Perhaps you think when you get health insurance, you can put your mind at rest as you are fully covered for any medical treatment you might need in return for your monthly premium.
However, when you start to look into it, you realize that you still need to pay a lot out of pocket.
You have a high deductible that you need to pay toward your medical treatment before your insurance kicks in.
You have copays for things like prescription medicine, so, although you are receiving a discount, you are still paying every time.
And then there are all the little things that your insurance doesn’t cover, such as some tests and those crutches you needed when you broke your leg.
But on top of all that, why does my health insurance still go up and up every year?
You can be forgiven for wondering if health insurance is really worth it. But if you are involved in an accident or get a serious disease for which the medical costs run into the tens or hundreds of thousands, you will be very grateful for the coverage.
But why is your health insurance premium rising year after year? No, it is not just because you are getting older and therefore considered more likely to make a claim.
Let’s dig into exactly how health insurance premiums are calculated and why they are likely to increase year after year for the foreseeable future, no matter what you do.
How Are Premiums Calculated?
Health insurance companies set their premiums to cover their predicted costs. Those costs are to cover the healthcare of everyone who has a plan with them, and to pay their operating costs, such as paying their staff, advertising costs, and so forth.
The company will make individual healthcare cost estimates for each person they cover, based on a series of factors for which they have a formula.
For example, they will have a standard formula for a child of two to three years of age. This will include the number of doctor visits normal for children of this age, vaccinations scheduled for this age, and something for the stitches and broken bones that kids of this age tend to suffer.
For an older woman, perhaps 50–55, the calculation is different and will take into account things like an annual mammogram, bone scans, and blood tests for conditions that are prevalent for this age group, such as diabetes and high cholesterol, plus prescription medication they might need.
Then there will be a general buffer for catastrophic accidents or serious diseases that could affect any of the clients the company is covering.
Every individual who is covered will have a slightly different premium based on their expected costs. So age, gender, and lifestyle factors such as whether the person smokes, is overweight, is sedentary or active all make a difference.
But collectively, these premiums need to cover the full costs of the insurance company, both operational costs and all their health coverage payouts.
It is reasonable to expect premiums to increase each year in line with inflation to cover the increasing cost of delivery. But the cost of health increases is far outstripping inflation. For example, in 2015 the annual inflation rate was 0.7 percent, but health plans increased an average of 10.15 percent.
This is because the cost of healthcare is increasing at a rate much faster than inflation.
According to a recent study, annual healthcare spending in the U.S. rose by a trillion dollars in the 20 years between 1996 and 2015.
According to the same study, in 2017 healthcare spending in the U.S. was around $11,000 per person. It’s estimated that in 2027, it will be $17,000 per person.
But why is the cost of healthcare increasing so rapidly?
The first issue is increased demand. Unlike in many industries where increased demand can provide economies of scale, this is significantly more difficult to achieve in a resource-intensive industry such as health, especially when compromising on quality is unacceptable. So rather than reducing the costs for everyone, increased demand makes healthcare more expensive for everyone.
Increased demand is due to a variety of factors that go well beyond overall population growth. The population is also aging. This doesn’t just mean that people are around longer to demand healthcare. Older people require more health services, as they generally suffer from more health conditions.
And it is not just older people who need more health support. Modern lifestyles make certain health conditions more prevalent, increasing demand for their treatment. These include diabetes, heart disease, back and neck pain, high blood pressure, high cholesterol, obesity, and depression.
Finally, government programs such as Medicare and Medicaid also increase demand as healthcare becomes more accessible. While this is certainly a good thing, it does mean that overall costs increase for the population as a whole.
But increased demand is not the only reason why health insurance premiums are increasing.
Technological advancements in diagnostic tests and treatment are good news for patients in terms of outcomes. But these advanced technologies are also more expensive. This is probably the area of increased expense that few would complain about.
The increasing cost of pharmaceutical drugs is also a significant contributing factor, but one which is more problematic. This is not just due to innovation, as Americans pay significantly more for drugs than people in other countries around the world. They pay more than people in any other developed country.
Price increases in pharmaceuticals are often due to a lack of competition and a regulatory environment that allows for the cost of existing drugs to be increased at the discretion of the manufacturer. You can read more about the U.S. pharmaceutical marketplace here.
Similar problems caused by a lack of competition can be seen in the market for medical treatment. There is a lack of transparency about how much things cost, which makes it difficult for consumers to shop around. They are forced to accept the cost presented by the provider.
As an example of how this can go wrong, a recent Wall Street Journal article revealed that one hospital was charging more than $50,000 for a knee replacement surgery that in reality costs between $7,300 and $10,550.
How To Lower Your Health Insurance Premiums
While there is little we can do on an individual level to lower the costs of healthcare in general, there are things you can do to ensure that you are getting the lowest premiums possible within this high-cost environment.
1. Shop Around For The Best Deals
Different insurance companies have different methods for calculating premiums and different overheads, so some can offer lower premiums than others. The only way to find the lowest premium is to shop around. This is easier than ever with online marketplaces such as eHealth. Read our full review of their services here.
2. Go For A High Deductible
If you are in relatively good health and therefore don’t need to use your health insurance often, but have it in case disaster strikes, then agree to a higher deductible. This means you will pay out more before your insurance kicks in, but your premiums will be lower.
This is a viable option for anyone who is low risk and doesn’t draw heavily on their health insurance plan.
3. Choose A Plan That Pairs Insurance With A Health Savings Account
A health savings account is an account that you pay into and then use to cover your medical expenses. This can save you money, as the money you put in or take out of the account is either tax-free or tax-deductible.
The truth is that, due to the nature of the American healthcare market, you can probably expect to see your premiums rising significantly year upon year, as this is a necessity to cover costs. While you may feel like you are paying a lot, it is a lot less than will have to pay if you are hit with unexpected, serious medical expenses.
There are some things you can do to ensure that you are getting the best possible rates for your health insurance, but in the end, it is about balancing investment and risk.