Why health insurance is unaffordable
Health insurance premiums have increased almost four times faster than inflation over the last 22 years—twice as fast as workers’ earnings.
In 2021, the average annual cost of health insurance in the USA was $7,470 for an individual and $22,221 for a family, according to the Kaiser Family Foundation—a bill for which employers typically fund roughly three-quarters (see chart). The average deductible is $1,670 for individuals. The individual must pay [out-of-pocket] $9,140 before the insurance covers any additional health care costs. The trends in healthcare are unsustainable.
Twelve years after the passage of Obamacare, Americans buying health insurance under the law are still worse off financially than before the health law was enacted. Data on how much Americans paid for their health insurance confirm that the ACA’s mandates and regulations dramatically increased the cost of individual market health insurance in almost all states.
Premiums for health insurance coverage vary due to differences among plans—in their scope of covered benefits, their levels of patient cost-sharing, and their panels of participating providers, as well as differences in enrollee demographics (such as age and location). Furthermore, customer purchasing decisions reflect personal preferences among the available options offering different combinations of price and benefit.
Deductibles, also known as out-of-pocket fees, are a common feature in American health insurance policies, meaning upfront costs are common even for those who are insured. Of covered American workers, 83% have a general annual deductible that must be met before services are funded by their health plan and the average size of a deductible is $1,670 for individuals. These fees tend to be higher in smaller firms.
Of course, not all companies offer health benefits to employees—41% of firms offered no insurance to staff in 2021.
For those without cover, as well as entrepreneurs and the self-employed, taking out private health insurance is a common route. The average cost of purchasing your health insurance in this way is $456 per month for unsubsidized individuals in the USA, according to a 2020 survey by eHealth.
Reasons health insurance costs continue to rise
In 2021, group health insurance premium costs increased 4% to $22,221 for an average family plan. But where do these cost increases come from? Following is a summary of key trends driving the rising costs of health insurance in America today.
Obamacare
Obamacare more than doubled health insurance costs for workers and families, with the national average premium increasing by 136 percent from 2013 to 2021. The average out-of-pocket deductible for single coverage increased 62 percent.
Starting in 2014, the ACA imposed several costly new mandates and regulations on individual-market health insurance coverage and displaced private markets by creating new government-run health insurance “exchanges” to sell insurance. Partly to offset the increased costs of its mandates, the ACA also provided income-related subsidies for plans purchased through those exchanges. Recent years have shown that costs drop when states can use regulatory relief to provide options tailored to the unique needs of citizens with high health costs.
Increasing medical costs
One of the primary causes for the rise in health insurance costs is increasing medical costs. The Centers for Medicare and Medicaid Services (CMS) projects national health spending will increase at an average rate of 5.5% each year between 2018 and 2027—eventually reaching $6 trillion.
Medical providers are rewarded for doing more (rather than being efficient)
Most insurers—including Medicare—pay doctors, hospitals, and other medical providers under a fee-for-service system that reimburses for each test, procedure, or visit. This can incentivize the medical industry to order more services than needed. On top of this, our medical system is not integrated, which leads to repetitive tests and over-treatment.
Rise of chronic illness and obesity
Did you know that six in ten adults in the U.S. population have a chronic condition, such as asthma, heart disease, or diabetes? Four in six have two or more chronic conditions. Chronic illnesses combined with an aging population drive up costs. Additionally, 42% of adults are obese, which leads to additional health conditions with estimated costs of $147 billion annually.
Healthcare is not consumer-centric
Another contributing factor to rising health insurance costs is that healthcare is not yet fully consumer-centric. Most people do not pay directly for their health insurance—their employer does. As a result, many people don’t consider costs as they evaluate treatments and services.
Lack of cost transparency
Related to the lack of consumerism in healthcare, even if more people wanted to consider costs, the lack of price transparency makes this difficult. There is no uniform or quick way to understand treatment options and the costs associated with them, and medical billing is often difficult for most people to understand.
Pharmacy costs are skyrocketing
The final trend influencing the rising cost of health insurance is the skyrocketing costs of pharmaceuticals. The median cost for generic drugs rose 37.6% from 2015 to 2019.
Carrier consolidation
As CB Insights reported in a recent article, carrier consolidation reduces competitive price pressure, which has resulted in higher costs. For example, the six largest health insurance companies own the majority of the market. New startups like Oscar Health have just 1% of the market share and will be hard-pressed to compete.
Fewer plan options and smaller provider networks
Finally, health insurance companies know they have to control costs somehow to cover more people. While they do this fairly effectively given all the upward price pressures just discussed, this control comes at a cost to the consumer. Many carriers find themselves limiting the number of plans in their portfolios and the provider networks within each plan. Consumers in many markets are finding fewer plan options and have reduced access to doctors and providers.
Summary
The primary reason for the rise in health insurance costs is Obamacare, poorer health, lack of insurer competition, and lack of transparency to help consumers make informed decisions.
The pandemic has revealed how vulnerable the healthcare industry is and its need for structural change. Private companies will need to take the lead in restructuring the industry. Centralized government control and management of health care are too inefficient and expensive. They lead to higher costs and lower-quality care. New business models and engaged health care consumers are required to transition from treatment-based reactionary care to prevention and well-being.
Obamacare supporters tend to conflate subsidized and unsubsidized health care. Many deny or dismiss the idea that Obamacare has, in large measure, driven up the cost of insurance for Americans. Only 9.3 million people (87% of 10.7 million) who purchased insurance on the Marketplace are subsidized. The other 280+ million Americans are paying budget-busting high premiums and out-of-pocket deductibles. As of 2020, over 297 million people in the United States had some kind of health insurance. Ironically, the cost of healthcare isn’t making us healthier—just poorer.