Understanding the Rise in Health Insurance Premiums

Employer-based health insurance premiums have spiked unexpectedly, according to the latest Kaiser Family Foundation/Health Research and Educational Trust (KFF/HRET) Employer Health Benefits Survey. Premiums rose 8 percent for single coverage and 9 percent for family coverage from 2010 to 2011, up from 3 percent for 2009–2010.

While such spikes are not out of step with premium trends over the last decade, some are attributing the latest increase to the cost of the 2010 insurance reforms included in the Affordable Care Act, along with the “usual suspects” like technology, overall inflation, and an aging population. But a new analysis we’ve conducted attributes only 1.8 percentage points of the 8 percent to 9 percent rise in premiums to the insurance reforms. Moreover, this marginal increase as a result of the reforms also means that families have better coverage that protects them from catastrophic health care costs as well as lower out-of-pocket costs for preventive services like colonoscopies and mammograms. It’s logical that improvements in the quality of the product would increase the cost of premiums and lower out-of-pocket costs to some degree.

The 2010 insurance reforms expanded financial protections to Americans with group or individual health insurance and included:

1. designated preventive services must be provided with no cost-sharing; 
2. young adults can be covered under parent’s policies to age 26; 
3. a ban on rescissions; 
4. a phasing out of annual limits of less than $750,000; 
5. a ban on lifetime benefits; and 
6. a ban on preexisting condition exclusions for children.

The $64,000 question is how much do these new benefits affect premiums? With funding from The Commonwealth Fund, we conducted actuarial modeling to calculate the cost of benefit improvements. Our principal databases were the 2010 KFF/HRET Employer Health Benefits Survey and medical claims data from MarketScan. In this blog post, we highlight findings from the project. We will feature more detailed data on our methods and calculations in a forthcoming issue brief.

Measuring the Financial Impact of the Reforms
We estimate that insurance reforms, which will affect about 97 percent of people with employer-based coverage, increased the premiums of group insurance by 1.8 percent (Table 1). The provision having the largest impact on health insurance premiums is coverage for adult children (0.9 percent). The ban on limits on lifetime maximum benefits will increase premiums by 0.5 percent and affect about 39 million employees who are policyholders. Requiring employers to offer select preventive services without cost-sharing will increase premiums by 0.4 percent.

Table 1: The Effect of 2010 Insurance Reforms on Plan Premiums, Group Insurance

Two factors explain why reforms have a comparatively small effect on premiums. First, most employers are already in compliance with the reforms. Annual benefit maximums, exclusion of coverage for children’s preexisting conditions on children, and rescissions of coverage affected relatively few plan enrollees before the reform was enacted. Likewise, although about 45 percent of employees in the group market are enrolled in plan with a lifetime benefit maximum, the difference in cost between a plan with a $3 million lifetime maximum and no limit is very small—simply because so few individuals ever exceed the $3 million figure.

What Is Causing the Spike in Premiums?
If the Affordable Care Act accounts for only 1.8 percentage points for the 8 percent to 9 percent rise in premiums, what is causing the spike? First, medical claims data from MarketScan, covering nearly 15 million enrollees, shows the per capita cost of health care services increasing at about 7 percent a year since 2008. Similarly, the Towers Watson/National Business Group on Health survey of employers reported a 7.6 percent increase in medical claims expenses in 2011 and 5.9 percent to 7.4 percent in each year since 2007. (Both MarketScan and NBGH data are limited to large employers.) The Mercer survey has reported rate increases in the 6 percent to 7 percent range through this period. Premium increases reported by KFF/HRET have been 5 percent or lower in each of these years.

We note three possible explanations for the spike in premiums. If we base our analysis on KFF premium trends and MarketScan medical claims data, the spike is consistent with catch-up pricing. Claims expenses have outpaced premium increases for the previous four years.

Second, any of these health care cost surveys is likely to have a sampling error of 1–2 percent in any given year. Consequently, we must be cautious in our interpretation of year-to-year trends.

A third explanation is that the protracted recession has sent many former workers onto COBRA coverage in the same plans provided to active employees. COBRA expenses per person are approximately 50 percent greater than those for active employees, because healthy ex-employees tend to decline coverage and sick ex-employees and their families take up COBRA. The net effect may be to make the risk pool sicker. Another possibility is that more young and healthy workers are opting out of employer-based coverage, leading to rising per capita expenses.

Coverage of adult children, however, should have no impact on the cost of single coverage. This may be one explanation for why single premiums increased 1 percentage point more than family premiums.

It is possible that all explanations are valid and contributing factors. But our research finds insurance reforms contributed less than 2 percentage points to the premium increase.