Another agent -- a close friend (and mentor) -- called me recently to pose this question:
“Hank,” he asked, ”how do you explain to your clients why health insurance keeps getting more and more expensive?”
Now, my wife insists that there are no coincidences, which is why I find it interesting that I received a call today from a (soon to be former, I guess) client, who complained that his rates had gone up AGAIN, for no good reason, and that he wasn’t going to pay any more.
Both calls really involved the same principles, and answers.
My initial response to Tony (the aforementioned friend) was tongue-in-cheek: I simply tell my clients that the rates go up so that I can make a bigger commission. The truly ironic part, of course, is that, for the most part, commissions keep going down. I went on to enumerate some of what I see as the primary contributors to recent rate increases:
First, the cost of prescription medications has become a bigger and bigger portion of the health insurance dollar. Of course, this is good in the sense that new medications (with the obvious exceptions of Vioxx, etc) mean improved health and quicker recovery. On the other hand, the cost of advertising the next “purple pill” drives the cost of the meds even higher. And, of course, we see the commercials and all flock to our physicians for a scrip for “that new pill.”
Second, “managed care” itself shares some of the blame. Let me explain that:
Years ago, managed care (HMO’s, PPO’s, etc) was touted as the answer to sky-rocketing premiums. And, for a while, bean-counting medicine seemed to work. But, as with so many such phenomena, it ran into the brick wall of diminishing returns. That is, there is a point where, no matter what you do, there is a minimum cost – a floor – below which prices cannot go. And when we hit that floor, a few years back, prices had nowhere to go but up.
Third on the list would be hidden costs, primarily in the form of government mandates. Insurance is primarily regulated at the state level, and each state requires (“mandates”) that certain coverages be included, regardless of whether a given insured actually wants or needs that coverage. Mandated benefits are estimated to account for as much as 17% of health insurance costs. Interestingly, Ohio is looking at ways to change this, by allowing carriers to offer “mandate light” plan designs.
Well, enough for now….more on this later.
“Hank,” he asked, ”how do you explain to your clients why health insurance keeps getting more and more expensive?”
Now, my wife insists that there are no coincidences, which is why I find it interesting that I received a call today from a (soon to be former, I guess) client, who complained that his rates had gone up AGAIN, for no good reason, and that he wasn’t going to pay any more.
Both calls really involved the same principles, and answers.
My initial response to Tony (the aforementioned friend) was tongue-in-cheek: I simply tell my clients that the rates go up so that I can make a bigger commission. The truly ironic part, of course, is that, for the most part, commissions keep going down. I went on to enumerate some of what I see as the primary contributors to recent rate increases:
First, the cost of prescription medications has become a bigger and bigger portion of the health insurance dollar. Of course, this is good in the sense that new medications (with the obvious exceptions of Vioxx, etc) mean improved health and quicker recovery. On the other hand, the cost of advertising the next “purple pill” drives the cost of the meds even higher. And, of course, we see the commercials and all flock to our physicians for a scrip for “that new pill.”
Second, “managed care” itself shares some of the blame. Let me explain that:
Years ago, managed care (HMO’s, PPO’s, etc) was touted as the answer to sky-rocketing premiums. And, for a while, bean-counting medicine seemed to work. But, as with so many such phenomena, it ran into the brick wall of diminishing returns. That is, there is a point where, no matter what you do, there is a minimum cost – a floor – below which prices cannot go. And when we hit that floor, a few years back, prices had nowhere to go but up.
Third on the list would be hidden costs, primarily in the form of government mandates. Insurance is primarily regulated at the state level, and each state requires (“mandates”) that certain coverages be included, regardless of whether a given insured actually wants or needs that coverage. Mandated benefits are estimated to account for as much as 17% of health insurance costs. Interestingly, Ohio is looking at ways to change this, by allowing carriers to offer “mandate light” plan designs.
Well, enough for now….more on this later.
BTW, I'd really love some feedback on this one (hint, hint)
Rates go up and the natural inclination (of the consumer) is to blame the carrier, or the industry in general.
ReplyDeleteFact is, insurance is a demand driven business with (in many cases) limited supply. The greater the demand, the greater the claim frequency, and, in some cases, the higher the ultimate claim is.
Loss ratios are the result of two things . . . frequency & magnitude. Some cat claims are getting more expensive, such as treating premies, spinal cord injuries, head trauma. As medicine advances more expensive treatments follow.
But cat claims are only a small portion of total claims. The bulk of claims are $500 or less and these claims increase in frequency with the popularity of low copays, particularly in the Rx area.
The HDHP has the ABILITY to hold down claims and future premiums. Whether it will depends on many factors including the popularity (or lack thereof) of these plans.
Until cat plans (such as the HDHP) predominate over copay plans the bulk of a carriers claims will be small claims that are just as expensive to adjudicate as a larger claim. When claim volume subsides so will premiums.