Health Economics Program Issue Paper July 1999 Health Insurance Premium Trends Health Insurance Premium Trends Ensuring that Minnesotans have adequate access to health insurance was a major goal of the health reforms enacted in the state in the early 1990s. For example, reforms in the small group insurance market were intended to increase the availability of private Rising health insurance premiums have led to concern that some Minnesotans may lose their health coverage. employer-sponsored health insurance. However, two national studies have recently shown that despite an increase during the early and mid-1990s in the number of employees to whom health insurance is available, fewer individuals are choosing to accept offers of employer-sponsored health insurance. 1 These studies underscore the importance of affordability as well as availability in ensuring access to private health insurance. This issue paper examines the available information on trends in health insurance premiums, discusses the advantages and disadvantages of various sources of information, and provides a framework for analyzing the relationship between premiums and underlying health care costs. While the issue of premiums for individuallypurchased coverage is touched upon briefly, the primary focus is on premiums for employment-based coverage. Why Are Premium Trends Important? The cost of health insurance is an important determinant of who has access to the private health insurance system. For low-income families especially, increases in health insurance premiums may lead to a loss of coverage. However, it is important to remember that premiums are only one of the components of the health care costs faced by consumers factors such as Minnesota Department of Health copayments, deductibles, maximum out of pocket expenditures, and comprehensiveness of health insurance benefits are also key determinants of the overall affordability of health care from the consumer s perspective. To private employers that offer health insurance as a benefit, premiums are of concern because they affect the cost of doing business. When faced with an increase in health insurance premiums, employers have several choices. For example, employers can reduce the extent to which they subsidize the cost of insurance (placing more of the burden of the premium increase on employees), they can change the health insurance benefit package, or they can make up for the cost increase by reducing wage increases or cutting other benefits. Some employers may decide to stop offering health insurance as a benefit altogether. From the perspective of government, trends in health insurance premiums are important for two reasons. First, as an employer, government faces the same concerns about the cost of providing health insurance to employees as any private employer does. Second, to the extent that increases in private health insurance premiums lead to an increase in the number of people who lack private insurance, public budgets could come under pressure from increased enrollment in programs like Medical Assistance and MinnesotaCare, or from an increase in uncompensated care.
Premiums vs. Costs Both in Minnesota and nationally, health insurance premiums at least for some segments of the market began to rise more rapidly in 1998 and 1999 than they had for several previous years; similarly high premium increases are expected in 2000. 2 At the same time, Minnesota and national estimates indicate that total spending on health care services is growing slowly relative to historical averages. National estimates indicate that health care spending grew more slowly in 1997 than in any year since 1960, when the federal government first began keeping track of health spending. 3 In general, premium growth is not a very good indicator of the trend in actual spending on health care. This is because health plan companies set their premium rates based on historical information and projections of future claims. Delays in getting the most current information, uncertainty about whether an observed change in costs is likely to be temporary or long-lasting, and errors in projecting future claims result in health plans setting premiums too high in some years and too low in others. A premium cycle results, in which insurers tend to keep premium growth low following years of lower than expected costs in order to gain or keep market share, followed by years in which premium growth exceeds the growth in costs to make up for past losses. Currently, both Minnesota and the nation are experiencing the second part of this cycle. In other words, although overall health care costs may be growing at a modest pace, the premiums charged in a given year may be higher or lower than these costs, depending on the factors described above. Over a period of several years, however, increases in premiums should be roughly equal to increases in costs. Recent Trends in Health Insurance Premiums There is a great deal of variation in the level of health insurance premiums across employers. For example, premiums may vary by firm size, geographic region, type of insurance product (e.g., HMO vs. indemnity insurance), demographic characteristics of the group of people being insured, and of course, comprehensiveness of benefits. As a result, there is no single reliable source of information on trends in private health insurance premiums. There