Health care costs are headed up – and so are premiums

Health care costs are on their way up – or more precisely, the rate of inflation is going to increase.
Although the medical CPI, currently sitting at 2.8%, looks quite good compared to historical rates in the mid-single digits, there are several reasons for the coming rise in costs, and precious few factors likely to drive them down.
Let’s start with the worsening economy and its impact on employment. As people lose jobs, they also lose their insurance coverage (unless they can afford COBRA, which is doubtful for many desperate to hold onto cash). They will still need health care, but won’t have insurance to pay for it. As a result, they will either have to rely on the understanding of their current providers, or go to hospital emergency rooms for treatment. Either way, the folks who provide care have to recoup their loss on charity care by charging their paying customers more.
Expect to see more cost shifting as unemployment grows.
The economy will likely cause more employers to cancel their health insurance. While it is too early to see if this is actually occurring, it seems a safe bet that employers faced with declining sales will cut costs wherever they can. With the average family policy premium close to $13,000, terminating a health insurance policy will save any employer big bucks. Again, these newly-uninsured will still require health care, but they won’t have insurance to pay for it.
Those who hold onto their jobs, and their health insurance, will likely feel rather uncertain about their future and the stability of their employment. Seeing others lose their jobs and health insurance may well result in higher utilization on the part of the employed, as they get all their elective procedures done, prescriptions filled, and preventive care taken care of while still on their employer’s policy.
Finally, consider a situation we can think of as ‘retroactive adverse selection’. Seniority often plays a role in the who-gets-laid-off calculation; the older folks who have been there longer are more likely to be retained. As the younger, healthier folks leave the plan, the demographic mix becomes older and (usually) more costly. This drives up per-employee costs, which inevitably leads to higher premiums.
If the economy continues to stagnate, the effect of these cost drivers will grow. And the longer it takes to pull out of recession, the more we’ll feel the impact on health care costs.