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Health insurance premiums, dissected

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We all know that health insurance premiums are going up. But, except for a few more extreme situations (think: Blue Cross of California’s massive rate hike mid-health reform debate), we don’t spend a lot of time looking at why.

What, exactly, makes health insurance cost more? Thanks to some new insurance rate filings, required by the health reform law, we’re starting to get some answers — but also a lot of familiar finger pointing over who is to blame for growing health insurance bills.

The health reform law requires that insurance companies publicly justify every double-digit rate increase. As of last week, Health and Human Services started posting those rate filings online. I’ve spent the past few days reading through them, and they make for a pretty good portrait of what, exactly, is causing insurers to charge their customers more.

One caveat: These are rate filings that have yet to be reviewed by regulators, so they could contain some errors (although, because they will go through review, there’s an incentive for insurers to get facts right). Also, these data don’t capture rate increases below 10 percent.

But in the data that we do have, most of it comes down to medical costs. Flip through the filings and you see that, on average, insurers attribute about 60 to 70 percent of any given insurance rate increase to the growing cost of delivering health care. In some cases it gets even higher: In Washington State, a small carrier called Time Insurance Co. is requesting a 37 percent rate increase. It says 87 percent of that will cover the increased cost of delivering health care. Most of that looks to come from an increase in unit price — how much each medical service costs — rather than people using more medicine.

This bears out the argument that insurance companies often make: Premiums are going up because the cost of care is going up. Or, as America’s Health Insurance Plan spokesman Robert Zirkelbach put it to me,  “the prices being charged for physician services, hospital stays and other treatment is having a direct impact on the cost of care.”

But the hospitals say its not their fault: The cost of treating patients, as new and more complex medical options become available, necessarily pushes prices up. “There’s better technology that’s demanded by patients and physicians,” says Caroline Steinberg, vice president of trends analysis for the American Hospital Association.

An HHS official, who works on health insurance rate review, adds that “new technology, and the intensity of treatments, really continues unabated.”

This issue is a bit of a double-edged sword: Although no one likes seeing their insurance premiums go up, most of us do want access to the best and newest treatments. Those treatments cost money.

Where do the rest of the costs go? Most companies say that a smaller portion of their premium increase, usually hovering around 15 percent, will cover growing administrative expenses. This part of the premium is facing downward pressure from the health reform law, which bars insurers from spending more than 20 percent on anything that’s not medical treatment.

As for profits, its a pretty mixed bag. I found a pretty even split between plans that expect to earn money next year, usually about 3 or 4 percent, and those who expect to take a loss. That lines up pretty decently with Fortune 500 data, which shows health insurance ranks as the 35th most profitable industry with a 2.2 percent profit margin. As U.S. News’ Rick Newman has pointed out, health insurers make a kind of lousy villain in this regard: most data suggests they aren’t reaping giant profits.

So what makes up a premium hike? It’s a pretty simple equation: mostly medical costs, a bit of administration and, in about half the cases, a slight profits bump. The more difficult math problem is how to reduce these costs, and curb the constantly growing cost of health insurance.

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