are, however, several different types of information that are useful for analyzing premium trends in Minnesota and the nation. These include surveys of private employers, information on premium increases experienced by large public employee groups, and information on premium rates and aggregate premium revenues filed by health plans with regulators; however, the information obtained from these diverse data sources is not always consistent. Employer Surveys One of the most common ways of tracking premium trends is to conduct a survey of employers who offer health insurance. Several private consulting firms conduct and publish the results of employer health insurance surveys on an annual basis, and the results of these surveys are widely cited. The federal Bureau of Labor Statistics also collects information on employers costs of compensation, including the cost of providing health insurance. Table 1 summarizes the findings of several of these surveys in recent years. While the survey results cannot be directly compared because of differing methodologies, each of the surveys in Table 1 shows the same general trend high premium increases in the early 1990s, followed by slower growth or actual declines in the mid-1990s and a return to higher rates of growth starting around 1998. Table 1: Results of National Employer Surveys: Health Insurance Premiums Per Enrollee, Percent Change from Previous Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 KPMG Peat Marwick 12% 11% 8% 5% 2% 1% 2% 3% na Mercer/Foster Higgins** 12% 10% 8% -1% 2% 3% * 6% na Towers Perrin 14% 11% 12% 6% 2% 4% 3% 4% 7% Bureau of Labor Statistics 12% 10% 8% 6% 2% * * 2% 4% na=not available * growth/decline of 0.5% or less ** survey methodology changed in 1993 2
While these surveys are generally quite timely and provide some useful information on premium trends, it is important to be aware of their limitations. There are several general caveats to keep in mind when considering the evidence on premium trends from employer surveys: 4 Most of the well-known surveys focus exclusively on larger employers. Thus, the survey results are not necessarily generalizable to the entire labor market. 5 The way that firms are selected for inclusion in the survey also affects the degree to which the results can be generalized. Some surveys use a convenience sample of the surveying organization s own clients, while others use a random sampling method to obtain results that are more representative of the market in general. The reliability of results is also affected by the surveys response rates. Because benefits are constantly changing and firms may switch health plans from year to year, it is virtually impossible to tell how much of a premium change as measured by these surveys is purely due to price changes and how much is due to the fact that the product being purchased is changing. Some employer surveys attempt to control for the fact that firms may switch plan types from year to year, and some do not. The surveys vary in the information they collect about premiums and how the results are presented. For example, some collect information only on the employer sshare of health insurance premiums and thus may not accurately reflect the trend in total premium costs. Some present results on premiums for active employees only, while others present results for active employees and retirees combined. In addition, information on single and family premiums may be combined using different methods to determine the overall trend in premiums. Minnesota-specific information on premiums paid for employment-based health insurance is available from the 1993 and 1997 Robert Wood Johnson Foundation (RWJF) Employer Health Insurance surveys. Unlike the surveys done by private consulting firms, the RWJF surveys provide state-level information on health insurance premiums and premium changes experienced by all sizes of employers; data for Minnesota can also be compared with national survey results. National and state-specific data on employmentbased health insurance is also available from the Insurance Component of the 1996 Medical Expenditure Panel Survey (MEPS) conducted by the federal Agency for Health Care Policy and Research (AHCPR). Premium ($) Figures 1 and 2 show the trend in premiums for single and family health insurance coverage in Minnesota from 1993 to 1997. As shown in these figures, average premium levels do not vary a great deal by firm size, costing about $157 per month for single coverage and $410 per month for family coverage in 1997. During the period from 1993 to 1997, health insurance premiums rose very slowly, with an average increase of about 2% per year for both single and family coverage. Results from MEPS show that health insurance premiums in firms with fewer than 50 employees were lower in Minnesota than the national average for both single and family coverage in 1996; for larger firms, however, premiums in Minnesota were not significantly different from the national average in 1996. 6 Figure 1: Monthly Premiums for Single Coverage by Firm Size 180.00 160.00 140.00 120.00 100.00 80.00 60.00 40.00 20.00 0.00 1993 1997 Fewer than 10 10 to 49 50 to 99 100+ Average, all Number of employees firms Source: 1993 and 1997 RWJF Employer Health Insurance Surveys Figure 2: Monthly Premiums for Family Coverage by Firm Size Source: 1993 and 1997 RWJF Employer Health Insurance Surveys 3
