Health Care Spending Is Down, Why Aren’t Our Premiums?

Happy New Year and welcome, most of you, to another year of sometimes-painful health insurance premium increases.

Does this have to happen again?

I ask because health care spending is down — or is at least not rising as fast as our premiums. We have proof for 2012 in two recent reports.

In 2012, total medical expenses increased just 2 percent in Massachusetts, according to the state Center for Health Information and Analysis (CHIA).

That same year, the average premium increase for large employers who don’t self-insure was between 4 and 10 percent.

So should health insurers have compensated us last year, in 2013, or in our 2014 rates?

Ninety percent of premiums are based on medical expenses, CHIA Director Aron Boros says, “so if plans are seeing that their medical expenditures are growing at about 2 percent, you’d expect that to be roughly reflected in the premiums.” If, he continues, “premiums are growing faster than that, then there are things at work that the plans should be able to explain.”

Tufts Health Plan says premiums are set well in advance of when they actually take effect, are based on historical data, and anticipate costs but are still a challenge to predict.

Tufts collected too much money in 2012 and reimbursed members $33.4 million. Harvard Pilgrim sent back $13.5 million. Blue Cross Blue Shield did not issue a rebate for the second year in a row. Insurers are allowed to keep 10 percent of premiums. They only have to reimburse members if they have money left over after subtracting that 10 percent.

OK, reimbursements to members begin to explain the gap between what we spent and what we paid in 2012, but doesn’t account for all of it.

And what if the gap is bigger than it looks?

Nancy Turnbull, an associate dean at the Harvard School of Public Health, says “we should be seeing health insurance premiums rise by less than total medical expenses”. That’s the 2 percent mentioned above.

Why? Because most employers are saving money by buying plans with higher co-pays and deductibles and the like. As we patients take on a bigger share of total medical expenses, then the share paid by premiums should shrink, right?

The gap between actual spending and premiums wasn’t so great for all employers, says Eric Linzer, senior vice president for the Massachusetts Association of Health Plans.

He points out that the starting point for small businesses was between 2 and 4 percent in 2012, depending on the firm’s renewal date. Fine, but few, if any, employers pay the starting or “base” rate. Many small businesses reported increases well above 10 percent in 2012. And keep in mind that small employers are a modest segment of the total insurance market.

Nationally, it looks like health care spending has hit a plateau and is not rising as fast as overall economic growth. I know insurers base premiums on multi-year cycles, looking at trends. So is four years of largely flat growth enough of a trend? Are patients starting to spend more money now on care? If insurers are seeing this, no one mentioned it.

Rick Lord, the CEO at Associated Industries of Massachusetts, says he’s optimistic about the CHIA report “and would hope that in the next year or two that would be reflected in the premiums.”

Lord says a practice hospitals have of inflating what they charge private insurers to make up for low government insurance reimbursement rates may be one reason that private insurance continues to go up more than actual expenses.

And Phil Edmundson, who runs the brokerage firm William Gallagher Associates, says “insurers will seek larger price increases when the economy is better, when they feel that corporations are less price sensitive.” So that might also explain the gap in 2012.

Then finally, suggest employers, it may be that CHIA’s numbers aren’t completely accurate; this is a preliminary report.

But there are other signs that the pace of health care spending is down. Take a look at this slide from the state’s Health Policy Commission. It shows that personal health care expenditures grew slower than the state economy as a whole. These numbers would not translate directly to lower premiums because they include health spending outside of our medical expenses. Still, it makes me wonder, do we have health care spending under control and we just don’t know it?

(Via Health Policy Commission)

The state’s health care cost control law requires all kinds of new reporting and reviews and analysis of how we spend money on medicine in Massachusetts. But its success will be measured in our premiums. Is the law going to save money for you, me, employers, towns and the state?

We have to make sure that all the claims of savings and efficiencies translate into lower cost but still good-quality health insurance.

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  • Dennis Byron

    I suspect you are confused about the conflicting trends because the state wants you to be confused to further its (not clear to me) political agenda:

    1. The CHIA report about a 2% 2011-2012 change measures TME. According to the report you link to “TME represents the full amount paid to providers for health care services delivered to a payer’s covered enrollee population (payer and enrollee cost–sharing payments combined). TME covers all categories of medical expenses and all non­claims related payments to providers, including provider performance payments.” It does not appear to cover all revenue flowing through all the different types of insurance plans mentioned in the report.

    2. The premium increases that year for large employers “not self insured” involve a very small subset of the groups and insurers covered in point 1. Only about 50% of the state’s residents are in large groups and only a small percentage of them are “not self insured.” Where the TME report covers 80% of the state’s population the premium increase only involves maybe 10% of it There would be no direct relationship.

    3. Even if there was a direct relationship, I think Director Boros is incorrect in saying insurers should “give back” in some way in the next year’s premiums. As you explain, they now “give back” separately if they overestimated the projections they made for provider payments in a given year. They send members a check in the middle of the following year if they break the MLR thresholds but that has no effect on the estimates and projections for the next year.

    4. And then as I think someone you quoted sort of said, it then all gets averaged through so that to the extent that the state manipulated the premiums being paid in the merged market (small groups and individuals buying insurance individually) down (as it did for 2012 — I think that was the year about which the Patrick administration lost in the regulatory court and then the lawsuit with Fallon, who didn’t settle out of court or go into the regulatory court), people in large group market pay more

    5. And of course the last chart is a pure fabrication after 2009 as the authors admit with the dotted line (and you also have to remember what the NHE is measuring in 2009 and in the years previous: designer eyeglasses, aspirin and other OTC “medicine,” custodial nursing care, hearing aids, orthodontic braces, chiropracty (sp?), private nurses, non-medical-related elder services and a lot of other stuff not related to insurance).