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September 24, 2010

Talkin’ Health Insurance Rate Increase Blues

 A super-enormous spending bill gets press attention, so I’ve been talking with the media these days (1) regarding recent health insurance premium rate increases following the enactment of health reform, which is estimated to cost approximately $250 billion per year once fully realized.  While rate increases by Aetna and certain Blue Cross and Blue Shield plans correlate with the recent passage of health reform, it is hard to believe health reform is the cause, at least not entirely.  The fact is that health insurers have been raising premiums at hard-to-believe rates for well over a decade.  The primary cause then and now is runaway healthcare inflation.  It is true that for the most part insurers, like any other business, look to maximize profits, but most markets for health insurance are extremely price competitive.  Generally it is the increase in expected medical expenses that drive rate increases, and unfortunately demand for medical care has been increasing at approximately 3x the rate of general inflation.  From what I can tell this will continue forever until fundamental structures in the healthcare system change, so expect ongoing rate increases from insurers to persist, despite the political pressure.

A recent study by the Kaiser Family Foundation, while subtle in its presentation, is astounding in its exposition of runaway medical inflation’s impact on health insurance premiums.  Take a look at the charts below.


Compounded Annual Growth


Absolute 10 Year Growth

Total Health Insurance Premiums   7.8%   114%
Employee Contribution to Insurance Premium   9.5%   147%
Employer Contribution to Insurance Premium   7.3%   103%
US Inflation   2.4%   26.8%
US Real GDP (2000-2009)   1.6%   15.3%

From just this small amount of data it is clear that health insurance premiums have been sky rocketing for almost two decades.  US inflation averaged 2.4% per year, while health insurance inflation has averaged 7.8% per year, with the brunt of this premium increase being absorbed by employees at an average rate of 9.5% per year.  Wage increases have essentially kept up with inflation, meaning the annual disposable income of the average insured family, in real terms, was reduced by nearly $2,000 over the past decade as a result of medical inflation.  W/r/t employers, their bills rose at 7.8%, about 3.25x their ability to raise prices.  Result: employees and shareholders are getting squeezed.

Why so much medical inflation?

There are lots of little reasons that emanate from one major trend: we (the US and its medical profession) keep getting better and better at keeping people alive.

There are many definitions of the word “doctor,” the most relevant to understanding medical inflation being (from MWD – free version):

Doctor : (n) a person who restores, repairs, or fine-tunes things

Today there are an astounding number of ways to restore, repair and fine-tune humans. “Take two aspirin and call me in the morning” is all but gone.  We now understand thousands of causes of the headache, from too much protein in the diet, to brain tumors, to meningitis, to stress, to something called Syringomyelia ($1 to the first reader that knows what this is, and no fair if you are Neurologist), and so on. 

We now know so much that we are increasing exponentially the things that doctors can restore, repair and fine-tune, creating treatments for ailments, many of which were once life-threatening that are now survived regularly, leaving us with an older and sicker population that costs more and more to fine-tune every year.  In short, much of our medical inflation is a symptom of our amazing technology and our wealth.  Modern medicine, while an awesome exposition of human inventiveness, is slowly and steadily eating away at the more productive sectors of our economy that created the means for such inventiveness in the first place.

Will it end?

If the “it” is invention, the answer is clearly no.  We will forever be extending our life expectancy and reducing the health and fitness levels necessary to achieve it.  Medical invention will not be stopped.

If the “it” is medical inflation, the answer is not anytime soon.

Much of the healthcare chat on this blog, and that of my business partner Lisa Suennen, involves the many structural changes that must take place within the healthcare economy in order for medical inflation to come under control without the government resorting to over-reaching measures like rationing of care and reimbursement controls.  Many changes are underway, and everyday we meet new companies designing new systems and technologies created to both reduce healthcare costs and improve quality.  Unfortunately it will be many years, perhaps decades before the healthcare system begins to function primarily around a cost/quality paradigm.  I would look for measureable changes in the following areas before expecting any meaningful downward shift in the medical inflation trends:

  1. Patients evolve toward more active, cost and quality conscience consumers of healthcare and health insurance.
  2. Insurers evolve to managers of health risk rather than pure underwriters.
  3. Providers evolve their business models from a strict fee-for-service reimbursement model to a more pay-for-performance model, like most advanced industries (will doctors offer one-year warranties? – why not?).