Data from the RWJF survey show that the average premium increase in 1997 across all firms was about 2.4 percent in Minnesota, compared to 1.9 percent nationally. 7 As shown in Figure 3, however, there is substantial variation in the experiences of individual firms. For example, while nearly one-third (29 percent) of Minnesota firms had experienced no change in premiums per enrollee, 6 percent of firms had seen premiums decline by more than 10 percent, and 12 percent of firms had seen premiums rise by more than 10 percent. 8 Figure 4: Average Employer and Employee Contributions to Premiums in Minnesota, 1993 and 1997 Figure 3: Distribution of Premium Changes for Minnesota Firms, 1997 Source: 1993 and 1997 RWJF Employer Health Insurance Surveys Source: 1997 RWJF Employer Health Insurance Survey Figure 4 illustrates the changes in employer and employee contributions to health insurance premiums from 1993 to 1997. The share of health insurance premiums contributed by employers for single coverage was roughly constant (about 82 percent), while the employer share for family coverage rose slightly (from 68 to 70 percent). For single coverage, employees share of the premium increased from about $24 per month to $28 per month between 1993 and 1997; at the same time, employers cost per enrollee increased from $119 to $129. For family coverage, employees paid about $2 per month more on average in 1997 than they did in 1993, and employers paid about $27 more per enrollee. Large Public Employee Groups Year-to-year changes in health insurance premiums faced by large public employee groups are often viewed as a bellwether of premium changes in the broader marketplace, since large employers are seen as having the best bargaining power. Figure 5 shows the trend in health insurance premiums per enrollee paid for employees in Minnesota s State Employee Group Insurance Program (SEGIP) and for federal employees nationwide (under the Federal Employees Health Benefits Program, or FEHBP). As of 1997, SEGIP covered nearly 154,000 employees, retirees and dependents. FEHBP covers an estimated 8.7 million federal employees, retirees, and their dependents nationwide. 4
Figure 5: Trend in Premiums for Large Public Employee Groups FEHB: weighted average premium changes for employees, dependents and retirees. 1999 premium increase based on 1999 rates and 1998 enrollment (i.e., does not account for plan switching in response to price changes). Source: U.S. Office of Personnel Management. SEGIP: weighted average premium change for employees only. Data not available for 1998 and 1999. Source:MN Department of Employee Relations. Health insurance premiums faced by these two large groups show a similar trend over the past several years. In the early 1990s, annual premium increases were in the high single digits. In the mid-1990s, premiums either grew very slowly or actually declined. Beginning in 1997 for SEGIP and in 1998 for FEHBP, premium growth began to accelerate again. Although data on weighted average premium increases for 1998 and 1999 is not yet available for SEGIP, preliminary data shows that premiums have continued to follow a trend of higher growth. Small Group and Individual Markets In Minnesota, premium rates in the small group (firms with 2 to 50 employees) and individual insurance markets are subject to regulatory approval. In 1992, legislators enacted market reforms designed to improve both access and affordability of coverage in these markets. The small group and individual markets are generally viewed as more vulnerable to premium increases because small groups and individuals lack sufficient size to spread insurance risks (in other words, the premium for the group may be disproportionately affected by a small number of people with high medical claims). In addition, small employer groups and individuals lack bargaining power with health plans. The RWJF Employer Health Insurance Surveys are a valuable source of information on health insurance premiums faced by small employers in Minnesota, but the survey is not done on a regular basis. There are two other data sources that can be used to provide a regular, ongoing picture of premium trends in Minnesota s small employer market. The first of these is premium rate information filed with regulators. 9 Because there are many different types of products and benefit sets offered in this market and we do not have information on enrollment in each type of product, it is impossible to calculate a premium growth rate for the small group market as a whole based on these rate filings. A sampling of recent small group rate approvals for HMOs shows premium increases of 5 to 11 percent in 1998 and 4 to 13 percent in 1999. However, the actual premium change faced by a small employer may vary by more than this amount adjustments to these index rates are allowed based on age, geographic region, and the health of the group. A second source of information on premiums in Minnesota s small employer market is data on aggregate premiums and enrollment from the Minnesota Health Coverage Reinsurance Association (MHCRA). According to data from MHCRA, the average premium per member per year in the small employer market rose by 13.7 percent in 1997 and an additional 8.5 percent in 1998. 10 Enrollment in small group health insurance in Minnesota has grown rapidly over the past several years. A 1995 study by the Minnesota Department of Commerce found that the number of small employer groups (defined at that time as groups with 2 to 29 employees) enrolled in this market increased by 15% in the first year after the market reforms took effect, and the number of people covered through these groups increased by 8%. A 1997 survey of insurers conducted by the Minnesota Department of Health with the Minnesota Department of Commerce found that total enrollment among groups with 2 to 49 employees increased by about one-third between 1994 and 1996. However, recent premium increases in the small group market threaten to erode some of the enrollment gains that have been achieved due to legislative reforms and the very strong economic growth of the past several years. 5
