Health Insurance Premiums Exceed Costs

April 16, 2003 ( - Recent increases in health insurance premiums have exceeded growth in health care costs.

The major factor driving the increase in health care spending is premium increases, because, simply put, most premium dollars go toward paying health care costs, according to a report issued by the American Hospital Association and the Federation of American Hospitals, prepared by actuarial and consulting firm Milliman USA.

However, the results indicate that factors related to the underwriting cycle – the repeating pattern of several years of gains followed by several years of losses – also play a major part in health plan increases. These culprits include increased competition, legislation, regulation, and the difficulty predicting future costs.

This pattern has been going on for part of the past four decades. Since at least 1965, the health insurance industry repeatedly has experienced several years of gains followed by several years of losses. This primarily happens because of uncertainty in predicting health care costs and the competitive environment

During this time, health plans typically realized underwriting gains when health care cost trends were falling and experienced losses when trends were rising, the report said. This pattern changed toward the end of the 1990s when underwriting losses were replaced by gains, even as health care costs were rising, the report said.

“This was due to insurers attempting to improve their profitability after having eroded their surplus by aggressively pricing in reaction to the stiff competition (for market share among health plans) in the mid-1990s,” the report said. Financial problems contributed to market consolidation, reducing competition and allowing health plans to increase premiums, it added. “This trend correction began to produce gains in 1999 and 2000 that have continued through until 2002.”

The report, Health Insurance Underwriting Cycle Effect on Health Plan Premiums and Profitability, is available at .