Healthcare costs, and consequently insurance costs, have been growing at an alarming rate in recent years. As healthcare costs climb, the amount you, as an employer, must pay for health benefits also increases. Health benefit costs are rising faster than the rate of inflation, with no end in sight.
Unpredictable and uncontrollable health insurance rate increases are having a severe financial impact on many employers and employees. Many employers pass these costs onto employees, resulting in employees’ dissatisfaction with the quality of their benefits. With each renewal, employers and employees alike are asking the same question: why are healthcare costs rising? Several factors have contributed to climbing healthcare costs over the past decade, including the following:
- Demographics
- Expansion of healthcare providers
- Consolidation of managed care companies
- Government regulation
- Increased utilization and consumer demand
- New medical technology
- Weakening of the managed care system
- Healthcare spending and medical cost inflation
- Increased prescription drug costs
The Aging of America
According to the most recent census conducted by the U.S. Census Bureau, the number of Americans age 65 and older was expected to nearly double by 2025. As this population ages, there is a subsequent rise in the occurrence of chronic diseases such as asthma, heart disease, and cancer, and the need for more resources to fight these diseases. This leads to the increased use of prescription drugs and other medical services, and an overall increase in healthcare spending.
The Dramatic Rise of Prescription Drug Costs
Prescription drug costs continue to represent an increasingly large portion of healthcare expenditures. According to the National Library of Medicine, the United States spent $633.5 billion on prescription drugs in 2022. And prices have only increased since.
While prescription drug spending has been a fairly small proportion of national healthcare spending compared to spending for hospital and physician services, it has been one of the fastest-growing components, compared to hospital and physician services.
The Consolidation of Insurance Companies
During the economic boom of the 1990s, competition among insurance carriers and managed care companies was fierce. In order to gain market share, many large insurance companies acquired smaller, weaker firms and kept their rates low in order to stay competitive. This practice has taken its toll, leading to dips in profitability and stock prices for a number of large insurance carriers. Now, those companies that have survived are faced with much less competition and are committed to returning to profitability, which has ultimately resulted in increased rates for employers and contributed to greater cost-sharing for employees.
The Weakening of the Managed Care System
Also, in the 1990s, employers began offering plans that allowed patients to see out-of-network doctors or those that had less strict referral processes through benefits, such as point-of-service (POS) plans. In addition, many employers making health plan purchase decisions focused on keeping employees happy by ensuring that most doctors in an area were in a chosen network, rather than choosing narrower networks with deeper discounts. All of this has led to a general weakening of the managed care system. With the level of premium increases over the last few years, many employers have backed away from offering such rich benefits, and instead have restricted networks to reduce costs.
Increased Utilization and Consumer Demand
Utilization of many healthcare services has risen over the last decade. A number of factors such as improvements in medical technology, the influence of managed care, elevated consumer awareness and demand, and a boost in the number of practicing physicians caused health services—like the number of surgical procedures and the number of prescription drugs dispensed—to rise significantly. Other services such as breast cancer screenings, immunizations for children, and diagnostic procedures like CT and MRI have also experienced sharp utilization increases.
Massive Claims
While the Affordable Care Act (ACA) is credited with providing many Americans with access to healthcare, it has also had a part to play in skyrocketing healthcare costs. Prior to the ACA, it was customary for insurance plans to include a lifetime maximum (generally set at $1M). This was essentially an out-of-pocket maximum, but for the carrier. Once any member on that plan reached that million-dollar limit, the plan would cease to pay any claims they incurred.
These are now prohibited by the ACA, and while that may be good news for individuals with expensive health conditions, it has greatly contributed to insurance increases. The frequency of claims over $1M continues to rise, and as healthcare companies are forced to pay out more overall, those costs are passed along to employers.
What Does It All Mean?
Many employers are facing the same question: how do we keep increasing health plan rates from having a serious financial impact on both employees and the company? Many organizations absorbed the increasing costs for years to avoid further burdening their employees. Now, most are finding it necessary to pass portions of the costs on to employees in the form of higher premiums, or benefit designs that require them to pay more out-of-pocket for the medical services they use through increased coinsurance, copayments, or deductibles.
