What You May Not Know About Your Health Insurance

March 20, 2010 at 7:32 pm (Guest Post, Icepick) ()

A guest post by Icepick

Recently I heard President Obama once again claim that his health care/health insurance reform is needed to stop the growing costs of health insurance. He has repeatedly implied that health insurance costs are rising mostly because health insurance companies are raising rates to increase their profits. This is ill-informed at best. Health insurance costs are rising because health CARE costs are rising.

I know this because of personal experience. I used to have the fancy title of Senior Benefits Planning Analyst at a Fortune 100 company. I did the financial modeling of that company’s employee benefits costs for ~54,000 full-time employees, including the medical costs. Our department did a lot of research into the costs of health care, in part so that we could make decent forecasts, and also so we could give corporate leadership recommendations on how much we should charge for medical coverage. That’s right, the company set insurance rates (sometimes after collective bargaining, sometimes not), not some evil insurance company. That’s because the company was self-insured.

Something that the President never mentions is that most large companies self-insure their medical plans – they pay most or all of the medical expenses of their covered employees and families themselves. Let me explain it another way. If a company purchases insurance for an employee, the company only pays for the insurance which is typically a fixed cost. If that employee’s medical expenses are less than the insurance, the company loses money on that employee’s insurance. In a self-insured plan, the company pays those medical costs itself. Once a certain threshold in size is passed a company often finds it less expensive to self-insure.

Most people working for a self-insured company won’t know that the company has self-insured. Usually a company will hire an insurance company to handle the actual claims. Companies do this for several reasons. First, privacy concerns and HIPAA law mean that a company does not want direct access to its employees medical information. Second, most companies do not have the expertise to handle insurance claims. Third, insurance companies typically have more power to negotiate favorable rates with local providers. So a self-insured company will pay an insurance company to handle the administrative side of things, while the company pays for the actual medical expenses.

When I worked for such a company, we analyzed our medical and insurance costs in excruciating detail. And you know what? Our medical costs were increasing at roughly 9% a year for at least a decade. And the insurance company costs had little to do with it. Our costs were going up at that huge rate because medical expenses were going up that fast.

So all the talk of insurance companies fleecing the public is at best a side issue – insurance costs have increased in recent decades because medical expenses have increased. The current bill, which will no doubt be passed this weekend, does nothing to truly address that issue.

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