Despite the significant premium increases in Minnesota s small employer market in 1997 and 1998, total enrollment increased by about 12.3 percent to nearly 480,000 during this two-year period. Although there is no evidence yet that high premium increases are causing enrollment in the small employer market to decline in Minnesota, some evidence suggests that this may be beginning to happen at the national level. One recent study found that the percentage of firms with 3 to 199 employees that offer health insurance coverage fell from 59 percent in 1996 to 54 percent in 1998. 11 In the individual insurance market, a sampling of recent rate increases by Minnesota HMOs shows that base premium rates are rising by 15 to 20 percent in 1999, following increases of 6 to 20 percent in 1998. As in the small employer market, however, actual rate changes can vary from these index rates due to adjustments based on age and geographic region. Unlike the small employer market, after an individual purchases a health insurance policy the premium may not be raised due to changes in the health status or claims experience of the individual. Approximately 4 percent of Minnesota s population (roughly 200,000 people) purchases health insurance coverage through the individual market. Aggregate Premium and Spending Data Aggregate financial data from health plan companies can also be used to track trends in premiums. The main disadvantage of this approach is that because this information is aggregate, we are unable to analyze premium changes in specific segments of the market, such as the small employer market. Another disadvantage is that these overall averages mask the significant variation among premium changes experienced by individual employers that is illustrated in Figure 3. Since 1993, the Minnesota Department of Health has collected aggregate financial and enrollment data from all health plan companies that do business in the state. 12 Figure 6 shows the growth in commercial premiums per member per month for Minnesota HMOs from 1994 through 1998 (data for 1998 are preliminary). As shown in the table, premiums per member grew slowly from 1994 through 1997 (an average of 0.5 percent per year), followed by an 8.1 percent increase in 1998. Throughout the 1994 to 1998 period, spending per member per month grew by about 5 percent per year. In other words, even though spending growth has been moderate in comparison with historical standards, premiums did not keep pace with spending, creating the need to raise premiums to make up for past losses. This illustrates the premium cycle described earlier in this paper. Figure 6: Growth in Commercial Premiums Per Member Per Month, Minnesota HMOs Source: Group Purchaser Financial and Statistical Reports submitted to MDH. 1998 data are preliminary Outlook for Health Insurance Premiums As described above, it is widely recognized that health insurance premiums are cyclical, with periods of low premium increases followed by periods of higher than average premium increases. Undoubtedly, the fact that premiums did not keep up with spending on a per member per month basis at Minnesota HMOs during the mid-1990s partly explains why we are now seeing relatively high premium increases in Minnesota. National data also show that premiums have failed to keep pace with costs over the last several years, with the result that current premium increases are higher than underlying cost increases. 13 It is still too early to tell how long these high rates of premium growth will continue. Over a period of several years, premium growth should be roughly equal to the growth in the underlying cost of providing health care. 6
Current national forecasts project that growth in total private health insurance spending for benefits and administrative costs will be about 6.6 percent per year from 1999 through 2008. 