After years of astronomically rising prices, health care costs are increasing at their slowest rate in decades; recent health spending has been so much lower than projections, it's saving Medicare and Medicaid hundreds of billions of dollars in projected spending.
Even better, some of those savings are trickling down to patients. In 2010, three out of four of insurers requested that monthly charges to policyholders be raised 10% or more. Last year? Only one-third of insurers requested premium increases that big, saving consumers $1 billion.
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Which leads us to some interesting questions: If insurance costs are slowing down overall, then why are any insurers still requesting double-digit rate increases that will cost consumers more? And, hey, wasn't the Affordable Care Act supposed to rein in how much we pay for our health insurance?
Why Are Health Care Costs on the Decline?
In 2013 so far, the average increase in the cost of health insurance has been low, almost in line with inflation, compared to insurance hikes that were double-digits above inflation previously.
One big factor is the recession, which began slowing down the increase in health costs even before Obamacare passed. Since people have less disposable income, some of them are forgoing medical care.
Additionally, some insurers have shifted away from the "fee for service" method, which pays doctors for every procedure they perform or test they run. Instead, they're testing out pay structures that give doctors incentive to reduce complications and stop wasteful treatments.
Some Obamacare provisions already in effect require regulators to approve any request to increase a health insurance rate by 10% or more. Karen Pollitz, a senior fellow at the Kaiser Family Foundation, says that provision has contributed to fewer requests so far, as more regulators are emboldened to tell an insurer when a rate increase isn't reasonable.
In this landscape, then, why do some insurers still insist on huge rate hikes? For some policy holders in California, Aetna rates may go up by as much as 22%, Anthem Blue Cross rates by 26% and Blue Shield of California rates by 20%, reports The New York Times. In states such as Florida and Ohio, rates have gone up by 20% for some policy holders, which can tally up to several hundred dollars a month.
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Where are these outliers coming from, when most other insurers can make do with just small increases?
Why Some Policy Rates Are Spiking
"Most of us, in any given year, get a flu shot and have a couple doctor visits," Pollitz says. "So when companies compete to cover people, they prefer to cover people who are healthy, and they try to get rid of them when they're sick."
On that note, some reasons that insurers might request a jump in premiums:
- Charging extra to certain customers while they still can: Starting in 2014, insurance companies will be prohibited from charging more to applicants based on their health. Right now, many insurers segment their populations into healthy groups and older, sicker ones. Because premiums are based on the average cost of care for participants in a given plan, insurers can justify charging sicker customers much more than healthy ones. What we're seeing with these big rate hikes are, in some instances, what Pollitz calls insurers' "last gasps" of upping premiums for "sicker" policies. After this year, insurers can't do this anymore.
- Business strategy: Let's say an insurer needs more policyholders. For a year or two, the company might keep its rates low. After they finally reach the market share they want, the low premium will become untenable, so they'll need to bump up the rate significantly in order to catch up.
- Negotiating skills or lack of luck: The insurer could simply be worse at negotiating fees with doctors and hospitals, or they could just get unlucky and have more than their share of expensive treatments among their policyholders.
- The economy: Insurers, like people and other businesses, sometimes rely on investment income. If they have a bad year in the market, sometimes they'll look to make up the shortfall by raising premiums.
Obamacare Is Reining in Premiums After All
Under the Affordable Care Act, people will tend to pay higher rates while they are healthy, but they will pay lower rates when they are sick, and the coverage will be more comprehensive—prenatal care, maternal care, pharmaceutical coverage and pre-existing conditions can no longer be excluded.
Additionally, provisions under the Affordable Care Act will help temper new hikes. The provision already in effect that requires regulatory approval for large rate hikes is only one piece of the puzzle. Additionally, insurers now have to adhere to a "minimum medical loss ratio," which says that an insurer has to spend 80% of the money it receives from premiums on health care—and it can't spend more than 20% on items such as marketing, administration, CEO salaries, etc.
This ratio also forces companies to give rebates if they can't reach 80%. So, if an insurer only spent 75% of its premiums on health care, policyholders would receive a 5% rebate.
Meanwhile, Medicare is working to reduce health costs by experimenting with special groups of health care providers, such as hospitals, doctors and other health care givers, who coordinate care and chronic disease management in order to improve care and cut costs. They are incentivized to work together because they can keep a portion of the cost savings they create.
"Hopefully, you'll see health insurance rates tracking a little more closely and consistently across carriers with health care costs. And to the extent that you see cost differences, they'll be based on differences of efficiencies between insurers," says Pollitz. "If Blue Cross is cheaper than United Health care, that will hopefully be because Blue Cross negotiated better deals and is more efficient and figured out ways to lower costs—and not because they are good at cherry-picking healthy people."