Whether you’re part of the 50 percent of insured Americans who receive health coverage through their employer, or part of a smaller group that purchases insurance directly from the insurer, you’re probably concerned about the rising cost of health care.
Premiums are up across the board. Americans are wondering why healthcare costs are rising, and where their health insurance dollars being spent. As it turns out, the answer to rising healthcare costs is more complex than politicians make it out to be.
The Health Insurance Dollar
Every month, insured Americans (or their employers) send a check to health insurance companies to pay the premium on their insurance policy. But, as the image below demonstrates, only a few cents of that dollar remain with the insurance company..
About one-third of your insurance dollar goes to cover the cost of physicians’ services; another 35 cents covers inpatient and outpatient stays at the hospital. Pharmaceuticals account for 14 cents of the insurance dollar, and other medical services eat up five cents. That leaves 10 cents of every dollar to cover the insurance company’s administrative costs—such as claims processing and complying with government regulation–and three cents for profit.
Government data from the Centers for Medicare and Medicaid Services estimate that the country’s two largest healthcare expenditures last year were hospital care (31 percent of all expenditures) and physician care (20 percent of all expenditures). So it’s not surprising that increased utilization of these services and an increase in their prices are the driving causes behind rising premiums.
A 2008 study from consulting firm PricewaterhouseCoopers found that one-quarter of the reason for rising health insurance premiums was increased use of medical services—either because of changes in the population or increased use of tests and new treatments.
Thirty percent of the rise in insurance premiums was due to increases in the price of healthcare services above and beyond the rate of inflation. Those higher prices are driven by a decrease in competition between medical service providers, and also by the use of new (and more expensive) technology. The remaining 46 percent of the increase in premiums was due more generally to inflation—a general rise in prices across the economy.
In the coming years, another reason that insurance costs will rise is the new mandates and taxes included in the healthcare law.