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Health Insurance: Rising Costs and Declining Coverage

Few things are as important to a person as health. Money, a house, cars, a job, clothes, entertainment - none of these is worth forfeiting health. So why, then, is the cost of health insurance rising? Yes, there is a consistent increase in the cost of living, but it does not match the rise of health insurance costs. An even more important question is, why is health coverage dropping while insurance costs are rising?

Consider the following statistics. From 1990 to 1998, the percentage of uninsured Americans rose over 17 percent (Farber and Levy 2000). According to a 2005 study done by Chernew, Cutler and Keenan, coverage fell 3.1 points, while cost rose 53 percent over the 1990s.

There are many reasons for the rise in health insurance premiums, some perfectly acceptable, others surprising. In fact, the conclusion reached by Chernew, Cutler and Keenan in their 2005 study is quite surprising indeed: "the rising cost of health insurance is the major identifiable factor explaining the reduction of insurance coverage in the 1990s." In other words, "why is cost rising while coverage declines?" is the wrong question. Instead, the rising cost of premiums is actually the very reason why health insurance coverage is declining!

Why specifically would premium costs increase? First, the rise in premium costs reflects a rise in medical care costs as well. As new technology is developed and new pharmaceuticals are researched and prescribed, it is fair to expect that health insurance costs would eventually pay for that improvement. A second factor in the rise of better health care is the risk involved. New technology promises better results, but often with more risk involved. Insurance companies are often hesitant to cover "riskier" procedures, so they make corresponding coverage optional and pass along an additional charge if the customer wishes such coverage.

Why would coverage costs decrease at the same time? It is noteworthy that rising premiums often result in a removal of higher risk patients from the insurance plans. This may be the most important reason why coverage is declining. Higher premiums remove higher risk patients from the mix; fewer high risk patient results in lowered coverage costs for insurers. The reason, however, for the decline in coverage costs can be stated even more broadly: there is a decline in people purchasing health insurance coverage. Another trend observable over the 1980s and 1990s is a decline in employer-sponsored insurance. A number of things contribute to this decline, such as increases in self-employment or the rise of high deductible health plans.

What ramifications does this have for the future of health care? It has been suggested that if premium costs continue to rise, that will cause an increase in the number of uninsured Americans. This appears to be a self-propelled problem. If fewer people are insured, the cost of insurance will rise because there are fewer payers. The rise in cost will, in turn, lead to a greater increase in the number of uninsured.

Another possible result of the rise of premium costs is that more people will turn to high deductible health plans. These plans have lower premiums. They come with significant risk, however, since initial medical costs will be high and since there are a number of hidden costs for the policyholder. Used in conjunction with a health savings account, the high deductible health plan does offer another option for the responsible and healthy customer who does not want increasingly more expensive premiums.

In examining the question of rising premiums and declining coverage, it is necessary to remember what is not happening. This trend does not prove that individuals are receiving lower quality health care while their premiums are rising. It simply notes that nationwide coverage costs are dropping. As the percentage of uninsured Americans rises, particularly with a drop in employer-sponsored insurance, national coverage costs drop accordingly. At the same time, as medical technology and pharmaceuticals are developed, there is a corresponding rise in the cost of health insurance premiums.

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