• Premiums over time

    Here’s another good graph from Rex Santerre and Stephen Neun. It appears in the eleventh chapter of their book Health Economics: Theories, Insights, and Industries Studies.

    The left-hand scale is in 1960 dollars. There’s nothing new here, it’s just a nice long time series. Other than a few periods, premiums have gone up, as well as premium as a percent of income. The only period of level or declining premiums I know anything about is the 1990s, the era of managed care. There are other, shorter periods of stable or falling premiums. A few years are like that in the 1960s, 1970s, and 1980s. Can anybody explain any of those?

    • I think that one of the problems in health care is that a system makes sense for 5% of GDP does not necessarily make sense for 15% of GDP. That is particularly true for a payment system. While health care spending is low employers buying for employees makes sense, at greater than 15% of spend people need to buy for themselves because it means tough choices.

    • The drop after 1965 is likely related to the passage of Medicare and Medicaid, particularly Medicare, which took some of the least healthy people (seniors) out of the private insurance pool. With the remaining risk pool much healthier, average real premiums declined.

      The HMO Act of 1973 probably also paid a role in the decline from 1973-1975. Price controls were also used during this period.

      I cannot explain what happened in the mid-1980s.

      It should be said that the longterm average needs to be considered when evaluating a policy’s effects on premiums. Managed care slowed cost growth (largely by rationing use) for a while in the 90s, but premiums surged as managed care came to an end. The overall trend 1990-2005 was no different than that of 1980-1990.

    • It’s possible that this is related to the Underwriting Cycle (see more here: http://content.healthaffairs.org/cgi/content/full/23/6/91/F1).

      This is commonly taught in actuarial exams and the like and the phenomenon exists because the trends set by insurers use data from the previous few years of experience. So when the pool of insureds actually experiences a slow-down in medical trend it may be that the adjustment to the next year’s premium results in a stagnant premium rate …

    • The insurance industry is the one private business in which long-term persistency is discouraged.
      For example, here in Texas, Blue Cross and Blue Shield will charge low, initial rates for individual policires ,after one proves his health.
      Ten years later, his premium may be double or triple that, if he proves his health again with BCBS.
      This type of “underwriting” is not confined only to BCBS. It is rampant in the industry.
      It also occurs in the life insurance industry with term life or universal life (which is yearly renewable term with a side fund).
      How can a business survive if it turns over the vast majority of its clientele every 5 years?
      Even with whole life, where the premium is stable, dividends on my policies have been reduced over the last 10 years, rather than increased.
      In fact, on a couple of inforce illustrations (which are usually not very conservative), my duiidends werte projected to stay the same until age 100!
      Looks like they’re throwing in the towel as far as my “block” of business is concerned.
      Don Levit

    • Health care insurance is a misnomer. You cannot insure a highly expensive event that is bound to happen. It is nonsensical. Everyone who is born is bound to get sick and eventually die. Everyone will need expensive health procedures at some point in their life, some unfortunately earlier than others. It’s a certainty. Ipso facto, health insurance is like buying home insurance as your home burns to the ground. It’s ludicrous.

      The above fact is why premiums go up over time. The CEO’s of the private health care insurance companies understand that they do not provide anything remotely resembling insurance, since healthcare is patently not insurable in any rational economic manner by any privately-funded entity. Without any economic reason related to healthcare behind the premiums, and with no meaningful government regulation whatsoever of private healthcare insurance, the private providers are free to price premiums at whatever they please. Is it any wonder the prices go up?

      We need to stop trying to make sense of premium growth relative to healthcare costs. The two are entirely unrelated in reality and simply a ruse by the private insurance companies to get people to ignore the simple reality that private healthcare insurance makes no sense to begin with.

      • Sam:
        I understand where you are coming from.
        It indeed is difficult, and different, to insure an expensive event that is bound to happen.
        Life insurance is a similar product, and that is why permanent plans began developing in the early 1900s.
        Health insurance has some similar aspects except for at least 2 primary features:
        1. Health care is needed before death, and can happen several times, in terms of high expenses.
        2. It is more difficult to predict when these health expenses will occur.

        What we CAN do, however, is to attempt to transform what is a difficult and different product to insure, into one which is more standardized.
        For example, a product which is designed to pay large claims, at the most, once a year, every 5 years or so.
        This will not adequately insure everyone, but it can provide valuable and timely coverage for many people.
        In addition, in relation to premiums paid, the benefits are many multiples over what has been paid in – a basic insurance function.
        Of course, for this to be a viable product, healthy people must be in, and remain in, the pool. We have attempted to do that with our product design with Milliman, an actuarial firm.
        We should have their numbers and accompanying reports next week.
        Don Levit