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The wrong whipping boys

Health insurance companies are taking heat for raising premiums. But you can't blame the insurers for the fact that medical treatment costs continue to soar.

March 29, 2010|By Patrick Johnston

In the run-up to last weekend's vote on healthcare reform, much of the debate painted health insurance companies as villains.

Now that a bill has passed, we need to have a calm, rational discussion about the many serious issues that threaten the stability of our healthcare system.

I lead an organization that lobbies state lawmakers and works with regulators on behalf of California health plans.

But I am also an employer, and our organization -- like other small businesses -- has had to cope with the rising cost of health insurance premiums. Our employees now pay a greater share of their benefits and absorb higher out-of-pocket costs. The strain of rising healthcare costs is very real to us.

Working in the healthcare system, however, I have more insight than many into what is causing those premiums to rise.

Think of your health insurance bill as a funnel. Payments to hospitals and doctors, medicines, medical equipment, labs and tests, care coordination, disease management programs, claims processing and many other costs pour into the top of the funnel. All of those costs blend together, and out of the bottom comes one dollar figure -- your health premium. As the cost of the ingredients going into the top of the funnel gets higher, health insurance gets more expensive.

Not all ingredients are equal, of course. On average, 87 cents of every premium dollar goes to direct medical care. The remaining 13 cents covers everything else, including administration and profits.

Medical treatment costs are soaring. For the past decade they have risen two to three times faster than inflation. Data from the federal government show that increased spending on hospital care, doctors and prescription drugs is driving up premiums.

A recent report in the journal Health Affairs found that consolidation among hospitals and doctor groups has given them unprecedented leverage to demand double-digit pay increases from insurers year after year. With doctors and hospitals commanding the largest share of the health premium dollar, steep increases in their billings have a considerable impact on the cost of health insurance.

In the individual market, where people purchase health coverage on their own, the weakened economy has changed the market. With more healthy people dropping coverage, the market is increasingly dominated by people with higher health costs. And that means that insurance companies have to charge more.

Also, as unemployment increases, so does the number of uninsured. The only healthcare option for low-income uninsured residents is to use hospital emergency rooms. Hospitals aren't compensated for caring for the uninsured, so they make up for those losses by charging the insured higher prices.

The bottom line is that our individual market is stressed. Fewer people are buying insurance. Healthy people are dropping coverage. And at the same time, utilization of healthcare services continues to increase. The federal government inadequately reimburses hospitals and doctors for Medicare and Medi-Cal patients. Medical treatment costs continue to skyrocket.

State legislators are considering a proposal to regulate health insurance rates. The stated goal is to curb health insurance administrative costs and profits.

However, health plan profits average between 3% and 5%, with total administrative costs including profits just over 12%. Fortune magazine ranks insurance companies' profits well below those of other healthcare sectors, such as drug companies and medical device manufacturers. In 2009, the percentage of premiums that paid for administrative costs and profits declined for the sixth year in a row.

Rate regulation is a distraction that avoids the difficult task of driving down the cost of medical care.

While Congress passed a bill that makes progress in covering more of the uninsured, it shied away from tackling the thorny issue of cost. If we want sustainable reform, we've got to make sure healthcare is affordable.

Controlling costs is not easy. There is no simple one-step fix. It takes political will and requires all stakeholders to bear some of the weight.

California's health plans stand ready to discuss how all healthcare sectors -- including insurers -- can work to lower costs.

Patrick Johnston is president of the California Assn. of Health Plans.

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