Across the country, the cost of health insurance premiums has consistently increased faster than inflation or workers’ earnings. Between 1999 and 2008, premiums grew 119 percent, compared with inflation growth of 29 percent and wage growth of 34 percent, according to PricewaterhouseCoopers’ report. While you’re undoubtedly paying more toward the cost of your health care benefits, you may not understand the factors that are contributing to rising health care costs.
“Increases in health insurance premiums across the nation are a product of overall increases in health care utilization,” says Mary Lou Osborne, chief operating officer for HealthAmerica. “Health insurance companies continue to maintain relatively low administrative expense costs, meaning a relatively larger portion of premiums are available to pay benefits.”
Smart Business spoke with Osborne about what drives health insurance premiums and what businesses can do to help control costs.
What do health insurance premiums cover?
Nationally, 87 cents of every health insurance premium dollar is spent on medical services: 33 cents pay for physician services; 20 cents go to inpatient costs; 15 cents go to outpatient costs; 14 cents pay for medications and 5 cents pay for other medical services. Ten cents of every dollar is spent on administrative costs, consumer services, wellness and preventive programs, health promotion and disease management programs, claims processing, compliance and other administrative duties. Health plans’ profits account for 3 cents of the dollar and are available to help meet state-required risk-based capital needs and to support the continued investment in the company.
Health plans’ net profits are less than a third of those for the health care sector as a whole. In August 2009, U.S. News & World Report reported the profit margin for health insurance companies ranked 87th out of 215 industries. Less than 7 cents of every dollar of U.S. spending is on administration and the net cost of private insurance. The nation’s health care spending is estimated at $2.5 trillion this year, so even the elimination of insurers’ profits and executive compensation would lower health care spending by just 0.5 percent.