Health insurance increases are almost as reliable as death and taxes. In 2020, group health insurance premium costs increased 4% to $21,342 for an average family plan. But where do these cost increases come from? Following is a concise summary of eight key trends driving the rising costs of health insurance in America today.
1. Increasing medical costs
One of the primary root causes for the rise in health insurance costs are increasing medical costs. The Centers for Medicare and Medicaid services (CMS) projects national health spending will increase at an average rate of 5.5% each year between 2018 and 2027—eventually reaching $6 trillion dollars. Many of the following sections highlight where these increases are coming from.
2. Medical providers are rewarded for doing more (rather than being efficient)
Most insurers -- including Medicare -- pay doctors, hospitals, and other medical providers under a fee-for-service system that reimburses for each test, procedure, or visit. This can incentivize the medical industry to order more services than are strictly needed. On top of this, our medical system is not integrated, which leads to repetitive tests and over-treatment.
3. Rise of chronic illness and obesity
Did you know 6 in 10 adults in the U.S. population have a chronic condition, such as asthma, heart disease or diabetes? 4 in 6 have two or more chronic conditions. Chronic illnesses combined with an aging population drives up costs. Additionally, 42% of adults are obese, which leads to additional health conditions with estimated costs of $147-billion annually.
4. Healthcare is not consumer-centric
Another contributing factor to rising health insurance costs is that healthcare is not yet fully consume-centric. Most people do not pay directly for their health insurance—their employer does. As a result, many people don’t consider costs as they evaluate treatments and services.
5. Lack of cost transparency
Related to the lack of consumerism in healthcare, even if more people wanted to consider costs, lack of price transparency makes this difficult. There is no uniform or quick way to understand treatment options and the costs associated with them, and medical billing is often difficult for most people to understand.
6. Pharmacy costs are skyrocketing
The final trend influencing the rising cost of health insurance is the skyrocketing costs of pharmaceuticals. The median cost for generic drugs rose 37.6% from 2015 to 2019.
7. Carrier consolidation
As CB Insights reported in a recent article, carrier consolidation reduces competitive price pressure, which has resulted in higher costs. For example, the six largest health insurance companies own the majority of the market. New startups like Oscar Health have just 1% of market share and will be hard pressed to compete.
8. Fewer plan options and smaller provider networks
Finally, health insurance companies know they have to control costs somehow to cover more people. While they do this fairly effectively given all the upward price pressures just discussed, this control comes at a cost to the consumer. Many carriers find themselves limiting the number of plans in their portfolios and the provider networks within each plan. Consumers in many markets are finding fewer plan options and have reduced access to doctors and providers.
The core reason for the rise in health insurance costs are: rising healthcare, lack of insurer competition, and lack of transparency to help consumers make informed decisions. What other trends are you seeing that are leading to rising health insurance costs?
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This post was originally published on April 25, 2016. It was last updated December 7, 2020.