Column: The Health Insurance Premium Dollar: Who Gets What?

This series titled “Column: US Healthcare System” is sponsored content from our partners at Axene Health Partners.  AHP offers highly specialized health care actuarial and consulting services across a number of states.  We have curated this content because we think it adds value to the work our readers are engaged in.  As always, we welcome your feedback on this series.

In today’s health care arguments about lowering costs, it is sometimes forgotten that insurance premiums are set based on the underlying cost of health care. Other than the portion (<20%) needed to cover insurance administration, taxes, commissions, and profit, the remaining 80%+ of the cost of healthcare itself goes to the hospitals, physicians, drug manufacturers, and other providers in the health care space.

For a premium reduction to occur, the cost of care either needs to shift away from the insurance premium back to the consumer, or these players that make up the premium dollar – insurers, hospitals, physicians, drug manufactures – need to cost less.

According to the Centers for Disease Control and Prevention (CDC), total U.S. healthcare spend in 2014 exceeded $3 trillion dollars. The portion of this care covered under a typical health insurance policy has remained consistent over the past 50+ years at almost 70%. The major components of health insurance spend – hospitals, physicians, and drug companies – have consistently shared the same proportion of the health care pie, despite significant efforts over the past 30 or so years to move healthcare out of the hospital and into the professional office setting.

This 8% average annual total health care trend over the past 50+ years has led to the United States spending a higher % of GDP on health care than any other country. Today’s health insurance purchasers (i.e., the government, employers, and individual consumers), often need to give up other spending to continue to fund their health care and health insurance needs. The government’s reaction has been to use their purchasing power to limit publicly funded trends (i.e., Medicaid and Medicare) to lower levels, but as a result, the commercial market, made up of employers and individual consumers, has experienced trends even greater than this 8% average.

This article looks at the major players whose combined spend makes up the majority of today’s health insurance premium. Once we understand all stakeholders are working hard to maintain current revenues and margins, we can understand how difficult it is to reduce insurance premiums. If health care costs continue at high levels it is hard for carriers to reduce premiums. While it is easy for politicians to say they will cut cost by “getting the waste out of the system”, these players know that is another way of saying the system is working to find ways to pay providers less to care for their patients.

We will now look at these key players and some of challenges they are dealing with to keep their piece of the health insurance premium dollar.

Continue reading the column here.