Competition Among Private Health Insurance Companies
One of my favorite bloggers, Jaan Sidorov of Disease Management Care Blog, has written a very thoughtful article about the Wellpoint premium increases. He pointed out that public health insurance policy premiums are rising too – sometimes dramatically – and that the problem does not simply lie with a quick explanation about how premium increases must be about driving profits.
Wellpoint has been roundly criticized for the proposed rate increases for CA insureds with individual coverage. The whole situation begs the question: why would they do this if they didn’t have to? I have to assume that the premiums on their policies will still be in the same ballpark as policies offered by other carriers, even after the rate increases. Health insurance companies have to compete with each other just as any other private business does. And for the majority of customers, price is the primary concern. If a health insurance company sets prices that are dramatically higher than those offered by their competitors, they will quickly find themselves insuring only their current members who are too sick to be accepted by a new carrier, and whose medical expenses are likely outstripping their premiums, even after the rate increases.
In Colorado, we routinely see annual rate increases that vary from 10% to more than 30%. They’re spread out across all of the major carriers, and over time their prices tend to keep pace with each other. A company that has a relatively small rate increase one year will likely have a bigger one the next year. A company with the most competitively priced policy one year is likely to be less competitive the next year. And people shop around; many of our clients ask us to revisit their policy options every few years.
I will be interested to see more on the Wellpoint story as the rate increases are investigated this spring, but I imagine that it’s not a simple problem or one that has a simple solution. It’s true that Wellpoint is in business to make money. But a dramatic, highly publicized rate increase is bad for business, and it’s hard to explain it away as a company simply trying to raise profits.
Jaan’s article was included in the Cavalcade of Risk this week, hosted by David Williams at the Health Business Blog.
Louise:
You wrote “If a health insurance company sets prices that are dramatically higher than those offered by their competitors,
they will quickly find themselves insuring only their current members who are too sick to be accepted by a new carrier, and whose medical expenses are likely outstripping their premiums, even after the rate increases.”
You seem to suggest that health insurance carriers want to keep their original block of members intact, with a proper mix of healthy and unhealthy insureds.
But, if that was the case, when many of your clients ask you to revisit their policy options every few years, I would think their options would be very few. This is assuming that their present insurer’s prices were not dramatically higher than others,so they wouldn’t lose their “best” customers.
Over time, “don’t their premiums tend to keep pace with each other?”
So, wouldn’t shopping around be a relatively fruitless endeavor?
Don Levit
Don,
Yes, over the long term, premiums from all the major carriers tend to keep pace with each other. But from one year to the next, there can be significant variation. So it makes sense for a healthy person to shop around every few years, as they might be able to find another carrier that is currently lower priced than their existing policy, or providing better coverage. That doesn’t mean that the new policy will always be lower priced (chances are it won’t be) but they can save money in the short term.
This isn’t always possible. Jay and I have had our coverage with the same carrier since 2003. We shop around every year when we get our rate increase, but there has never been an option that is significantly better.
Louise:
So when you shop around for clients, and do find a better deal, it is usually better for only a few years.
In that situation, if other agents respond accordingly, wouldn’t that particular carrier “find themselves insuring only their current members who are too sick to be accepted by a new carrier, and whose medical expenses are likely outstripping their premiums, even after the rate increases?”
Don Levit
Don,
That would be the case, except that we’ve found that the rate increases tend to rotate among the various carriers. So a carrier that has a higher-than-average rate increase one year might have a lower rate increase than their competitors the next year. Of the top 4 or 5 carriers in Colorado in the individual market, there isn’t really one that is consistently the best price year after year. Most of our clients tend to choose policies based largely on price, and we often find that a carrier that was very popular with our clients one year is much less so the following year… usually because of price fluctuations.
The scenario I was describing in my post had to do with a hypothetical situation in which one carrier raises rates drastically more than all the others in the market – they would likely find themselves without many healthy insureds. But when carriers are raising rates based on real claims and medical expenses, it makes sense that the rate increases across all the carriers will pretty much even out over several years.