 Such an evolution spawns subsets of ideas like wellness, care management, value-based health insurance, healthcare information exchanges, insurance exchanges, provider pricing based on quality scoring, telemedicine, and on and on.  I have been and will be discussing them all with the understanding that without meaningful progress medical inflation is here to stay.  Expect it (healthcare inflation) to continue at about 8%, so in 5 years our average family will cost about $20,000 or more a year to insure.


 (1) Here are a couple of links.  First an brief piece on medical inflation from along with a podcast interview (download the podcast titled “Best (and Worst) Bonds, Insurers and Obama, Gold’s Rush” – my segment comes in around the 23:00 mark).



  1. Very informative, thank you. I think it’s important to recognize that the figure for the employer contribution to insurance premium is the equivalent of a 7.3% raise every year for workers who had employer coverage. So total compensation for workers who have employer sponsored coverage has been inflating.

    A significant proportion of total medical expenses occur in the last year of life; i.e. last ditch procedures that fail in the end. I don’t claim to have the answers, but there needs to exist a discussion of the cost/benefit per additional month of life and the quality of that life.

    Comment by Scott — October 26, 2010 @ 11:30 pm | Reply

    • Hey Scott,

      End of life healthcare (along with the overall cost to society of an older population) is a very touchy subject and one we are not likely to handle with much grace.

      If you are interested in an amusing take on this very tough issue check out the book Boomsday by Christopher Buckley. It’s funny and thought provoking.

      Beyond that, the likely outcome overtime will be that certain end-of-life procedures will not be included in insurance policies subsidized by the government. People will have to purchase seperate “riders” like they do in Canada and Europe.


      Comment by Steve Krupa — October 28, 2010 @ 2:04 pm | Reply

  2. been dealing w/ health insurance co’s for 30 plus yrs – have yet to see physician profit as the driver in rising health ins. premiums – here’s a nice summary

    Health Insurer Profits Jumped 250% in Last Decade
    By MELLY ALAZRAKI Posted 5:10 PM 02/18/10

    Profits for the 10 largest U.S. insurance companies jumped 250% between 2000 and 2009 while millions of Americans have lost coverage, according to a report released Thursday by the U.S. Department of Health and Human Services. The report found that the five biggest insurance companies — WellPoint (WLP), Cigna (CI), UnitedHealth Group (UNH), Aetna (AET) and Humana (HUM) — saw their profits increase 56% in 2009, a year in which 2.7 million people lost their private coverage.

    What’s more, the report found that the companies combined earned a total of $12.2 billion last year. And lest we forget, on the executive compensation, CEOs of the top five received $24 million on average in 2008, the report said.

    See full article from DailyFinance:

    Comment by healthcarewonk — October 31, 2010 @ 11:34 am | Reply

  3. Thanks for your comments.

    You will not find me taking sides one way or another in the insurer v provider blame game regarding medical inflation. It is clear that health insurance costs are rising because demand for healthcare is rising, and as I note above this is largely due to the increase in chronic illness and the ongoing miracles in life-saving performed by the medical profession every day.

    In reality neither providers nor insurance companies are compensated to manage healthcare costs and medical inflation. It is not part of their business model. In all other industries the management of cost and quality is done by the consumer as part of each and every purchasing decision. We know that individual consumers do not purchase health insurance and many of those that are insured do not perceive themselves as being at risk for the bulk of healthcare expenses. As a result there is no management of rising demand in the healthcare system.

    As I mention at the end of this post, until 3 things begin to happen, namely consumer engagement, risk management by insurers and alternatives to fee-for-service medicine (the last, in my opinion will be a by-product of the first two), medical inflation will continue, forever.

    Some notes on a single-payer systems:

    They are effective at insuring everyone, however, they do ration care to control cost. They do not manage risk and they inherently weaken the consumer even more than our current system. Single payer systems world-wide are dealing with healthcare inflation that is as bad as or worse than in the US. I don’t see the single-payer system as a solution to medical inflation. It may be a solution to getting insurance for everyone, however. But if you cannot control the costs in the long run it will be hard to afford meaningful insurance for everyone. I am interested in seeing the US evolve to a system of consumer engagement wherein insurers manage risk and providers deliver optimum care. It will be very hard to get there, but I believe it is possible, particularly as it becomes financially necessary.


    Comment by Steve Krupa — November 1, 2010 @ 12:38 pm | Reply

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