Why Have Health Insurance Premiums Increased

Employer-sponsored health insurance premiums increased at an ever-decreasing rate from the late 1980s through 1996.

Two arguments have been advanced to explain the increase in premiums: the backlash against managed care and decreased competition among providers. These explanations are not mutually exclusive, and other factors undoubtedly pay a role as well.

Managed Care Backlash

The managed care backlash is said to consist of physicians and patients complaining about the nature of the restrictions that managed care plans impose. A plethora of cartoons and late-night comedy bits about managed care pinpoint the popular antagonism. This intuition is supported by consumer survey work by Blendon et al. [1998] and media criticism of managed care reported by Brodie, Brady, and Altman [1998]. We should look at these concerns carefully, however.

Physician opposition is said to revolve around the difficulty in admitting patients to hospitals and keeping them there as long as physicians think prudent. There are concerns about limited drug formularies, limitations on which specialists are covered, and allegations [largely unproven] that managed care plan contracts prevent physicians from discussing some treatment options with patients.

Quality of care has not been measured fully, however, and it may be that providers came to abide by utilization management protocols even as they objected to them.

Patients' concerns are similar to those of physicians with respect to perceived access. In addition, patients are worried about quality of care. Judging the quality of a physician, hospital, or other medical care provider is difficult. The concern with managed care is that the limited panel of providers that makes managed care successful on the price front locks patients into providers who may not be right for them in either a clinical or an interpersonal sense.

Marquis, Rogowsi, and Escarce [2004/05] examined the decline in private health maintenance organizations [HMO] enrollment in metropolitan areas between 1998 and 2001. In this study, they broadly defined HMO enrollment to include both HMO and point-of-service [POS] plan enrollment. They found only modest declines in HMO enrollment over this period [from 47.7 to 44.9%] and little association between these declines and measures that might be indicators of having a greater local choice of health insurance options. They "conjecture[ed] that backlash either represented the views and perceptions of physicians and the media while consumers were generally satisfied . . . or that consumers exercised ‘voice' and health plans responded very quickly to avoid losing market share" [p. 387].

However, the decline in HMO [and POS] enrollment has been more substantial since the time of the Marquis, Rogowsi, and Escarce study. HMO enrollment among ensured workers declined by over 30% [from 29 to 20%] and POS enrollment declined by 38 % between 2001 and 2006. During this same period, enrollment in preferred provider organizations [PPOs] increased by 18%age points and did so at the expense of all other plan types. One interpretation of this shift is that employees switched to a less-restrictive form of managed care. PPOs typically allow members to pay higher copays to use a provider who is not part of the health plan network. By switching to a PPO, consumers arguably have some of the benefits of managed care selective contracting but avoid the risk of poor-quality or incompatible providers by being able to step outside the network if they deem it necessary.

There is a cost to this switch, however. Because of the patient's freedom to step outside the network, PPOs are unsure of the volume of patients who will actually use the providers in their networks. As a consequence, PPOs are not as effective in negotiating lower prices with providers. From this perspective, the message is simply that greater choice costs more, and the increase in health insurance premiums over the last decade reflects, at least in part, consumers' desire for greater choice of providers.

There is some irony in this. The public's perception of managed care, and of HMOs particularly, seems to be one of denial of referrals to specialists, restrictions on hospital days, and substitution of cheaper but less-effective drugs and treatments for more-effective ones. Yet not much of the cost difference between HMOs and indemnity plans can be attributed to differences in treatment protocols, and the management of ambulatory utilization has been far from successful. It is hard not to conclude that managed care plans have shot themselves in the foot by implementing and continuing utilization management techniques that have not saved money but have alienated consumers.