Bernadette Fernandez Specialist in Health Care Financing
In general, the premiums charged by health insurance companies represent actuarial estimates of the amount that would be required to cover three main components: (1) the expected cost of the health benefits covered under the plan, (2) the business administrative costs of operating the plan, and (3) a profit. The final premium calculation often is adjusted upward or downward to reflect several factors, such as making up for a previous financial loss, that are often referred to as the “underwriting cycle.”
Health insurance premiums have been trending up, while the value of coverage generally has been trending down. Specifically, the year-over-year percentage increase by month in private health insurance premiums has averaged around 4.4% between 2004 and 2010, but has accelerated some since 2009, ranging from 4.8% to 5.5%. At the same time, cost-sharing requirements have generally increased. For example, a typical family of four with private employer-sponsored health benefits has seen its out-of-pocket cost sharing increase between 5.4% and 10.5% annually between 2006 and 2010.
Of the main components that constitute the premium amount, health benefits expenses represented about 85% of that amount in 2010. Publicly available data indicate that medical costs have steadily risen over the past several years, but the rate of growth in these expenses slowed between 2008 and 2010. The data also suggest that the rise in medical costs is primarily attributable to the price of services, not increased utilization.
The rise in the cost of health insurance has received considerable attention by Congress and resulted in calls for more regulation. The regulation of private health insurance has traditionally been under the jurisdiction of the states. Most states have used their regulatory authority over the business of insurance to require the filing of health insurance documents containing rate information for one or more insurance market segments or plan types.
Under the Patient Protection and Affordable Care Act (P.L. 111-148, ACA, as amended), the federal government will assume a role in private health insurance rate reviews by providing grants to states and requiring health insurance companies to provide justifications for proposed rate increases determined to be unreasonable. However, ACA does not authorize the federal government to decline or bar implementation of proposed rate increases; such authority still is retained by the states. On May 23, 2011, Health and Human Services (HHS) issued the final rule implementing the rate review provisions in ACA. The rule clarified which proposed rate increases would be subject to review (i.e., defining “unreasonable” rate increase), established a process for rate review to be conducted either by the state or HHS, and specified notice requirements to inform the public about the process and outcome of the rate reviews.
This report provides an overview of the concepts, regulation, and available public data regarding private health insurance premiums. Specifically, this report analyzes the four broad components of health insurance premiums: medical claims, administrative costs, profit, and the underwriting cycle. Finally, the report discusses state requirements to review health insurance rates, and rate review provisions under federal health reform.
Document available via e-mail as a pdf file or in paper form.
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