Cost shifting is the name of the game as management grapples with the rising expense of employee health care. Employers are having employees pay more out of pocket through higher deductibles, larger drug co-pays, and higher premiums.

The key word is “premium.” When employers contract with insurers for their employees’ health care coverage, a premium is the monthly amount the employer pays to the insurer for each employee. (Since your employer will likely charge you part of what the insurer charges, this part is also called a premium.)

This year, the average employee with family coverage under an employer health benefits program will be paying $2,790 out of pocket, which is almost $1,000 more than in the year 2000.

After several years of double-digit increases, premiums rose this year by almost 14 percent, the largest increase since 1990. Why are the premiums that insurers charge employers rising so fast?

THE PROFIT MOTIVE

Despite a period of general economic downturn between 2000 and 2003, insurers have somehow become more profitable. How?

Since 2000, the total amount of premiums paid for health insurance has increased roughly 2 percent more per year than the total cost of all claims made by the privately insured to pay for the care they receive.

By increasing the premiums they charge faster than their costs are rising, insurers earn larger and larger profits.

That health insurers of all types-the traditional fee-for-service insurers, preferred provider organizations (PPOs), and health maintenance organizations (HMOs)-are pulling this off is not in dispute.

Anthem reported a 51 percent increase in profits in 2001; UnitedHealth Group reported big gains in 2002; Standard & Poor’s managed-care stock index of the five largest HMOs increased 21 percent for the first quarter of 2002, in contrast to the 4.8 percent drop in the S&P 500.

The managed care revolution of the early 1990s had promised efficiencies that would reduce the cost of providing health care, but costs have continued to rise. The companies are making higher profits not because of such efficiencies but because they are increasing their premiums.

NO INCENTIVE TO CURB COSTS

It doesn’t really bother insurers that health care costs are rising.

In fact, higher costs just provide an opening for health providers and suppliers to inflate their prices. For example, the insurer will pay hospitals or physicians’ centers close to whatever they commonly charge for various types of scans, responding with a tick up in premiums. In turn, the manufacturers of medical equipment will charge providers more.

So cost is set free from any kind of constraint, because the money coming from the insurers is seemingly endless.

Employers who still act as insurers for their own employees are an exception-they do care about the cost escalation that the dominant external insurers are permitting. At some point these employers cut back on coverage rather than pay more for health benefits.

DECLINING COMPETITION

Wouldn’t competition for the enrollment of members keep premiums from rising so fast?

No. The industry is now an oligopoly (a market dominated by a few large companies). The mergers that have made UnitedHealth Group, Aetna, and Anthem/Wellpoint so large leave less and less room for genuine competition that could bring premiums down.

In addition, insurers have another strong incentive for raising premiums faster than costs go up. Doing so puts money in their hands that they can then invest in real estate, bonds, and corporate stock.

Even if premiums don’t rise any faster than health costs, insurers get the benefit of a time gap between the moment when an insured person pays a premium and the moment when that person uses a health service for which the insurer pays.

The incoming premium money doesn’t stay idle during this time gap, but is invested.

A PROFITABLE CYCLE

Now we can see why the big health care/insurer corporations have raised premiums so rapidly during the 2000-2003 slump. As returns on many investments began to decline with the end of the 1990s boom, insurers were able to offset this decline in their own income ledgers by sharply raising premiums.

Under cover of raising premiums to keep up with escalating medical costs, they got away with raising premiums faster than the rise in costs. The result was a run of exceptionally profitable years for health insurers.

It wasn’t always so. In the mid-1990s, profitability was low for health insurers, despite the booming economy, due to the false expectation that cost-cutting imposed by HMOs and by mergers would end health care inflation. To reach higher levels of profitability called for double-digit premium increases.

DIRE CONSEQUENCES

In human terms, the consequences of constantly rising premiums are tragic. Other social priorities, such as education and fighting poverty, are forced into the background as health care consumes around one-sixth of the gross domestic product.

Escalating Health Costs

Year, Annual Change in health benefit cost/worker, Total health benefit cost per worker 

1998 6.1% $3,817

1999 7.3% $4,097

2000 8.1% $4,430

2001 11.2% $4,924

2002 14.7% $5,646

2003 10.1% $6,215

Source: Mercer National Survey of Employer-Sponsored Health Plans 2003 The numbers of working uninsured continue to rise. To save their industry, the insurers respond by offering scantier coverage through higher deductibles and co-pays, as well as more exclusions.

How high can deductibles, co-pays, and employee cost-sharing go? When even limited coverage becomes too expensive, and employees drop their insurance, the companies have a solution: they raise the premiums of those who can still pay. In this way, providers can care for the indigent by using the excess from the payment of claims for others. Naturally, this situation does not lead to either regular or comprehensive care for the uninsured.

Since private insurers profit from greater health care costs, they cannot be part of the solution. Yet Congress has just passed legislation that will eventually make Medicare a mechanism for subsidizing private insurance for seniors.

The solution lies in another direction: extending something like Medicare to cover everyone. The resulting national health insurance would lack the perverse profit incentives of private insurance.

Milton Fisk is the author of Toward a Healthy Society: The Politics and Morality of American Health Care Reform. He is active in the living wage movement in Bloomington, Indiana.

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