Press Releases & Statements

Report: Recent Premium Increases Exceed Health Care Cost Growth

Contact:
Alicia Mitchell, AHA - 202-626-2339 - amitchell@aha.org
Alicia Mitchell, AHA - 202-626-2339 - amitchell@aha.org

Washington D.C. (Thursday, April 10th 2003)

Recent increases in health insurance premiums have exceeded the growth in health care costs, according to a new report released today by the American Hospital Association (AHA) and the Federation of American Hospitals (FAH).

The report, prepared by Milliman USA, examines the pattern of annual gains and losses in the private health insurance industry -- known as the underwriting cycle -- and its impact on Health Plan premiums and profitability.

"Today, as the underwriting cycle approaches another high point, we see improved profitability of Plans as premium growth trends exceed health care cost trends," it notes. "Thus the current level of premium growth is not only a reflection of rising health care costs, but also reflects the current stage of the underwriting cycle."

The new report makes clear that health care spending is the primary factor driving premium increases, because most premium dollars go toward paying health care costs. However, it indicates that factors related to the underwriting cycle -- including Health Plan profitability targets -- also contribute to Health Plan premium increases.

"It is understandable that recent health plan premium increases have caused sticker shock for employers, consumers and policymakers," remarked FAH President Chip Kahn. "When examining premium increases, they need to understand, as this report illustrates, that health plan profit targets and the underwriting cycle contribute to premium increases, as does the cost of care."

"We've all seen many parts of the health care spending picture: Health care labor costs are increasing, new and expensive technology is in demand, and more Americans are using more hospital services," noted AHA Executive Vice President Richard Pollack. "Today's report completes the picture by demonstrating that the insurance underwriting cycle is an important factor as well."

Over the last few decades, typically, Health Plans realized underwriting gains when health care cost trends were falling, and experienced losses when trends were rising, according to the report. This pattern changed toward the end of the 1990s, it notes, when underwriting losses were replaced by gains, even as health care costs were rising.

"This was due to insurers attempting to improve their profitability after having eroded their surplus by aggressively pricing in reaction to the stiff competition (for market share among health plans) in the mid-1990s," according to the report. "Financial problems contributed to consolidation in the market, reducing competition and allowing Health Plans to raise premiums. This trend correction began to produce gains in 1999 and 2000 that have continued through until 2002."

The report explains that underwriting refers to Health Plans paying or reimbursing for health care in exchange for a premium. When Health Plans collect premiums that exceed the amount of money that they pay out for health care ("claims costs") and the cost of doing business, they experience an "underwriting gain." When their collected premiums are less than claims and business costs, Health Plans experience an "underwriting loss." Health Plans' profitability is determined primarily by underwriting gains and losses, and by investment income.

The report -- "Health Insurance Underwriting Cycle Effect on Health Plan Premiums and Profitability" -- was conducted by Milliman USA. It is available in its entirety on the American Hospital Association's Web site, www.aha.org, and the Federation's Web site, www.fah.org (under "Publications/Studies").

About AHA

The AHA is a not-for-profit association of health care provider organizations and individuals that are committed to the improvement of health in their communities. The AHA is the national advocate for its members, which includes more than 5,000 member hospitals, health systems and other health care organizations, and 38,000 individual members. Founded in 1898, the AHA provides education for health care leaders and is a source of information on health care issues and trends.

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