Why do health insurance premiums increase every year?
Receiving your insurance renewal documents can sometimes mean also receiving a big surprise: your annual premium increase. Whilst an increase of 5 to 15% is within the norm, some see their premiums jump by 20 to 50% in one go! What causes these increases and what are the insurance companies doing to try and keep them down?
Please note: this article focuses on individual international health insurance policies and not group policies.
1. The amount the insurance companies pay-out vs. how much they receive
It is important to understand how the insurance companies work. In order to keep their books balanced, the insurance companies adjust their tariffs annually (or half-yearly in a few cases) in relation to their client portfolio. For example, if the amount they have paid out in claims in the preceding year is greater than the amount that they have received in premiums from the client then the insurance company will automatically adjust their tariffs so that the amount received is greater than the amount paid out.
Over the years the amount paid in claims has tended to increase at a higher rate than the premiums received by the insurance company, as clients have benefited from a wider variety as well as more complex treatments (we will discuss further on in the article the different factors leading to a higher claims rate). As the insurance companies cannot indefinitely cover the difference using their reserves, they must find a way to remove the gap between the high healthcare costs and the premiums received leading to an overall premium increase. This is one factor why health insurance premiums go up every year.
Looking at this “mutualisation” of the risks, the changes in your premium are therefore less dependent on your personal consumption of medical care than the consumption of the entire client base of your insurance company. For example, if you pay £1,000 per year in premiums, but develop a condition resulting in a claim for £100,000, the following year your premium will not increase by £100,000 but by the general increase applied to all the clients. However, this also means that even if you do not use your policy your premium will increase due to the claims of others insured by your company.
2. The age of the client
Even though your own consumption of healthcare has a minor impact on the increase of your health insurance premiums, changing age bracket can significantly increase your insurance premium.
Statistically, the healthcare consumption of individuals increases in line with age: the older the insured person is, the higher the risk that they will develop an illness or condition which will be costly to treat (cardiovascular diseases, cancer, and respiratory problems are the three most common illnesses for which insurance companies receive claims and they become more frequent with age).
In order to balance the risk, the insurance companies calculate their premiums based on age brackets of the clients (for example: 20 -35 years, 35-50 years, 50 years etc.)
Therefore, even if you have not made any claims yourself, your premium can increase simply because you have changed age bracket.
3. The increase of chronic conditions
The increase in chronic conditions (linked to an ageing population, as well as lifestyle) has a big impact on the increase of healthcare costs. It’s important to note that it is chronic conditions which cost the most, as they usually need long-term treatment which is likely to be necessary throughout the patient’s whole life. For example, in the USA, those with more than three chronic conditions make up around 1% of the population but 20% of total healthcare costs. The increase in obesity and those overweight is another factor leading to an increase in healthcare costs worldwide, as this can lead to numerous chronic conditions.
4. Medical inflation
Medical inflation is the increase in cost of medical treatments. It is generally much higher than normal inflation. According to the International Monetary Fund (IMF), in 2014, medical inflation was 10.34% which was 6.11% higher than general inflation. For 2015, the difference is even bigger: medical inflation is expected to increase to around 10.15% compared to 4% for general inflation – a difference of 6.15%.
The cost of medical technologies is the primary cause of the high rate of medical inflation: the equipment necessary to treat patients is becoming more sophisticated and complex – MRI machines for example; this is why today a scan is much more expensive than it was twenty years ago. As these new types of technology become more and more prevalent insurance companies are increasingly adding them to the cover that they offer in order to remain competitive within the market (today all companies cover MRIs), and consequently their premiums rise in line with their increased costs.
It is equally important to note that medical inflation varies from country to country or from region to region. For example, it tends to be very high in countries such as Singapore or the Unites States. This is why insurance companies offer different zones of cover, and apply a tariff dependent on the zone that the client has chosen.
5. The demographic of those insured by your insurance company
The increases implemented by each company are directly related to the demographic of those that they insure. For example, an established company which has been in the market for many years is much more likely to have a larger number of older clients than a young company, due to the fidelity of their clients. However, as discussed previously, healthcare costs of older clients tend to be higher. This demographic is particularly vulnerable to chronic conditions, as well as more likely to need new and cutting-edge treatments. An insurance company with a high proportion of older clients will therefore be more impacted by medical inflation than an insurance company with a majority of young clients, and this is reflected in their premiums.
6. Other factors
Some doctors or hospitals charge artificially elevated prices in order to defraud insurance companies. British newspaper, The Telegraph, indicates countries where this type of fraud is most common, including Hong Kong and China. If fraudulent billing is not detected and as it can represent a large pay-out by the insurance company, this cost will then be reflected by the premium increase of the whole client base.
An insurance company may also incorrectly forecast their costs: offering overly “generous” extra benefits, and may subsequently experience an overconsumption of healthcare. In this case it is not uncommon for the company to have to readjust their premiums the following year, sometimes by between 20 – 50%.
How do insurance companies keep their costs under control?
Keeping costs under control can be a challenge for the insurance companies. On one hand, they must ensure that the medical consumption of their clients does not drastically increase. Often within the plans are limits on some benefits, excesses/deductibles or co-payments options, pre-authorisation needed for certain treatments, and, depending on the underwriting terms, they may also exclude some pre-existing conditions or add a surcharge to cover them.
Some insurance companies use the method of cross-subsidisation in order to help maintain stable premiums. This means that one age-group may be charged a slightly higher level of premium in order to help maintain the premium stability of another age-group.
On the other hand, the insurance companies also take steps in order to reduce the hospital bills of their clients: negotiating prices with healthcare providers, ensuring that they are being charged appropriately by the hospitals, asking for a second medical opinion for certain treatments, and setting up partnerships with medical providers in order to secure preferential rates.
As an insured person, you may also have the option to adjust your cover in order to reduce the cost. Keep an eye on our blog as that will be one of the next subjects that we tackle!
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