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Health insurance rate hikes: Costs, causes and effects

October 18, 2009|By ARNOLD PLATOU

o Dealing with difficult health choices

o Employers, individuals face tough choices on health coverage

HAGERSTOWN -- Maryland's largest health insurer posted one of its lowest profits ever last year -- even as some of its clients are seeing their highest insurance bills ever.

CareFirst BlueCross BlueShield, which covers nearly 3.4 million people in Maryland, northern Virginia and Washington, D.C., cleared $9.3 million -- about "one-tenth of 1 percent" of its $6.6 billion in revenue, said its chief spokesman, Michael Sullivan.

"The simple fact of the matter is health care premiums and what companies pay for health insurance are driven by health care costs," Sullivan said.

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In the Maryland-Virginia-D.C. region, "health care costs rise at an average of between 8 (percent) to 12 percent per year," Sullivan said.

So the problem is not insurance company profits, as some allege, but rather those costs, he said.

"We believe that something must be done to reduce the underlying health care costs," Sullivan said. "That's where there's not enough discussion in federal health care reform.

"Question is, how do you reduce what health care costs?"

Report: Maryland's costs grow faster than U.S. average

Marylanders spent about $35.8 billion on health care services, including hospital care, practitioner services, prescription drugs and long-term care, in 2007, the most recent year for which such data is available.

According to a report issued in March by the Maryland Health Care Commission, state residents spent an average of $6,374 per person for health care services in 2007.

On average, health care spending per person rose 7 percent per year from 2003 to 2007 in Maryland, the report said. That was slightly higher than the national average of 6 percent per year, it said.

Spending for hospital care has risen the fastest, accounting for about one-third of total health care expenditures in 2007, the report said.

Also growing fast are expenditures for the administration and net cost of insurance, it said.

"In 2007, Marylanders spent $3.1 billion for the administration and net cost of insurance, equal to $559" per person, according to the report.

"Per capita, Marylanders spent about 10 percent more in this category than the national average, in part reflecting higher rates of private insurance coverage in the state," the report said.

From 2003 to 2007, it said, this cost "grew at an average annual rate of 8 percent in Maryland, twice as fast as the national average."

Researcher: Premiums up more than costs nationwide

Across America, health care costs are rising, but not as fast as health insurance premiums, according to an official at Georgetown University's Health Policy Institute in Washington, D.C.

"Insurance rates have been going up steadily every year at double digits because insurance profits are increasing," said Karen Pollitz, the institute's research director for private health insurance.

To make her point, Pollitz pointed to a national study by the Centers for Medicare & Medicaid Services, in the U.S. Department of Health & Human Services.

The study shows health care costs throughout America increased 6.1 percent in 2007.

"And the years before that, (they increased) 6.7, 6.8, 6.9 ... You have to go all the way back to 1990 to find the last year that we saw double-digit growth in health care cost," Pollitz said.

"And yet, we see double-digit growth in insurance premiums all the time," she said.

The study also gives a breakdown of national health care expenditures.

Among them, Pollitz noted, is the net cost of administering private health insurance.

"In one particularly interesting year, 2002, health care spending grew 9 percent. The cost of administering private health insurance -- 16.8 percent," Pollitz said. "When you look across the last 30 years, the cost of health insurance is rising faster, significantly more. It's data."

Revenue vs. expenses

Unlike many insurers, CareFirst is a not-for-profit company, Sullivan said.

"When you take a look at the industry as a whole, that's different than when you only examine not-for-profit," he said.

CareFirst is part of the national family of BlueCross BlueShield companies, some of which are for-profit, he said.

But at CareFirst, "at the end of the year, we seek to make a profit margin -- we call it net income -- we seek to have a net income that's somewhere between 1 (percent) and 2 percent. It's what we make after all expenses," Sullivan said.

In all, "85 to 86 cents of every dollar we take in goes right back out to pay for health care for our members," he said.

Most of the rest of every dollar pays operating expenses and goes into a reserve fund, Sullivan said. Reserves are used to improve service and "to make sure we have the ability to pay our members, regardless of what their health problems are," he said.

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