Health Insurance Costs

Health insurance costs in the United States are an individual issue and a national issue. As illustrated in Chart 1, the average annual costs for health insurance coverage for an individual have risen from $2,196 in 1990 to $5,049 in 2010. This is equivalent to an average rate of increase of 7.9% per annum compound1, which is well in excess of the rate of price inflation (2.6% per annum compound) for the same period2.

The increase in family coverage has been even greater, with average premiums rising from $5,791 in 1999 to $13,770 in 2010, a rate of increase of 8.2% per annum compound3.

Chart 1: Average Annual Health Insurance Premiums4

Graph of average annual health insurance premiums

In addition, the average percentage of the premium paid by employees, as opposed to that paid by employers, has increase in this period too. The average percentage paid by employees for individual coverage has increased from 14% to 19% in the period from 1999 to 2010, and the percentage paid for family coverage has increased from 27% to 30% in the same period. In effect however, employees tend to pay the full cost of health insurance anyway, by receiving a lower rate of remuneration than that which would apply in the absence of an employer plan.

Health Care Cost Drivers

For almost all of the past 40 years, annual spending on health care in the United States has increased at a greater rate than the overall growth rate of the economy. As a consequence, the proportion of national income spent on health care has almost tripled over that period, and health care expenditure now stands at more than $2.5 trillion per year. The rate of increase in this expenditure is expected to continue to outpace economic growth in the years ahead.

The reason why health care costs have risen in such a dramatic fashion has been the subject of widespread analysis and debate. However, according to the Congressional Budget Office5, approximately half of all growth in health care spending has been caused by changes in medical practice as a consequence of advances in technology. These advances have included the development of sophisticated diagnostic equipment and new forms of drugs, both of which often require large capital sums to develop, with resulting high recoupment costs.

The factors which are cited as accounting for most of the remainder of the growth are rising incomes, changes in insurance coverage (which have tended to increase demand for medical care), and rising prices in the health sector in response to increases in demand. However, some health economists point to two other factors which are driving costs: Firstly, the general aging of the population, and secondly, increases in the incidence of chronic diseases (such as type 2 diabetes), some of which are due to lifestyle factors and increased levels of obesity.

Health care funding in the United States is sourced from both the public and private sectors. In the public sector, federal and state governments combine to fund both welfare and social insurance programs, the largest of which are Medicaid, Children’s Health Insurance Program (CHIP), Medicare and High-Risk State Insurance Pools. In the private sector, funding is sourced from both organizations and individuals, with the greatest proportion of funds being directed into group insurance plans, individual insurance plans and tax-advantaged accounts established by employers and individuals for health care costs.

Health Insurance Cost Factors

There are two major types of cost factors which determine how much you pay for health insurance coverage, namely your characteristics and your choice of plan. It is helpful to analyze each separately, as discussed below.

Your Characteristics

There are a number of rating factors which are applied by health insurance companies in calculating your premium, more so if your application is subject to underwriting (assessment) as opposed to qualifying for guaranteed issue. In respect of your own characteristics, the main rating factors used in calculating your premium are:

  • Your age
  • Your gender
  • Your health
  • Your marital status
  • Your smoker status
  • Your zip code
  • Your occupation

Of the above, your age is the factor which tends to have the greatest impact on premiums. For example, the same one-person (non-smoker) plan with a $2,500 in-network deductible has the following premium rates dependent on age:

Age Monthly Premium - Males Monthly Premium - Females
20 $203 $228
30 $222 $279
40 $258 $335
50 $369 $427
60 $600 $537

Note how the monthly premium is greater for females as opposed to males through to age 50, and is then lesser at age 60. (In this particular example, the female premium ‘crosses under’ at age 55).

Health is another major rating factor. Two of the first health questions which insurance companies ask are your height and your weight. These numbers are not so much important in themselves, but rather in how they relate to each other. Insurers use your height and weight to calculate your Body Mass Index (BMI), a number which indicates the extent to which your weight is appropriate for your height. Body Mass Index is calculated as:

BMI = ( Weight x 703 ) / ( Height2 )

where your weight is measured in pounds and your height is measured in inches.

