Why are costs of health benefits going up?

Over the past few years, Nevada business owners have been shocked by the annual rate increases for their group health insurance, and, unfortunately, these annual rate increases may continue to increase as we move toward the full implementation of the federal Patient Protection and Affordable Care Act, (PPACA) in 2014.

Traditionally, our northern Nevada health insurance renewal rates have come to generally reflect the rising cost of medical care here in the Truckee Meadows. The average cost of care over the last few years here in Northern Nevada, as reported by both Renown and Saint Mary's, has increased by as much as 1 percent per month, and group health insurance premiums have followed this same general track.

In addition to the rising cost of medical claims, administrative costs are also included as a part of the monthly health insurance premium. PPACA requires insurance companies to spend at least 80 percent to 85 percent of every dollar that they collect in premiums for the payment of medical claims, with 15 percent to 20 percent of the balance to be allocated toward administrative costs. These administrative costs pay for claims processing, negotiation of rates with physicians and hospitals, agent commissions, customer service, production of the required member notices, production of ID cards, administration of fraud prevention, the additional cost to design new plans to comply with PPACA, and to comply with state mandated benefits. The State of Nevada currently requires over 43 mandated group benefits, including most recently, AB 162 (Requirement for Autism coverage).

In addition, with the requirements of the new PPACA legislation, all carriers are allocating time and resources interpreting this new federal law. All health insurance companies doing business in Nevada must make sure that the plans that they are offering now and the plans that they will be offering in the future will meet the new legislative requirements.

Another major component of everyone's health insurance rate is the Nevada premium tax. The tax is 3.5 percent of the monthly premium, and it is collected by the insurance company and is sent to the State of Nevada.

With all of these components within the health insurance premiums that we all pay today, one of the most frequently ask questions in our health insurance brokerage is: Why is my health insurance premium going up so fast and what can I do about it?

Of course, as mentioned previously, the rising cost of medical care itself is the main reason that insurance premiums increase, but what about the cost of the new federal PPACA regulations? Whenever new mandated benefits are added to any health insurance policy, there is a additional cost, and an increase in the insurance premium, to include the new benefit. During 2011, mandated PPACA benefits that increased the cost of our health policies included the requirements that group health insurance policies extend the benefits for children up to age 26, the addition of the "unlimited" annual benefit to all health policies, and the removal of member co-pays for preventative services.

In 2012, PPACA requires that all group plans will need to supply a summary of benefits and a coverage explanation that will meet the new federal guidelines. All 2012, all group plans will be required to include additional reports, both to the Department of Health and Human Services and to their insured members about health outcomes, preventing readmissions, improving patient safety, and wellness and health promotion activities.

As many of us see when we look over our monthly group health insurance statement, the individual monthly premiums are generally based on the age and gender of the insured employee. The difference between the least expensive employee on our statement when compared to the most expensive employee can be as much as 720 percent on some of our group plans. The new PPACA restricts this percentage to 300 percent. That is, the premium for the oldest employee will not be any more than three times the premium charged for the youngest employee.

At first glance, this sounds like a good thing. But, in order to reduce this percentage difference, premiums on the lower end will be rising proportionately with the reduction in the premium for the old generation.

Another major question that we receive is about the impact of the recession on health insurance premiums. As we all know, Nevada currently leads the nation in foreclosures, bankruptcy, and unemployment, and all of these factors contribute to two main impacts on our health insurance premiums.

Since many northern Nevada employers have experienced reduced overall sales figures, and have been forced to reduce their payrolls, the total number of insured residents in the Reno/Sparks area has been reduced dramatically. Overall, younger employees are more likely to drop their insurance coverage, and are usually the first to be laid off in a recession. Since younger employees generally represent the healthiest part an employer's group, their missing premium usually causes the employers overall health insurance premiums to rise. This trend has been shown to have a double effect. Not only does the younger laid-off employee become uninsured and a liability when they receive medical care, the premiums for the balance of the (older) group rise, leading to older insured members struggling with the affordability of the increased premiums. This is a vicious cycle.

J.T. Sampson is director of client services at Health Benefits Associates Inc., a health benefits brokerage headquartered in Reno. Contact him at 828-1216 or jt@healthbenefits.net.