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Published on January 07, 2016

stethescope on money

Why Is Health Insurance SO Expensive?: Part 1

This is one of the most common questions I get – or a variation on it.  Did you raise my premiums because I had claims? Why did you raise my premiums when I didn’t have any claims?

I’ve been struggling with writing this blog for a couple of weeks now. Every time I start to put thought to paper, it turns into something complicated and nerdy. At the end of the day, people just want to know – what’s really going on.

The Premium Pool

Let’s start with a couple of basics.

Premiums are based on a pool of people’s claims experience — not just one person’s. So if you have a claim or if you don’t have a claim, it isn’t your individual experience that lands you with a premium increase. It is the experience of everyone in the pool who did or didn’t have a claim that determines whether or not everyone in that pool will get a premium increase.

One of the reasons we’ve been hearing about huge increases for Affordable Care Act individual policyholders is because the people who are in that pool – individuals carrying policies sold on or after Jan. 1, 2014 – have more claims than what was originally expected back in 2013 when rates were being set for 2014.

Policyholder Health

A couple of reasons actually explain the increase in these premiums.

  • All the policies sold on/after Jan. 1, 2014, have to be guarantee issued. Insurance companies can’t turn anyone down or exclude you from getting coverage for specific diseases or conditions. In other words, an insurance company can’t tell a 30-year-old woman that they will cover her knee but won’t cover her pregnancy. Yes, that used to happen – all the time. So with guarantee issue and no exclusions from coverage, costs go up because more services are being covered.
  • Back in early 2013, when individual premiums for 2014 were being set, everyone thought there would be more people in the pool come Jan. 1, 2014. That didn’t happen. In November 2013 there was a great national debate over what was meant by “if you like your plan, you can keep your plan.”

In short, people with policies sold between March 23, 2010, and November 2013, got to keep their existing policies and not transition into the new pool. Without these policyholders in the pool come Jan. 1, 2014, the new ACA pool was less healthy and prone to lots more claims spread across fewer premium dollars. Eventually, the premium had to catch up with the cost of claims.

The Cost of Health Care

That leads to another driver of premium increases – the cost of health care. I had a great conversation with a furniture manufacturer a couple of weeks ago in Utah. Her husband does work in China. One of their employees, traveling with him, had to have an urgent MRI done while in China. She was shocked by the cost – $300. That is without health insurance. The average cost of an MRI in the US is $2,700.

The good news is he was fine. The question remains, why the difference? I didn’t have a good answer. There are a number of contributing factors – regulatory controls, defensive medicine, overuse, opportunity to profit, cost shifting – yet not one overarching “fix.”

Is there an answer to why health insurance is so expensive? Not really — or at least not one easy answer. But there are ways to help. We’ll talk more about it when I address another loaded question: Where is the “affordable” in the Affordable Care Act?

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