The U.S. Department of Health & Human Services has a BMI calculator which you can use to calculate your Body Mass Index and identify which of four categories you are in (Underweight, Normal, Overweight or Obese). It also identifies the limitations of using a BMI, namely that it can overstate body fat in people with muscular build (such as bodybuilders), and understate body fat in people who have muscle waste (such as the elderly). Regardless of its limitations, however, the BMI is an important indicator used widely by health insurance companies in calculating premium rates.

A further important factor in setting rates is pre-existing conditions. In your application for health insurance, the insurer requires details of any medical conditions which you had prior to the date of your application. A pre-existing condition is any health condition (other than pregnancy) or a medical problem (including the use of prescription drugs) that was diagnosed or treated prior to applying for health insurance. For any pre-existing condition disclosed in an application, the insurance company can respond in one of three ways, as follows:

  1. Accept your application at standard rates, but apply an exclusion for that condition for a specified period, normally 6 to 18 months from plan commencement; or

  2. Accept your application, not apply any exclusion for that condition, but apply an increased premium rate to compensate for the additional risk which the insurer then assumes; or

  3. Deny your application by reason of the pre-existing condition.

There are two important points to note regarding pre-existing conditions and your duty of disclosure. Firstly, application forms usually require disclosure not just of conditions for which you have obtained treatment or advice, but of any signs or symptoms that would cause an ordinary prudent person to seek advice or treatment. Secondly, an applicant has an obligation to disclose any medical conditions which develop between the date of application and the date on which coverage commences. In other words, pre-existing conditions really mean conditions which exist prior to the commencement date of the policy, not the date of your application.

You may qualify for the acceptance of pre-existing conditions if you have creditable coverage from a prior plan. Creditable coverage is health insurance coverage which you previously had from a qualifying plan, provided you can satisfy both of two conditions, as follows:

  1. You were a member of your prior plan for a period of 12 months or more; and

  2. The gap between your exit date from the prior plan and the date on which you applied for coverage under the new plan is not equal to or more than 63 days.

Your Choice of Plan

The second major type of cost factor is the particular plan which you choose to join. Apart from the scope of coverage which a plan provides, and its obvious effect on premium rates, there is a variety of cost-sharing mechanisms which health insurance companies normally employ. Depending on the plan you select and the extent to which you access health care services, cost-sharing can amount to a much greater component of your total costs than the premium itself. For example, a high-deductible health plan might have a low premium, but if you reach the point of receiving benefits from your health insurance company under such a plan then you will have already paid the full annual deductible from your own pocket, an amount which (as the name of the plan implies) is a significant amount.

The principal cost sharing mechanisms used by insurers are described as follows, together with examples of each from a typical health insurance plan:

Mechanism Description Example:
In Network
Example:
Out of Network
Deductible The annual dollar amount which the insured pays before the insurer begins to make payments. $3,000 Individual/ $6,000 family $6,000 Individual/ $12,000 family
Co-insurance The percentage amount which the insured pays of covered costs, after the deductible has been paid. 30% (0% if the out-of-pocket maximum is reached) 50% after deductible (0% if the out-of-pocket max is reached)
Co-insurance Maximum The maximum annual dollar amount of co-insurance which the insured is liable to pay. $4,500 Individual/ $9,000 family $4,000 Individual/ $8,000 family
Out-of-Pocket Maximum The maximum annual dollar amount which the insured is liable to pay in total (excluding premiums). $7,500 Individual/ $15,000 family $10,00 Individual/ $20,000 family
Co-payment The per-service dollar amount which the insured pays for covered costs when the deductible has been either waived or paid. $30 per non-specialist visit, $40 per specialist visit 30% after deductible

Managing Health Insurance Costs

The need to manage health care costs tends to increase in proportion to the percentage which those costs bear in relation to a person’s income. As noted at the beginning of this page, those costs are increasing at a much faster rate than the rate of increase of prices in our economy overall. Moreover, those costs have already become a major component of the average person’s or family’s household budget, to the extent that many individuals and families are no longer able to afford the levels of health insurance which their circumstances dictate.