14 While higher than the record-low growth of the mid-1990s, this projection is still significantly lower than historical averages. Growth in underlying health care costs depends on a variety of factors, many of which cannot be projected with much precision. For example, the fact that economy-wide inflation has been very low during the 1990s has contributed to slower health care spending growth. A return to higher levels of inflation could result in higher than expected health care spending growth in the future. Another large uncertainty in projecting cost is the effect of technology. The pace of technological advance is very rapid in health care; some new technologies are very expensive, and others have the potential to save money. Changes in the mix of services, such as increased use of higher-cost prescription drugs, also play a role. Other uncertainties include the effect that consolidation of health plans and providers may ultimately have on health care costs and premiums, and whether a managed care backlash may reduce the ability of managed care plans to contain costs. In summary, health insurance premiums are affected by both short-term and long-term factors. While it is clear that the current high premium increases being experienced in Minnesota are partly due to a short-term need to make up for past underpricing of health insurance, it is also possible that some of the increases are due to more permanent shifts in the underlying cost of providing health care services. The Health Economics Program will continue to monitor both premium and spending trends to ensure that accurate and timely information is available to policymakers and the public as Minnesota continues its efforts to make health insurance affordable for all Minnesotans. Endnotes 1. Philip F. Cooper and Barbara Steinberg Schone, More Offers, Fewer Takers for Employment-Based Health Insurance: 1987 and 1996, Health Affairs, November/December 1997; Paul B. Ginsburg, Jon R. Gabel, and Kelly A. Hunt, Tracking Small Firm Coverage, 1989-1996, Health Affairs, January/February 1998. 2. For examples, see Phil Galewitz, Health Benefits Costs Seen Up 9 Percent, AP/Minneapolis Star Tribune, January 26, 1999; Glenn Howatt, Health Care Premiums Rise as HMOs Continue Losses, Minneapolis Star Tribune, February 12, 1999; Milt Freudenheim, Health Insurers Seek Big Increases in Their Premiums, New York Times, April 24, 1998. 3. Katharine Levit, Cathy Cowan, Bradley Braden, Jean Stiller, Arthur Sensenig, and Helen Lazenby, National Health Expenditures in 1997: More Slow Growth, Health Affairs, November/December 1998. 4. The limitations of the most commonly cited employer surveys are discussed in more detail in an appendix to Trends in Health Care Spending by the Private Sector, Congressional Budget Office, April 1997. 5. For example, the KPMG Peat Marwick survey generally includes only firms with 200 or more employees, and the Towers Perrin survey includes about 150 very large (mostly Fortune 1000) companies. One exception, the Mercer/Foster Higgins survey, includes firms with as few as 10 employees; however, separately published results of the Mercer/Foster Higgins survey for the Twin Cities area are based on a very small number of firms with over 500 employees that are headquartered in the Twin Cities (regardless of where most of the firm s employees actually work). 6. Agency for Health Care Policy and Research, 1996 Medical Expenditure Panel Survey Insurance Component (www.meps.ahcpr.gov/data.htm). 7. National data are from M. Susan Marquis and Stephen H. Long, "Trends in the Cost of Employer-Sponsored Coverage," Center for Studying Health System Change Data Bulletin Number 14, Fall 1998. 8. Since these figures include only firms that continue to offer coverage, true premium increases may be understated to the extent that firms facing particularly high premium increases may have dropped their coverage rather than pay a higher premium. 9. Small group and individual market premium rates for HMOs and CISNs (Community Integrated Service Networks) are approved by the Minnesota Department of Health; the rates for Blue Cross Blue Shield of Minnesota and indemnity carriers are approved by the Minnesota Department of Commerce. 10. Minnesota Health Coverage Reinsurance Association, unpublished data. Calculations are based on premium revenue during the year and year-end covered lives. 11. Jon Gabel, Kimberly Hurst, Heidi Whitmore, Samantha Hawkins, Catherine Hoffman, and Gail Jensen, "Health Benefits of Small Employers in 1998," Report Prepared for The Henry J. Kaiser Family Foundation, February 1999. 12. Cost containment provisions of the 1993 MinnesotaCare legislation authorized MDH to collect detailed health care spending and revenue information from all health plan companies doing business in Minnesota. Although these cost containment goals are no longer in effect, MDH continues to have responsibility for collecting and analyzing this data to monitor trends in Minnesota's health care market. 13. Michael M. Weinstein, "Rising Health Premiums Don't Mean Medical Inflation Is Back," New York Times, December 31, 1998. 14. Based on July 1999 projections from the Health Care Financing Administration. 7
The Health Economics Program conducts research and applied policy analysis to monitor changes in the health care marketplace; to understand factors influencing health care cost, quality and access; and to provide technical assistance in the development of state health care policy. For more information about health insurance premium trends, contact Julie Sonier, Health Economics Program at (651) 282-6337 or Scott Leitz, Director, Health Economics Program at (651) 282-6367. This issue paper, as well as other Health Economics Program publications, can be found on our website at: http://www.health.state.mn.us/divs/hpsc/hep/hepintro.htm Minnesota Department of Health Health Economics Program 121 East Seventh Place, P.O. Box 64975 St. Paul, MN 55101 (651) 282-6367 Upon request, this information will be made available in alternative format; for example, large print, Braille, or cassette tape. Printed with a minimum of 30% post-consumer materials. Please recycle.