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Pulling it Together: When Premiums Go Up 39%

Our group that works on health care cost issues just updated an analysis that sheds light on what’s really happening to people in the individual health insurance market, the issue Secretary Sebelius, a former Kansas insurance commissioner, and others have put in the spotlight by calling on Anthem and other insurance companies to account for their proposed high premium increases. The analysis shows that people buying health insurance on their own in the individual market from 2004-2007 still paid 52% of their health expenses, on average, out of their own pockets. In other words, people bought insurance and paid premiums and still on average paid for about half of their health costs themselves. This compares with a much lower out-of-pocket share for employer-sponsored coverage of 30%. 1

This points to what has really been going on in the individual insurance market. There has recently been a great deal of focus on increases in individual insurance premiums such as the proposed Anthem increase in our home state. Such premium increases are eye-popping and greater scrutiny by regulators is appropriate. But there is another phenomenon in the non-group market even more pervasive than large premium hikes; it’s what is known in the industry as “buy-downs.” When insurers inform members of large premium hikes, they commonly suggest that the increase can be mitigated (or sometimes even eliminated) by switching to a lower cost policy (which  means a policy with higher deductibles and/or greater limits on benefits). Data from ehealthinsurance.com bear this out: The average deductible for family plans in the individual market increased from $2,760 in 2008 to $3,128 in 2009 — just one year later. After years of these buy-downs, you end up with what we found in our recent analysis; insurance that, on average, pays for only about half of people’s health care bills.

The trend is not unique to the individual market. We’ve experienced this choice ourselves on several occasions as a modestly-sized employer. Our annual employer survey has been documenting steady increases in high deductible plans for several years, especially in smaller firms where the percentage of workers in plans with very high deductibles increased from 16% in 2006 to 40% in 2009. All this underscores a basic point: rising health care costs and insurance company practices are leading not just to more expensive premiums, but to skimpier, less comprehensive coverage as well; slowly redefining what we have known as health insurance. To be sure, some economists argue that this is precisely what should happen, that people should have more “skin in the game.” But this is not likely how regular people see it. Appropriate cost sharing is one thing, but we may be reaching the point in the individual market where the policies many people have simply cannot be considered meaningful coverage.

These data also provide some context for the discussion at the recent health care summit about what would happen to insurance premiums under reform. The Congressional Budget Office (CBO) has estimated that individual insurance premiums would, on average, go up under reform because people will be buying better coverage. That’s not too surprising when you look at the kind of skimpy insurance people buying on their own often have today. In fact, for equivalent coverage, the CBO estimates that premiums under reform would be somewhat lower than under the status quo. And some would qualify for tax credits that would provide substantial premium relief as well.

But, affordability goes beyond what people pay in premiums. Ultimately, people may end up focusing as much, if not more on their deductibles (the share of their health expenses they have to pay before their insurance kicks in). Deductibles are not only understandable to most people, but they are important for health access and economic security as well. If they are too high, they can be a disincentive to get care, especially for the chronically ill, and a burden on family budgets. To date, the discussion of affordability in health reform has focused mainly on premiums and not as much on the bigger picture of total out-of-pocket costs, including deductibles and cost-sharing. In President Obama’s recent health care proposal, he notably improves on the affordability of the Senate health care bill; both in terms of premiums and out-of-pocket costs.

The recent premium increases in the individual market probably have done more to illustrate the cost of doing nothing in health reform in simple, graphic terms people can understand than anything so far in the health reform debate. However, as we follow the debate about proposed Anthem-like increases in the individual market, it is important to remember that the burden of those increases is felt not only in higher premiums, but often in less comprehensive health insurance coverage.

1. A few technical notes for those so inclined: These figures exclude dental and vision expenses. Also, you get somewhat different results if you look at the share of costs paid out-of-pocket in the aggregate rather on average. This is because people with high expenses are weighted more heavily when costs are measured in that way, though even for those people, out-of-pocket costs are substantially higher in the individual market compared to employer coverage. While some may point to data from 2004-2007 as being old, it’s unfortunately the most recent government survey data available, and other reports suggest that things have not improved since then. All the details are in the write-up of the analysis, which I encourage you to read.