Tatum Anderson assesses the many factors affecting the rise in health insurance premiums, including increasing treatment costs, higher incidence of chronic conditions, evolving and expanding regulatory requirements, and the accelerated use of insurtech
The coronovirus might have caused an unusual blip, but health insurance premiums, say insurers, usually go up, not down.
Willis Towers Watson, which tracks 287 medical insurers in 76 countries, said last year that healthcare benefit costs dropped to 5.9 per cent from 7.2 per cent in 2019, as people stopped seeking more routine treatments during the pandemic. It expects costs to rebound to 8.1 per cent in 2021, however, as vaccinations take off and more insured patients seek more non-emergency and elective medical treatments.
Some countries didn’t see a blip during 2020 at all. Pacific Prime, which tracks the cost of international health insurance premiums in 100 countries annually said the countries with the top 10 most expensive individual health insurance premiums actually saw premium rises: Hong Kong (6.64 per cent), Singapore (3.86 per cent), Dubai (10.39 per cent), Israel (3.6 per cent), Russia (4.93 per cent) and Switzerland (19.91 per cent). Several South American countries such as Chile, Argentina, Peru and El Salvador saw rises of more than five per cent.
Health insurance premiums tend to increase when the insurer’s loss ratio – the ratio of losses to premiums earned – is impacted. That’s why the cost of healthcare plays such a major role in rising premiums, said Darren Counsell, Director at Pacific Prime, based in Hong Kong. “Year on year, we’re seeing a rise in healthcare costs due to factors like chronic illnesses associated with bad lifestyle habits and ageing populations, as well as more expensive drugs and new high-cost treatments,” he said. “We also cannot ignore the growing challenge of insurance fraud.”
Expensive treatments and chronic diseases
In the US, rises in those healthcare costs are firmly secured for years, said Sheila Diaz, Director of Business Development at insurer GMMI. The Center for Medicare and Medicaid Services (CMS) estimates a national healthcare spending increase of 5.5 per cent on average every year until 2027. Interestingly, one-third of that cost can be attributed to hospital care, she said. “This data would suggest that with an ever-rising cost of medical services in the US, the insurance premiums must also increase to adjust for higher financial risk,” she explained. And some increases in premiums are due to increased demand for health insurance, said GMMI, because of increasing numbers taking advantage of the Affordable Care Act (ACA). Those customers are likely to have underlying complex medical conditions that typically excluded them from other packages. ACA customers’ use of healthcare resources has therefore contributed to higher overall premiums.
But how do these other factors increase healthcare costs, and therefore premiums? In part, it’s to do with general inflation – which affects the cost of salaries, utilities and equipment, for example, and impacts the entire supply chain, according to Nigel Oliver, Global Head of Pricing, Underwriting and Risk at AXA Global Healthcare. Medical inflation is a major culprit too, especially through new specialised technologies, software, equipment and medical expertise. “The evolution of medical capabilities and a greater accessibility to these treatments, as well as new high-cost drugs like immunotherapies and new ways of providing care, cost more than traditional methods,” he said.
The most significant cost increases are being seen in cancer treatment – so-called ‘targeted therapies’ – as well as in treatments for autoimmune disorders and congenital diseases, especially those using gene treatment via RNA splicing. Curative gene therapies can run into millions of dollars. Many new speciality drugs such as these are in the pipeline, and existing ones are increasingly being licensed for expanded use in other categories of patient.
Oliver said ageing affects premiums – at a rise of two to three per cent per year – and so do chronic conditions. “As we all know, age does of course have an impact on premiums, as the older a person becomes, the more likely they are to need treatment,” he said.
With a higher incidence of cardiovascular disease, cancer, diabetes, and obesity, it is expected that the overall cost associated with each episode of care will also increase, said GMMI’s Diaz. “From a clinical standpoint, comorbidities typically complicate treatment and extend hospital stays, resulting in overall higher charges,” she added.
An uneven global playing field
But, interestingly, a significant proportion of rising medical costs can also be attributed to the overuse of care. This is when, for example, insured patients seek inappropriate care, or when providers over-prescribe treatments and consultations that may be unnecessary, according to Willis Towers Watson.
The US healthcare model even incentivises providers to order more diagnostic tests via the traditional fee-for-service approach. Physicians and hospitals receive a reimbursement for each test, procedure and visit. This encourages over-ordering of diagnostic testing to increase profitability, say insurers. A lack of cost transparency in many facilities doesn’t help either. “This has proven to be a challenge for the insurance companies that try to remain competitive in the market and maintain profit,” said Diaz.
Pacific Prime’s Counsell adds that premiums are greatly affected by the disparity in costs of the same treatment at different healthcare providers. “The fact that patients are driven to luxurious private hospitals is a worrying trend. At these hospitals, the cost for a given treatment can be five to 10 times more than the usual and customary cost at mid- or lower-tier private hospitals, even though the medicines or care provided may be of a similar standard,” he said. “As such, health insurance premiums have to keep pace with these exorbitant costs of treatments.”
Meeting regulatory requirements in many countries is becoming increasingly onerous on insurers too, said Olan Mooney, Head of Pricing – International Health at Allianz Partners. “They include enforcing minimum benefit requirements, compulsory coverage levels and restrictions on medical underwriting,” he said. “Removing insurers’ ability to control excessive risk exposure through these mechanisms consequently leads to additional claims costs, which previously may not have occurred.” Additional costs can also arise due to the need to re-design products, price, customer literature and legal agreements to ensure full compliance with changing regulations, he added.
