Health Spending Slows, While Premium Growth Accelerates

A funny thing happened on the way to the so-called health reform promised in the Patient Protection and Affordable Care Act (PPACA), signed by President Obama on March 23, 2010: Although the cost of health care has increased at a slower rate than in previous years, premiums for health insurance and the share of premiums used for purposes other than paying claims has been increasing faster than in previous years.

That’s not exactly what President Obama promised, is it? In fact, it is the opposite of what he promised. What is going wrong?

The crisis of 2008, which resulted in a significant jump in unemployment, meant that the number of Americans with private coverage dropped. As a result, the overall rate of private health spending has decreased. As shown in the table below, the annual rate of increase in spending on private health insurance was 7.8 percent in 2007. It has dropped by more than two thirds to an annual increase of just 2.4 percent in 2010, according to a recent article written by analysts at the federal government’s Centers for Medicare and Medicaid Services (CMS).

Sources: Health Affairs; Altarum Institute; Milliman; and Kaiser Family Foundation.

Of course, Medicare (the federal single-payer health plan for seniors) and Medicaid (the joint state-federal complex of plans for the poor) have continued along their unsustainable course. Nevertheless, the tightening of private health spending has led to an overall reduction of the rate of increase in U.S. health spending to 3.9 percent in 2010, versus 7.6 percent in 2007. The Altarum Institute estimates that aggregate annual health spending for 2011 increased by a still reasonable 4.5 percent from 2010.

One would reasonably expect that, in such an environment, private health insurers would be in the doldrums, suffering from a loss of beneficiaries, and competing like mad for the smaller pool of still employed Americans.

That’s how they responded when the crisis hit in 2008 and 2009, before PPACA (or ObamaCare) was passed. Furthermore, health insurers became significantly more efficient at their business processes. McKinsey and Company describes the dramatic reduction in the rate of increase of health spending as “…the longest stretch of continuous deceleration since 1960. The recession appears to have contributed to this slowdown, marking the first time in five decades that an economic downturn has had an immediate and measurable effect on healthcare spending growth.”

McKinsey’s analysis concludes that of the various categories of health spending, spending on “health administration and insurance” increased the least — just 1.6 percent annually — during the period 2006 through 2009. The next lowest category was outpatient care, which increased by only 3 percent annually over the period. The CMS data shows that the “net cost of health insurance” (that is, the share of health insurance that does not pay for medical claims) shrank by an average of about 2 percent annually in 2008 and 2009, also shown in the table.

But this came to screeching halt, followed by a fast U-turn, when PPACA was signed. Although the rate of increase of private health spending is still low, this is now driven by increasing premiums, which make coverage less affordable for working Americans and their employers. The “net cost of health insurance” jumped by 8.4 percent in 2010, as PPACA began to overwhelm the U.S. health system. (This figure includes private plans’ costs of administering Medicare Advantage, Medicaid managed care, and other government health programs for which they win contracts, as well as private insurance.) CMS’ analysts conclude that “for the first time in seven years, growth in total private health insurance premiums exceeded growth in total benefits” in 2010. The increase in the “net cost of health insurance” was higher than any other component of health spending.

As a result, premium growth is accelerating. The Milliman Medical Index (MMI) for 2011 reported total health costs (including the administrative load of insurance) for a family of four covered by a PPO of $19,393, a 7.3 percent increase over 2010. The Kaiser Family Foundation’s latest survey of employer-based health benefits reported a significant increase of 9.5 percent from 2010 to 2011, much higher than in previous years, as shown in the table. Furthermore, this is for plans that usually have higher deductibles than in previous years: 31 percent of beneficiaries had deductibles over $1,000, versus only 12 percent in 2007. These premiums are increasingly unaffordable for many small businesses: the table shows that the proportion of small firms offering health benefits dropped from 69 percent to 60 percent just from 2010 to 2011.

There are two primary reasons for the fact that ObamaCare has caused premiums to spiral out of control for American families and businesses, despite tame increases in health costs. The first is static and the second is dynamic.

First, some of the law’s anti-competitive “consumer protections” took effect in September, 2010, especially eliminating pre-existing exclusions for children, coverage of preventive health services, and extending dependent coverage for young adults up to age 26 on their parents’ plans.

Linda J. Blumberg of the Urban Institute has summarized the official estimates of the consequences of these and other so-called “consumer protections.” Although there is a wide range of estimates for each “protection” that came into force in 2010, the mid-point for the aggregate effect is a premium increase of about three percent.

In the longer term, the second-dynamic-effect will be more pernicious and more difficult to estimate as ObamaCare continues its roll-out. Choice and competition are disappearing fast from U.S. health insurance. Reports abound of health insurers retreating, especially from small-group markets. For example, New York’s Empire Blue Cross Blue Shield has decided to dramatically shrink, dropping over 20,000 small groups containing over 200,000 beneficiaries.

