If you are like most Americans, you are very concerned about rising premiums for health insurance. It seems like they go up every year, and, for the most part, that is an accurate assessment. The average annual premiums for one person in 2002 was $3,083 or $8,0003 for a family, but just ten years later in 2012, the average annual premium for a single was $5,615 or $15,745 for a family. Between 2002 and 2012, health insurance premiums rose at an annual rate of 8 percent.
This meteoric rise in health insurance premiums is driven by many factors, but the key takeaway is that none of these inflation divers appear to be abating any time soon. So, unfortunately, it doesn’t seem likely that premiums will stabilize or fall in the near future.
How Health Insurance Works
To understand why your premiums are going up, you should first have a basic understanding of how your health insurance works. Health insurance is essentially a type of financial protection against future medical expenses. You pay your insurance premiums on a monthly basis, and, in return, your insurer promises to pay for a portion of your medical bills when you incur them. You must continue to make these payments to maintain this financial coverage.
Your insurer collects these payments and pools them with other premiums paid by all of their policyholders. When you or another policyholder sends the insurer a medical expense, the insurer withdraws the necessary funds from this cash reserve. Although you are paying into the fund, it isn’t just your money that pays for your medical expenses.
The insurer is able to operate by predicting how much medical care you and the other policyholders will require in a year. They then adjust the premiums to help cover those projected expenses. So if health care costs rise as they have done so consistently in the past, then the health insurance companies raise their premiums to compensate.
The Main Drivers of Rising Insurance Costs
At the heart of the matter is a health care industry that raises its prices faster than general inflation. In 2010, the U.S. spent $2.54 trillion on health care or almost 17.3 percent of the entire economy. By 2013, this amount had grown to $3.5 trillion, a 38 percent increase in just three years. Since 1970 health care costs have grown 2.4 percent faster than the general economy.
Since 1960, one of the major reasons that medical costs have risen so sharply is the adoption of new and very expensive technologies. For example, the medical establishment quickly adopted the use of MRI scans, but each machine costs more than $1 million. Furthermore, more doctors request more expensive MRI scans due to their precision even when a much cheaper x-ray would be sufficient. In the past six decades, almost half of all health care price increases are related to technology costs.
Another important inflation factor is over-utilization of specialists. Only 38 percent of Americans have a primary care physician. Instead of using a much cheaper general practitioner, many people go straight to a specialist that may cost from three to six times as much.
In 2010, Congress passed the Affordable Care Act, popularly known as Obamacare. It was intended to help lower health care costs by insuring more Americans who had previously not been covered. Millions more became insured, and many of these newly insured were exceedingly sick. When added to the insurance pool, the costs for everyone increased. This influx of sicker people forced insurers to raise premiums to pay for these higher coverage costs.
There are also some systemic issues that are driving up health care costs, and one of the most powerful is the law of supply and demand. The United States has one of the lowest per capita physician populations of any developed nation. There are only 2.6 physicians per 1,000 residents in the U.S., putting the U.S. ahead of only Canada and Japan.
Even though Americans see a doctor less than most other modern countries—about four visits a year—the low number of clinicians means that doctors can charge more. Most patients are willing to pay higher rates to avoid longer wait times on less expensive providers.
We also pay more at the pharmacy. Unlike most other countries which regulate the cost of prescription drugs, the U.S. government allows the market to set the price. This inevitably leads to inflated prices because the U.S. patent system grants a monopoly of some drugs for decades. Even when a cheaper generic version does become available, many pharmacies don’t stock them due to patient consent laws.
How You Can Lower Your Health Insurance Premium
All of this sounds fairly disheartening if you are a health insurance consumer, but there are some ways to lower your premiums. Some of these may take an additional investment in time, but even a modest reduction in your monthly payments can add up to big savings over time.
The most important way to lower your monthly premium is to qualify for government subsidies. The Affordable Care Act may allow you to obtain up to hundreds of dollars a month in tax credits that you can use to pay premiums. You must purchase a policy off one of the Obamacare health insurance marketplaces and have an income between 100 and 400 percent of the federal poverty level to qualify.
Another popular option is to opt for a high-deductible health plan or HDHP. A HDHP has a higher annual deductible, which means you will have to pay more before your insurer starts kicking. The good news is that you only pay a fraction each month of what you would pay for a more traditional plan. These kinds of plans are a good option if you are young, healthy and rarely visit a doctor. It is often a good idea to supplement a HDHP with a health savings account which is a tax-free fund for medical expenses.