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The Relationship Between Premium Increases and Reform

The Relationship Between Premium Increases and Reform

Never mind that PriceWaterhouseCoopers recently issued a study indicating the medical costs increases that health plans bear will further decelerate for 2008. Hewitt Associates just issued projections that initial premium increases quoted by the plans to employers will spike upwards for 2008. If indeed premiums increases reverse the trend of the past four years and accelerate again, such movement will in turn accelerate reform initiatives and market changes.

Lets take a step back and look at the premium pricing and underwriting cycle. Under this historical model, plans are driven by cyclical market share and premium price competitive behavior. There are periods where premium increases are significant, then decline, and then rapidly increase again. Here’s how the cycle works:

  • During profitable periods: a) plans want to expand market share; b) they start to lower price to do so; c) other plans match lower prices to keep pace and not lose share; d) price wars similar to airline fare wars erupt and multi year contracts develop.
  • Then a downswing develops: a) due to insulation of provider contract capitation and discounts and the time lag on fee for service claims, considerable time elapses before financial pressures are fully visible from the lowered premiums; b) due to multi-year contracts and price pressures nothing much can be done about the problem as it becomes apparent.
  • A period of significant losses then occurs: finally enough of the market is losing money so that several major players break rank and begin increasing rates and everyone else follows suite.
  • Finally there is a return to profits: the premium increases continue until profits are being generated, and the cycle begins anew.

However, with the new century, health plan economic behavior appears to have changed to some degree:

  • Plans are now somewhat less driven by long-term market share
  • Plans are now somewhat more driven by short-term bottom line profitability
  • Plans are more willing to exit unprofitable markets and product lines
  • Plan consolidation has occurred due to closures of failing plans, market exits and acquisition of plans.
  • Premium competition has somewhat diminished because of all the above.

This doesn’t mean that the premium pricing cycle has disappeared. It does mean the down part of the cycle will be less pronounced due to reduced premium competition. Here’s how the cycle looks graphically:


Source: MCOL Managed Care Fact Sheets

Now let's correspond a little history of some major reform and market movements in the past twenty years to this premium increase graph. You will notice each of these major market movements correspond with shifts in the premium trends:

  1. PPO marketshare diminished, and HMOs became the mainstream employer health plan option in the late 1980s as the vehicle to address double digit rate increases nearing 20%
  2. HMO tight utilization controls, provider capitation arrangements and deeper discounted contracts rapidly increased in scope as HMOs gained marketshare clout in the first half of the 1990s, and health plans required cost savings to counter significant premium price competition. Pressure for health care reform erodes after 1993 as premium increases rapidly delerate.
  3. Significant Managed care backlash emerged from providers, media and consumers in the late 1990s, causing a relaxation of utilization controls, a very large reduction of capitation programs and reduction of provider discounts. PPO enrollment again accelerated due to the backlash, and premium increased as resulting costs increased.
  4. Consumer driven health plans and greater consumer cost sharing emerged with the new decade as cost increases reached double digit levels. the number of uninsured reach peak levels and pressures for reform increase.

So now plot the next points on the graphs fro 2008 - 2010. Will they continue downward or climb back upward. If they continue to decelerate, we would predict diminished enthusiasm for significant health care reform, and for movement to consumer driven plans. If they start accelerating, a fire should be lit under greater pressures for reform, as well as consumer driven programs. Of course, the reform movement and consumer driven movement will most likely be at odds in the direction they intend to take us, but momentum they may both well have in that scenario.

So the question is, what happens next? Will health plans keep decelerating their premium increases, as the PwC medical cost study would cause us to believe, or will premium increases accelerate, as the Hewitt analysis indicates?

The PwC study: "Behind the numbers Healthcare cost trends for 2008" from the PricewaterhouseCoopers' Health Research Institute, released this June 2007 is available at The following is the PwC expected Medical Cost Trends for 2007 and 2008:

  2007 2008
PPOs 11.9% 9.9%
HMO/POS/EPO 11.8% 9.9%
Consumer Driven 10.7% 7.4%

The Hewitt Associates analysis can be reviewed in their June 28, 2007 press release "HMOs Propose Highest Rate Increases in Four Years, According to Hewitt Analysis" at . Overall, Hewitt projects these initial 2008 rates increases to average 14.1%, compared with 11.7% in 2007 and 12.4 % for 2006. How different are the final plan rates? Hewitt notes that after plan changes, negotiations and terminations, 2007 average HMO rates increased by 8.2%. If that same differential held for 2008, final 2008 rate increases would be around 9.9%, which if you round it, does bring us back to double digits even for the final numbers.

So, let's spin the premium rate wheel of fortune and see if we're headed into pressures for change or status quo as we inch along towards the election year.

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