Health Premium Hikes Slowing but System Still Wasteful

December 4, 2008 ( - Health insurance premiums have slowed to less than half the growth rate five years ago, yet higher costs, increased utilization, and waste in the health system still drive underlying health cost increases, according to a new report.

Prepared by PricewaterhouseCoopers (PwC) on behalf of America’s Health Insurance Plans (AHIP), the study found premiums increased 6.1% from 2006 to 2007 compared to 8.8% from 2004 to 2005 and 13.7% from 2000 to 2001. The growth in health insurance premiums was driven by general inflation (46%), health care price increases over inflation (30%), and increased utilization of services (25%), according to a news release about the research

The report also found that $0.87 out of every premium dollar goes directly to paying for medical services. Embedded within the $0.87 are the costs of medical liability and defensive medicine, which are estimated to be $0.10 of the premium dollar, according to PwC.

Of the remaining premium dollar, $0.04 goes to consumer services such as prevention, disease management, care coordination, investments in health information technologies and health support, provider support, and marketing. PwC said $0.06 goes to costs associated with government payments, regulation, and claims processing and other administration, while health insurance plan profits comprise $0.03 of the premium dollar.

The report found that physician spending accounts for $0.33 of the premium dollar and that it increased by 5.5% in 2007. Hospital inpatient spending amounts to $0.20 of the premium dollar and grew at a rate of 7.5 %.

Fifteen cents of the premium dollar goes to outpatient spending, which grew at the rate of 8.2%. The report noted that “This rapid and steady growth in outpatient diagnostic testing is in part driven by the practice of defensive medicine.”

The study found that prescription drugs account for $0.14 of the premium dollar and that drug spending increased 5.7%, compared to the double-digit jumps of recent years. The report suggests that health plans’ prescription benefit tools and techniques which have helped slow growth rates “offers lessons about strategies to restrain cost growth without harming quality.”

“Once again PwC’s report demonstrates that we have made strides in lowering costs, but more must be done to make health care more affordable and eliminate waste in the system,” said Karen Ignagni, President and CEO of AHIP, in a news release.

The report is available here .