If Health Spending Is Increasing Slower, Why Are Premiums Rising Faster?

January 27, 2012

The financial crisis of 2008, which resulted in a significant jump in unemployment, meant that the number of Americans with private coverage dropped.  As a result, the overall rate of private health spending has decreased, compared to recent years, says John Graham, director of health care studies at the Pacific Research Institute.

  • According the federal Centers for Medicare and Medicaid Services (CMS), the annual rate of increase in spending by private health insurance was 7.8 percent in 2007, but has since dropped to just 2.4 percent in 2010.
  • CMS data also shows that the "net cost of health insurance" (that is, the share of health insurance that does not pay for medical claims) shrank by an average of about 2 percent annually in 2008 and 2009.

These results are expected during a recession.  However, these trends were rapidly reversed with the signing of the Patient Protection and Affordable Care Act (PPACA) in 2010, as premiums rapidly increased.

  • The "net cost of health insurance," which as mentioned above actually decreased in 2008 and 2009, jumped by 8.4 percent in 2010.
  • CMS' analysts pointed out that the rate of growth in total private health insurance premiums was greater than the growth in total benefits for the first time in seven years in 2010.
  • The Kaiser Family Foundation's latest survey of employer-based health benefits reported a significant increase in total health costs of 9.5 percent from 2010 to 2011.
  • As these premiums become increasingly unaffordable for many small businesses, enrollment will drop as the proportion of small firms offering health benefits already decreased from 69 percent to 60 percent just from 2010 to 2011.

The rapid turnaround and subsequent increase in premiums is due to two separate factors.  First, the PPACA introduced a number of "consumer protections" that inherently increase costs, such as the expansion of coverage to children until age 26.

Second, as insurers consciously reduce market share in a burdensome and uncertain market, those who can bear the regulations benefit from decreased competition, allowing them to increase rates without consequence.  This drives up costs for recession-hit individuals and families nationwide.

Source: John Graham, "If Health Spending Is Increasing Slower, Why Are Premiums Rising Faster?" Pacific Research Institute, January 2012.

 

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