a $1000 deductible for single coverage, and 12% have at least a $2000 deductible for single coverage.

·        60% of all firms offered health care coverage; this was only 48% for firms with 3-9 employees.

How could health care premiums be going up even if utilization is going down?

è Cost per unit could be increasing, even though utilization is going down.  There’s a lot of evidence of this – see my post of September 27

è Younger or healthier people are dropping their insurance. This would be consistent with layoffs of the most junior workers.  America’s Health Insurance Plans suggests that this is the problem.

è Family size has increased. This certainly happened with the Affordable Care Act (ACA) requirement that adult children could continue on their parents’ policies until age 26.   Higher family size could also represent more single people losing their insurance, or more families with two working spouses where one lost a job, and was added to the spouse policy.

è Health plan actuaries could have overestimated future costs, and thus charged  higher premiums than would be justified.  The ‘underwriting cycle” for health insurance premiums does not match actual health care costs perfectly – there is some lag. Further, health plans facing future constraints on their profitability could seek to increase their premiums now – especially when many will attribute price increases to health care reform.

è Coverage mandates can increase the cost of care.  The ACA increases costs through mandates including a prohibition of excluding preexisting illness, removal of lifetime maxima and requiring for full coverage of preventive care. Most actuaries estimate the cost of these mandates at 1% -  so this wouldn’t explain the high rate of overall premium inflation.

The increase in health care premiums during 2011 is ill-timed.  The economy is shaky – even more so with the threat of a Greek default in the Eurozone.  Unemployment remains high, consumer confidence low, and employers are reluctant to hire new employees.  Further, families are increasingly unable to pay their larger share of health care costs.  They are facing the double whammy of high premium increases, a larger share of premium costs, and higher member cost share when care is delivered.

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Health Cost Increases Down

Today’s Managing Health Care Costs Indicator is 1.39

The Wall Street Journal calls growth in health care expenditures “sluggish,” and the Boston Globe  and others  report on multiple hospital layoffs and threatened closings.  The head of the Mass Taxpayer’s Alliance pointed out that health care expenditure growth is way down in Massachusetts – and cautions against overly-aggressive new cost control measures that could threaten the state’s medical, biotech, and pharma segments.

Sounds like we should be declaring victory.

But not so fast. 

There is growing evidence that health care growth is tightly correlated with GDP growth.   As a country becomes richer, its health care costs go up.  In the US, the correlation is 1.39. This means that health care costs have increased exponentially by a factor of 10^1.39 consistently, whether health care costs increases appeared out of control or restrained.  

The corollary is that when a country stagnates, health care growth lags.  Further, when a country frankly loses wealth, health care spending can collapse.

Austin Frakt has pointed to new research showing the correlation between wealth changes and health care cost changes in the US.  Dylan Matthews, who blogs with Ezra Klein at the Washington Post, has posted a series of correlations for different countries   that show that the correlation between health care cost increases and increasing GDP (or aggregate national wealth) appears to hold everywhere it is studied.  Rates of health care cost increases vary – but the correlation does not.

What this means to me is that we should not assume that the current slowing of health care cost increases means that we’ve come up with the right approach to controlling health care costs.  When (if?) growth returns to the economy, we’ll likely see an uptick in health care cost inflation absent new efforts at health care cost containment.  Efforts to constrain health care cost increases are clearly swimming against a powerful economic current of tight association between GDP increase and health care cost increases. 

Frakt suggests we should focus our efforts on getting better quality or quantity of life from health care, since cost increases appear almost inexorable.

I believe we need to keep seeking approaches, whether they are in public health, provider payment, network contracting, or medical management, to be sure we’re purchasing better value in health care.  Perhaps I'm an optimist - but I think the correlation number might have been higher than 1.39 if there weren't so many impressive if imperfect efforts to 'bend the cost curve.'  We should also continue to seek cost savings when the economy is rocky, as demand for elective care is lower, and extra capacity can lead to lower unit prices.  The imperative to control health care inflation will increase when the economy is on the mend.

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