Enhanced technology comes at a price
Insurtech has allowed more transparency in terms of assessment of cost associated with specific services. In the US, software allows small business owners to review the data for all 50 licensed states and choose a product that will meet their employees’ and business’ financial needs, for example. The pivotal need here being that insurers must invest in enhanced and robust cyber security systems to protect the data of policyholders.
Elsewhere, insurers point to the European Union’s GDPR, which remains a gold standard for data privacy regulation and the number of regional variations that are emerging. As more regulators catch up with the kinds of technologies that help them comply, costs are only going to increase in the future.
The hope is that, eventually, digitisation will lower costs in the long run because it will automate communications, claims handling, and fraud detection, as well as leveraging data analytics for underwriting purposes. “The ideal outcome would be regulations regarding healthcare cost that can stabilise the insurance market over the long term,” Mooney said.
And, as health insurance pricing is critically dependent on the quality and granularity of data, that could ultimately improve risk categorisation capabilities, the ability to spot emerging medical trends and influence the design of products that offer customers flexibility both in terms of price and level of cover.
Creative solutions to keeping costs down
In the shorter term, however, the coronavirus is likely to have an ongoing effect on premiums. Mental health costs due to lockdown measures could be a significant future cost for insurers going forward, for example, but there are other effects said AXA’s Oliver. “Unsurprisingly, the short-term effects of Covid-19 concern me, with the need for additional personal protective equipment and testing before in-patient stays, which has to be funded somehow,” he said. “This leads to an increase in price without taking any other factors into account.”
Another effect is a global economic downturn. Many employers, understandably, are tightening their budgets and reassessing their group health insurance plan, say insurers. Some might switch to lower cost providers, so a big challenge will be to retain their group clients, they say.
A more tailored approach to medical coverage with a strong focus on financial incentives associated with utilisation within the established networks will allow insurers to manage cost by projecting exposure based on reimbursements, said GMMI. Algorithms linked to comorbidities, risk factors, and lifestyle should be incorporated into the development of new products that will offer shared financial responsibility. “I would expect to continue to see development of products with narrower networks and reduced patient responsibility to make the product appealing to the consumer,” said Diaz. Increased visibility into hospital charge masters and average charge per inpatient episode, through new US regulation, might also have an effect here too. Some providers might introduce bundled rates to capture an increased market share when patients begin to seek medical treatment for complex conditions.
Similarly, AXA’s Oliver said collaborations between insurers/arrangers and providers can reduce not just fraud, but waste. For example, AXA Global Healthcare is working with Advance Medical to provide multiple services.
Telehealth, which gained in popularity during the pandemic, may also become a viable and desirable alternative to in-person care, saving employers and health plans on the episodic cost of care delivered virtually. That said, telemedicine might, however, drive up premiums in the short term, as investments are made in new telemedicine networks.
Adjusting group insurance offerings
Insurers stress that if a product is more expensive, but offers more value, it can still appeal to the buyer. “The key to combating this is to communicate the value of product,” said one insurer.
That’s why, as part of the renewal process, Allianz says it tends to outline premium increases to customers. However, it also tries to counteract increased treatment costs through negotiation with medical providers, as well as audits and controls of possible overutilisation. “Members can reduce premium increases by including deductibles in their plans,” reasoned Alex Bender, Global Head of Client Relationship Management, International Health, Allianz Partners. Allianz added that it has seen very solid client retention ratios so far. Health insurance is, after all, an essential part of any expat assignment, Bender said.
However, for schemes purchased by employers for their staff, increasing prices are becoming a real concern. “Often employers decide to adapt their cover and opt for a lower level of cover to reduce premiums or avoid high increases,” said Bender. “Ultimately, the group schemes need to be funded sufficiently on a sustainable basis and despite rising prices.”
The main challenge going forward, therefore, is ensuring long-term sustainable premiums with appropriate levels of cover. “As economic pressures have an impact on many companies, they are often looking for reductions in cover to maintain their plan at a reasonable funding level,” he explained. “This ultimately impacts the insured member as the beneficiary.”
Targeting the younger consumer could help sustain the health insurance market
Diverse portfolios may be one answer. Interestingly, the pandemic has actually helped younger adults better understand the need for insurance, therefore creating a new opportunity for insurance companies in that market, says GMMI.
Therefore, a potential offset strategy could be to increase the variety of policies in the market with more competitive pricing and limited claims exposure for the otherwise healthy young adult, according to Diaz. “This will help to maintain premium collection and manage the potential risk associated with cost for chronic conditions,” she said.
Of course, explaining an increase in premiums in relationship to any added benefits can help reframe the negative mindset surrounding that increase. It is also important for consumers to understand lower cost options when accessing acute care, for example.
What’s vital, ultimately, is that employers are able to financially sustain subsidising all or part of the premium to maintain coverage for the majority. So, encouraging telemedicine, when appropriate by waiving co-payments for telemedicine services. This might incentivise consumers to choose this method of care and reduce long-term costs. Creating wellness programmes based on consumer chronic conditions and developing long-term reward programmes for loyal consumers with low utilisation are all potential strategies. “The insurance companies that will thrive after the pandemic will be those that create products appealing to a broad range of consumers,” Diaz concluded. ■
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