Managing health care costs is therefore important to almost everyone. It’s no longer a case of simply selecting the individual or family plan which returns the greatest percentage of health care expenditure, irrespective of premium cost. It’s about choosing the most appropriate health care risk mitigation factors, including a healthy balance between self-insurance and a transfer of high-risk events to a health insurance company.

The following are the 10 most important points which we can offer regarding the long-term management of your health insurance costs:

  1. Put yourself into the lowest risk category over which you have some control. This means quitting smoking, striving to attain a ‘Normal’ Body Mass Index, and staying healthy by maintaining moderate levels of exercise and having a balanced diet. Remember, even with your existing health insurance plan, you can request a re-assessment of your premium rates at any time based on your current health and your ‘numbers’;
  2. Think about your existing medical requirements (and those of your family). Do you (or any members of your family) have any chronic or high-cost medical conditions? If so, this must be factored into your choice (or change) of health insurance plan;
  3. Think about your current financial situation. To what extent do your income and your (liquid) assets realistically enable you to carry your own risk in terms of annual deductibles, co-insurance and annual maxima for co-insurance out-of-pocket expenses?
  4. Does your employer offer a health insurance plan or two? Have you joined? Why not? Similarly, does your employer operate a health reimbursement account, or a flexible spending account?
  5. Choose levels for big-ticket items, namely annual deductible, co-insurance percentage, co-insurance maximum and out-of-pocket maximum, which are inside the boundaries set by your conclusions to 3 above;
  6. Be very careful in choosing a co-insurance percentage. Many (if not most) plans have a minimum co-insurance of 20%. This is already a high number. Watch out for ‘value’ plans which increase that to 30% or more. Remember, each year you need to pay (out of your own pocket) the full annual deductible before you even start to receive benefits from your health insurance company. After you have paid (all) your annual deductible, do you really want (or can you really afford) those benefits to be reduced by 30% or more? In other words, if you think you have health insurance, what is that for again?
  7. If you fit (or can even shoehorn yourself into) the high-deductible category in point 3 above, then you must open a health savings account. These are tax-favored accounts which enable you to meet a wide range of qualifying health care costs from tax-exempt income. All you need is an IRS-approved high-deductible health plan and you can pay all your deductibles, co-insurance, co-pays and most other medical costs (including dental, optical, laser and auditory costs) from that account on a tax-free basis;
  8. If you are subject to anything more than zero percent co-insurance or co-pay for drugs, then be sure to do two things. Check with your doctor that any recommended drugs are on your plan’s formulary, and ask your doctor to prescribe generic rather than branded drugs. They are both the same, except for the price tag;
  9. If you can’t get coverage, either because you have been rejected for insurance or you have been offered coverage at premium rates which you can’t afford, then enquire without delay about your state’s high-risk pool (if they offer one, which most do). These are a gilt-edged insurance alternative for people precisely in your circumstances, and you should grasp that opportunity with both hands;

If you are buying insurance from the individual market, be sure to shop around. This is of course the golden rule for buying anything in any market (except a monopoly). So, since health insurance companies don’t have a monopoly, shop around.

 
  1. ($5,049/$2,196)1/11 – 1 = 7.9%
  2. U.S. Department of Labor, Bureau of Labor Statistics: CPI Dec 1998 = 163.9; CPI Dec 2010 = 219.2; annual rate: (219.2/163.9)1/11 – 1 = 2.6%.
  3. ($13,770/$5,791)1/11 – 1 = 8.2%
  4. Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999-2010.
  5. Technological Change and the Growth of Health Care Spending, Congress of the United States, 2008.
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