Who's the Bad Guy in Insurance Premium Hikes?

(Feb. 19) -- Health and Human Services Secretary Kathleen Sebelius recently told the story of villainous insurance companies charging double-digit rate increases for health coverage while taking "wildly excessive" profits.

But economists and health experts said the plot is a lot more complicated.

Health insurance premiums are increasing faster than inflation, though for most Americans not by as much as the huge jumps detailed in the report. And the cast of villains is a lot broader than just insurance companies, according to experts.

"Over the last year, America's largest insurance companies have requested premium increases of 56 percent in Michigan, 24 percent in Connecticut, 23 percent in Maine, 20 percent in Oregon, and 16 percent in Rhode Island, to name just a few states," Sebelius said in a news conference Thursday. She called the hikes a "wake-up call" that Congress needs to revive the stalled health care reform effort.

But the report detailed increases to the individual insurance market -- which is different than the coverage most Americans get through their jobs. According to the Kaiser Family Foundation, those employer-coverage premiums increased about 5.4 percent last year -- faster than the ailing economy but not the financial earthquake felt by people who have to buy their own insurance.

The individual insurance market -- for people who can't get it at their jobs -- has long been dysfunctional, said Alwyn Cassil, spokeswoman for the Center for Studying Health System Change, a nonpartisan policy research organization.

The biggest factor driving up premiums, she said, is the fast-increasing amount that is spent on medical care. And that is driven by how much doctors are paid and how many services they provide.

"There are a lot more reasons why we are where we are than 'evil' insurance companies," she said.

One thing almost all health experts agree on is that insurance premiums will continue to go up if there is no reform of the system. And that will happen to both individual policy holders and those who have employer-sponsored coverage.

"As health care costs go up, nobody is immune," said Kansas Insurance Commissioner Sandy Praeger, a Republican who favors tort reform, which advocates say would reduce costs by allowing doctors to cut out unnecessary tests without fear of being sued.

Praeger, past president of the National Association of Insurance Commissioners, said another cause of the premium increases has been the lagging stock market. For years, insurance companies lived partly off the money they made investing premiums in the market. Now premiums must pick up more slack in their bottom line.

State insurance commissioners like Praeger can cancel insurance premium increases and have in some recent cases. But Praeger said she worries that reform will go too far if it allows the federal government to override states that allow increases that they think are justified.

"If they [insurance companies] can demonstrate they need the rate increase to stay solvent, it wouldn't do us any good to be denying it and have the insurer go belly up," she said.

Sebelius' report was timed for the week before President Barack Obama plans to sit down with lawmakers of both parties to try to revive his plan to expand coverage and rein in costs. The reform stalled amid public concerns that it was a takeover of the health insurance system.

Robert Blendon, Harvard professor of health policy and political analysis, said the report is an attempt to change that political equation. "They are trying to make tangible the argument if you don't do something large scale things will get worse," he said, noting the public is a lot more interested in what will happen to their own premiums than to what percentage of the economy is taken up by health care spending.

Sebelius said health reform would reduce premiums by 14 to 20 percent.

She also fired a warning shot at insurance companies about what will happen to them if health reform passes and they have been charging high premiums. Under legislation considered by Congress earlier, individuals and small business who have trouble getting insurance would use government-sponsored exchanges as a clearinghouse for buying health coverage. Insurers that take big profits or have hefty rate hikes won't get a shot at that market, she warned.

Between 2000 and 2009, profits for the 10 largest insurance companies jumped 250 percent, or 10 times faster than inflation, according to HHS, while their CEOs were paid millions.

Those profits don't come from the dicey individual insurance market, but from other areas, said Uwe Reinhardt, professor of economics and public affairs at Princeton University.

"This is exactly what scares people about Democrats," Reinhardt said. "Saying you cannot sell because we don't like what you pay your CEO, that's the worst thing. The real danger is for the government to go run every business. In a competitive market that shouldn't be necessary."

Insurers say the premium increases in the individual insurance market are caused by healthy young people dropping out because they are financially strapped during the recession and are betting they won't get ill. The older, sicker people left with insurance coverage add up to a sicker -- and more expensive -- group to insure.

Karen Ignagni, head of the lobby group America's Health Insurance Plans, said "soaring medical costs" also are to blame. Her group had backed health insurance reform because it would have required that all Americans carry coverage, thereby increasing the pool of customers and spreading the risks among more health consumers.

Reinhardt said young people who drop their coverage are definitely partly to blame for the premium increases. "Everyone is beating up on the insurance companies, but you may be shooting at the wrong target," he said.

And Cassil said many of the small insurance companies that sell in the individual market don't have a lot of market power so they must pay health care providers higher fees. The price hikes by doctors, hospitals and other providers hasn't gotten enough attention, she said.