If you own a business that offers a group health insurance plan, you may notice that the group rates go up every year. Your employees definitely notice It’s not always easy to explain premium increases, so we’ve provided a guide to help your employees understand why they must pay more for health insurance every year.
Before you can explain why rates go up, first you need to understand how premiums are set. This is a fairly complex calculation, but there are basic principles that’ll explain the process.
In the simplest terms, health insurance companies base their premiums on the amount of money they paid out in claims in a previous year, according to finance website ThisMatter.com. Then, they set premiums for subsequent years based on a series of complex statistical analyses of past claims by their insured members. The object of these analyses is to predict losses, or claims, in subsequent years. Simply put, insurance companies make educated guesses.
Why Premiums Go up Every Year
If health insurance companies base group rates in part on claims from previous years, why is it that those payouts increase every year?
America is getting older. The older we get, the more medical problems we develop. According to the Centers for Medicare & Medicaid Services (CMS), medical spending for seniors 65 years and older is growing faster than any other age group. And as Americans age, they tend to stay in the workforce longer. As we’ve seen, annual premiums are set based on previous years’ expenditures. We may expect that age-driven premium increases will continue for the foreseeable future.
Premium increases are also driven by expensive diseases. An unintended consequence of our success in treating cancer and other chronic diseases is that increasingly large numbers of Americans are surviving, only to incur more medical costs owing to their survival.
Advances in medical technology also drive up health spending, leading to increased insurance premiums, The Hastings Center explained. Expensive technologies are accessible to increasingly large numbers of Americans, too. As new technologies are rolled out, they’re typically embraced enthusiastically by the medical community, often before they’re proved more effective than older, cheaper technologies.
Regulations Affect Pricing
Some causes of increased group rates are included in government regulations. For example, the Affordable Care Act mandated a Health Insurance Providers Fee on companies that provide most of the group health insurance plans in the U.S., the Office of the Federal Register noted. Fees like this add important funds to tax revenue but they also affect the prices we all pay for health insurance.
Living With Rising Premiums
After explaining the reasons for premium increases to your employees, they may respond by inquiring about plans with lower premiums, such as high-deductible plans. It’s useful to explain to these employees that lower-premium plans may or may not save money for a family in the long run, depending on their utiliziation. It’s best to ask them to examine their use of health-related services in previous years and to attempt to forecast their use in the future.
Employers understand that educated consumers make the best customers. This is no less true for your employees who are consumers of the health insurance products you offer. A workforce that is financially realistic and anticipates premium increases every year is more likely to make the best decisions for themselves and their families.
David E. Williams is president of Health Business Group, a strategy consulting firm serving clients in technology-enabled health care services, pharmaceuticals, biotech, medical devices and software. He is frequently quoted in the media on the business of health care and is the author of the Health Business Blog. David sits on the board of both private health care companies and nonprofits.