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Why do Health Plans Need Rate Increases Every Year?

May 21, 2010

Yes, it happens every year. This year, it happened twice.  Health insurance plans in Rhode Island are  asking to charge their customers even more money- double digit rate increases!

The requests already trickled out earlier this week. Blue Cross is asking for a 12.4% increase for employers at small businesses and 13.4% for companies with more than 50 employees.  Tufts and United’s requests are similar. United- 15.5% for small, 11.7% for large. Tufts is 12.2% small and 11.6% large.

If you’ve been following the news, you already know that. What’s new is the Health Insurance Commissioner Chris Koller has released his analysis of the requests today.

Why should you care? If you want to know why these rate increases happen every year, take a look at this chart and this one. (You actually might want to print them out, they’re pretty hard to read on the screen.)  The charts explains WHERE all of that extra money would go if the rates are approved.

There are loads of categories.  For small companies, Blue Cross expects to pay 20.8% more for hospital services this year. Pharmacy costs would go up 11%. Primary care is up by 13.4%, and all other medical care shows a 7.7% increase.

These numbers fit with another report by the health insurance commissioner’s office. (John Cogan does a great job explaining  the numbers here.)

The study found that about 80% of insurance  rate increases go directly to places like hospitals and doctor’s offices.  The rest goes to administration, taxes, and reserves.

It’s possible to argue whether health plans should need that 20% for themselves, but even if you took out that amount, 80% of the costs would remain.

As Jon Kingsdale with the Massachusetts health connector (MA’s competitive market place where residents can choose their health care plans)  says-

It’s sort of like blaming the gas station because the price of gasoline has all of the sudden gone up by fifty percent. It’s similar economics,  most of the price you pay for gasoline is not what it costs the gas station to pump it, it’s the underlying cost of oil which the gas station has no control [over].

Of course, health plans have a responsibility to keep their costs under control. But the bigger problem, the harder problem, is that health care is really expensive. Not only that, health care costs are rapidly increasing every year. So to really fix rate increases, we need to make health care less expensive.

I did a feature on this a few months ago (our website’s archives are a bit scrambled right now, so I can’t offer a link) and sometimes I feel like re-airing it every time RI goes through the rate increase dance.

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