what drives insurance costs:

What Drives Insurance Costs?

As health care costs continue to increase at double-digit rates, it's important to understand why this trend continues, and what employer's can do to try and combat these increases.

Several factors contribute to rising health care costs:
The driving force behind premium increases is that the cost of health care is increasingly becoming more expensive. Estimates state that 90 cents of every dollar is paid back in claims. What causes this?

Managed Care
Once popular in the 1980's, is no longer the norm. Patients want more control over their care, such as the patient Bill of Rights.
The Population
The population is getting older as baby boomers reach retirement age. This is/will result in increases in chronic conditions, thereby increasing demand, and as a result, costs.
New Technologies
A dominant factor in the overall cost increase is the increased use of more costly treatments through more advanced technologies. Even more efficient treatments/technologies cost more since they stimulate a higher rate of use.
Frivolous Law Suits
Frivolous law suits and rising malpractice awards. As these rise so does the professional liability insurance rates providers must pay, and this increased cost is passed on to the industry.
Prescription Drug Costs
Prescription drug costs are another dominant factor as newer, more advanced drugs are produced and demanded. Nearly 15% of the entire health care cost is attributed to prescription drugs. Prescription drug costs have increased faster than all other major categories of health care spending. Consumer expectations have changed as these new drugs put an increased reliance on the health care system.
State Benefit Mandates
State benefit mandates also contribute to the increase as there are more than 1300 mandates in place in the United States. Small employers feel most of this.
Medicare and Medicaid Payments
Medicare and Medicaid payments to providers from the federal government continue to decrease, resulting in a loss of revenue to the providers. This loss of income is passed onto the private sector, thus increasing costs.

What can be done? Several things can be evaluated in order to help control rising health care costs for the individual employer group.

  • Closely evaluate the benefit structure in place to determine if more cost sharing on the part of the employee is necessary.
  • Look to consumer-driven and HSA type benefit programs that "engage the consumer", thus reducing costs in the long-term.
  • Give consumers more information on provider's quality and pricing, inviting more competition among providers.
  • Examine those benefit programs that create tax deductibility for the employer group and the employees.
  • Educate the group's employees on why health care costs are increasing so they understand how they may take steps to control costs.
  • Input preventative care and disease management programs into the benefits program.
  • Ensure that the plan(s) an employer group offers are not creating adverse selection.
  • Properly evaluate the employer group to ensure that the "Rate Area Factor" is justified. We will make sure any potential discounts up to 25% are given to the group.

Smith & Company understands the factors contributing to the increased costs of health care and finds it crucial that our clients and potential clients understand these factors as well. The right combination of employee education, proper benefit design, and overall understanding is key in a successful and cost effective benefits program.

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