Healthcare accounts for 17.4% of the US GDP. And yet most of us can’t or won’t include a healthcare line-item in our budget that accounts for 17.4% of our annual spending. Whenever health insurance carriers raise their rates – particularly if it’s a significant increase – there tends to be a public outcry, with the carriers getting lambasted for their premiums. Our own family’s health insurance premiums are going up by 28% next year, and that’s despite the fact that we’re switching to a different carrier and picking the absolute cheapest plan available in our area. We understand how frustrating that is.
Yet we also know that health insurance carriers don’t set their prices arbitrarily. Even before the ACA, Colorado had a robust health insurance market and a fairly solid rate review process through the Department of Insurance (it wasn’t always perfect, but they worked to address the issues). The driving factor behind health insurance premiums is the cost of healthcare. That’s always been the case, and it’s particularly true now that the medical loss ratio rules have been in effect for nearly five years. In the individual market, total administrative costs and profit can only account for a maximum of 20 percent of premiums collected. At least 80 cents of every premium dollar goes to medical costs and quality improvement.
But there’s no similar regulation pertaining to medical device makers, pharmaceutical companies, or healthcare providers. The ACA contained numerous cost-saving measures, but with the exception of health insurance carriers, there’s no legal standard that says profits and administration costs must be limited in the healthcare industry.
CO-OPs: lower premiums, but at what cost?
In 2014, 23 CO-OPs began providing health insurance in 25 states around the country – including Colorado. In many ways, they reinvented the health insurance model. They gained significant market share in 2015, and their policies were generally priced well below most of the other carriers in the markets in which they operated. But by the end of 2015, we’ll be left with no more than 11 CO-OPs nationwide. The other 12 have closed or will close by the end of the year, including Colorado HealthOP.
The problem? They ran out of money. To be fair to the CO-OPs, they absolutely got the short end of the stick in many ways. Their initial funding was chopped from $10 billion in grants to $2.4 billion in loans. And they went into 2014 and 2015 with the understanding that the ACA’s “3Rs” would be there to shore up their finances if their claims costs ended up higher than they were expecting. Instead, they (along with many other carriers) were left holding the bag when HHS announced on October 1 that carriers would only get 12.6% of the money they were owed under the risk corridor program.
But the fact remains that the CO-OPs simply didn’t bring in enough in premiums to cover their costs. Despite the fact that CO-OP plans in 2015 were often priced below the market average, they weren’t “cheap” by any stretch. For people who weren’t receiving premium subsidies, the premiums were still a significant chunk of money each month. They just weren’t enough to cover the cost of providing care.
HHS released a report last summer outlining the 2014 finances for the 22 CO-OPs that were still operational at that point. 19 of them spent more on medical claims alone than they collected in premiums. Once administrative costs were included, only one CO-OP (Maine) ended up in the black for 2014. It’s often argued that insurer administrative costs are an unnecessary expense that we could eliminate if we got rid of the for-profit health insurance model and switched to a single payer program. But the fact that virtually all of the CO-OPs paid out more just in claims than they collected in premiums indicates that the problem of high health insurance costs won’t be solved until we’re able to substantially rein in healthcare costs.
And this problem is not limited to CO-OPs. Traditional carriers in other states have also exited the market or pulled out of exchanges since the risk corridor shortfall was announced; they were losing money on their 2014 and 2015 enrollees, and made a calculated decision to pull back from the market in order to avoid further losses in 2016.
Higher premiums, but still justified by claims costs
The demise of CO-OPs in several states over the last few months should serve as a reminder that health insurers are not arbitrarily setting premiums. The nationwide individual market’s 12% – 14% average rate increases that we’re seeing for 2016 were scrutinized by state and federal regulators. In some cases they were able to end up with rates a little lower than carriers proposed, but for the most part, the premium increases that carriers submitted were justified by claims data.
So while it’s popular to condemn rate increases as carriers profiting on the backs of sick people, profit margins in the health insurance industry have been hovering around 3% since 2008. However, the pharmaceutical industry’s profit margin is closer to 20%, and in 2013, Pfizer’s profit margin was 42%. Clearly, we have a spending problem, but as long as the actual regulations are aimed at insurers rather than the entire health care industry, we’re going to be fighting an uphill battle. Incidentally, the Trans-Pacific Partnership free-trade deal would only strengthen U.S. pharmaceutical companies protection from cheaper generic drug competition.
So while it’s popular to say that health insurance premiums should be lower, the demise of more than half the CO-OPs should serve as a reminder that lower premiums aren’t feasible unless we make significant progress in lowering healthcare costs.