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December 12, 2003

Insurer develops paper to explain health insurance premiums

A top New York State health insurer has developed a brief paper designed to explain to business leaders and individuals anywhere in the country how health insurance premiums are spent and how increases are calculated.

"Health insurance is one of the most treasured benefits of American labor, but it is one of the least understood," according to the four-page explanation of health insurance premiums developed by Excellus Blue CrossBlue Shield, a western Rochester New York-based family of companies that finances and delivers health care services across upstate New York and long-term care insurance nationwide.

"Most Americans are insulated from most - if not all - annual premium increases that result from rising health costs. In contrast, consumers are much more informed about auto or homeowner's insurance because they pay directly for such coverage," the paper said.

"The Facts about Health Insurance Premiums"

The paper noted that typical health insurance pays out 80 to 90 percent of premiums to hospitals, doctors, pharmacists, and others for services, drugs, and medical goods. But increases in these costs are not the sole drivers of premium increases.

Noting that health insurance premiums this next year were are expected to increase an average of 12.6 percent nationwide, the paper reviews several typical factors involved and estimated their impact on this average increase.

Prices. The prices insurers agree to pay for care, prescription drugs, durable medical equipment, and other items will determine an estimated 4.5 percentage points in the 12.6 percent increase.

Utilization. The number of medical services and prescription drugs that people use will determine about 3.5 percentage points of the increase. This cost is increasing because of new technologies, increasing consumer demand, and an aging population that uses more health care services than ever before.

Intensity. Intensity is an industry term that refers to the replacement of less expensive treatments with newer, more expensive procedures. For example, in cases that once prompted providers to order X-rays, relatively most costly MRIs are increasingly likely to be ordered. This factor might account for 1.5 percentage points of the increase, on average.

Leveraging. Leveraging refers to increasing employer costs that result when procedures' actual costs increase but employee's costs for those procedures remain level. Employers generally bear these costs by keeping employees' co-payment rates stable. For example, if the cost of a prescription drug rises from $50 to $55 but the employee copayment remains at $15, employers' costs increase 14 percent. This factor could account for 1 percentage point of the increase.

Selection. Selection refers to the effects of individuals changing their health insurance product. Premiums are based on the projected costs of benefits for a pool of people enrolled in a specific insurance plan. When individuals switch from an expensive pool to a less expensive plan, they effectively bring a cost increase with them. The example used may account for 1.3 percentage points of the increase.

Administration. The normal administrative costs of processing claims, customer care, enrollment, and billing made up less than 1 percentage point in the projected increase.

Government actions. Actions by New York State government have also driven up costs. These include government requirements that health insurance cover certain treatments or practitioners, and New York's hidden health insurance tax that adds more than $1.3 billion in taxes on their coverage.

In addition, the federal government's new Health Insurance Portability and Accountability Act (HIPPA) will cost the health care industry more than $40 billion dollars, the report said.

Personal responsibility. The paper also highlights how important a role consumers play in the costs of health care with the personal choices they make in regard to nutrition, exercise and other decisions.