Obviously, as insurers flee, those who remain will reap the benefits of reduced competition. According to an analysis by Bloomberg Government, average operating profit margins for four of the largest insurers (UnitedHealth Group, Aetna, Cigna, and Humana) increased to 8.24 percent in the 18 months after the law was signed, versus 6.88 percent in the 18 months before the law was signed. Quarterly earnings per share from continuing operations between the third quarters of 2008 and 2011 jumped 29 percent.

If PPACA had not been passed, the recession would have been somewhat softened by moderate premium increases for health insurance. ObamaCare rubs salt in the wounds of the American people — either unemployed or without a raise in four years — who are suffering premium increases driven by that misguided reform.

Comments (8)

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  1. Tom H. says:

    Good post.

  2. Mike Ainslie says:

    Wanna bet what 2012 will bring? Obamacare if not struck down or repealed will continue this pernicious process. Consumers will be left with fewer and more expensive choices, smaller insurance co will get out of health insurance. We will be in a total collapse of private insurance and private practice of medical care. All will be controlled at the state and federal level where rationing by denial of care will be done. The ultimate aim of Obamacare is a single payer system. If you like your insurance and health care now- TS

  3. Brian says:

    Good point, Mike. Obamacare will be such as catastrophe for private insurance and private practice that the next great liberal reformer will have the right conditions present to move the nation to a single payer system. Of course that’s their aim.

  4. Deane Waldman, MD MBA says:

    John is of course right, showing not only that PPACA is “salt in the wound,” but that its title is a new high (or low depending on the direction of your scale) in Congressional/Democrat disingenuousness.

    PPACA harms rather than “protects” (second “P”) patients by making care less available through cuts in Medicare reimbursements which translate directly into fewer services.

    PPACA is the opposite of affordable (first “A”). It raises insurance premiums through a number of mechanisms, as John showed. It constrains competition through the “exchanges” that were disingenuously advertised as the use of free market forces.

    PPACA is reality is simply a massive expansion of the bureaucracy and revenue shifter. It tooks MORE money from the public, takes more away from providers – both individuals and hospitals – and gives it to hire new bureaucrats. PPACA is a jobs bill, but not jobs we need nor jobs that are productive, just jobs that will vote Democrat.

    All these “reforms” of healthcare (that are in fact exacerbation), from Medicare through HIPAA, UMRA and now PPACA have failed for one reason: they palliate, not even treat, symptoms and ignore the reasons why healthcare is sick.

    Unsustainable spending curves. Increased error rate. More lawsuits. Shortages of doctors and nurses. Hospitals going out of business. Bankruptcies from medical bills. These are all symptoms, and you don’t cure a patient by treating them. You must treat causes.

    Has anyone ever heard the President discuss WHY the above symptoms plague us? Of course not. The first thing he would have to say is the 40% (over $1 trillion/year) of the money going into healthcare does not produce any health CARE. It goes to his bureaucracy (and insurance profits).

    I apologize for the rant. … No, I don’t. I just want to speak out in support of what John wrote and ask everyone to consider WHY these things are happening. Do not take the President’s word, or mine, or even John’s Decide for yourself WHY healthcare has gotten sicker and sicker over the past 45+ years.

  5. Sarge says:

    Good comments but you people forget another comment given by 2 of my doctors. They are waiting to see how much impact Obama-care will have on their income. If it will reduce their income dramatically they will be closing their doors. This is only 2 doctors of the 400 in my area (Arcadia)and this is only the tip of the iceberg. More and more doctors will be leaving the health field. Less doctors available will increase the wait time between appointments or no appoitments whatsoever. Also those doctors who remain will not be increasing their patient load. This means that those who need it most will get it less or not at all. This is truely the death knell for Senior Citizens and those who are most in need including returning servicemen who are seriously wounded. Great Show Obama!

  6. E. Green says:

    My husband and I are self-employed, so we cover our family’s health insurance. Premiums went up 17% for no reason other than the turn of a calendar page to a hew year.

  7. TH Fall says:

    All true, but there is an additional serious flaw that no one is addressing. The anti-competitive mandates of PPACA force insurers to pay for just about everything in these categories. Thus, while doctors are getting squeezed, manufacturers of drugs, medical devices and diagnostics can charge whatever they please, since insurers are effectively prevented from pushing back and demanding lower prices. A good portion of the premium increase is due to substantial rises in drug cost. Notice that this industry was one of the first to make a back door deal with the Obama administration. In return for supporting PPACA, they get HUGE advantages in the marketplace. Simple economics: when demand is not price-sensitive, what happens to prices? Any Econ 201 student can explain why this is a recipe for massive inflation!

  8. James says:

    I am a employer with approx. 150 employees. Under the current Obomacare, if I am forced to pay for health insurance for all these employees, the only option I will have is to close up shop. No way I can afford this. I am in the homecare business with a large part of my income coming from Medicaid programs. Providers in my state, Georgia, have not had a provider rate increase since 2002. So we are trying to run out business in 2012 on 2002 dollars. My profit margin is very slim now.