As health care costs remain high, so do the costs of insurance premiums. Everyone has to pay them, but most people don’t know where that money actually goes.
“Across the U.S., companies large and small are seeing the effect of increasing health care costs in their insurance premiums,” says Bob Dawson, president and CEO of HealthAmerica, a growing statewide health insurer in the Philadelphia area. “Few people know what that money pays for.”
Smart Business talked to Dawson about the cost of premiums and how they effect health care services today.
Where do health insurance premiums go?
According to a recent report by Price Waterhouse Coopers, 86 percent of every premium dollar goes directly to paying for medical services such as hospital care, physician care, medical devices and prescription drugs.
As a caveat, not all of the 86 cents goes to improving health. Some of it includes costs to cover malpractice premiums as they continue to rise. Some physicians practice defensive medicine. To reduce the threat of lawsuits, they order tests and procedures that may not be medically necessary to limit any potential liability. The survey estimates that 10 cents of the 86 cents goes to medical liability and defensive medicine.
Of the remaining 14 cents, about 5 cents goes to consumer services, provider support and marketing. This includes wellness and preventive programs, health promotion, and disease management programs that benefit members.
Another 6 cents goes to claims processing, compliance and other administrative duties, including the costs to comply with government regulations. These regulations include any laws or requirements under the Health Insurance Portability and Accountability Act.
And finally, the health plan’s profits account for the remaining 3 cents and are available to help meet state-required risk-based capital needs and to support continued investment in the company.
How much does general inflation affect rising health care costs?
Like any other business, general inflation affects health care providers. The inflation for medical services has consistently run higher than the overall cost of living for other goods and services. This can be attributed to several factors including the migration to health care plans with larger provider networks, which we’ve seen over the last 10 years. The implementation of higher-priced technologies and cost shifting from Medicaid has also affected the costs. Many providers charge higher prices to make up for reimbursements from Medicaid, which don’t fully cover their costs to treat these patients as well as the uninsured.
Included in all of this are the additional costs of buildings and new programs and services provided by hospitals in any given market.
Are people using more health care services than before in spite of inflation? How does this affect the cost?
There has been a consistent increase in the utilization of health care services. In fact, utilization has accounted for more than 40 percent of the cost increase between 2004 and 2005.
The major factors driving utilization are increased consumer demand for medical care and prescription drugs, new treatments, new imaging technologies, and ‘lifestyle’ drugs for conditions that were once not considered illnesses. An X-ray costs less than $100 but an MRI often costs in excess of $1,000.
There is also more intensive diagnostic testing due in part to the defensive medicine we discussed earlier. The population, especially in Pennsylvania, is getting older and our lifestyle changes contribute directly to increased utilization. A 50-year-old man requires more health care services than a 24-year-old man does.
What can businesses do to better control their health care costs?
Through a better understanding of how and where we spend our health care dollars, we can work with employers and plan sponsors to address rising costs. First, we must create informed consumers. Employers can help their employees make informed decisions by educating them on the actual cost of health care and teaching them how to make wise health care choices. Providing information about their pharmacy program is one example. Consumers need to know why a certain drug has higher copay than another drug that treats the same symptoms.
Second, employers need to promote healthier lifestyles. The best and least-expensive way to treat a problem is to prevent it. This can be accomplished by encouraging employees to make healthier lifestyle choices through worksite wellness programs or by providing financial incentives to employees for healthy behavior.
Finally, be heard. Support medicine that bases decisions on treatments that have been shown to work.
BOB DAWSON is president and CEO of HealthAmerica based in Harrisburg. Reach him at (717) 540-6353.