Have you ever thought to yourself, “Why does the cost of my health insurance go up every year?” If you are a healthy person, you might think that since your health remains the same each year, then your premium should stay the same as well. Unfortunately, this isn't usually the case.
Trying to make sense of the cause of these increases can be difficult because many factors play into the rise of your insurance premiums.
One of the primary causes for the rise in health insurance costs is increasing medical costs. Medical costs continue to rise because our population is growing and aging, which requires more care and expensive technology to keep people alive and healthy.
Additionally, there's an increase in prescription drug use, and the cost of those drugs continues to rise as well.
Insurance companies also raise premiums because they are trying to keep up with medical inflation. Health insurance companies use actuaries to determine how much to charge for their policies based on the risk of a policyholder seeking care. They want to cover these expenses while still making a profit, so they raise rates over time.
Other factors that impact your health insurance premiums include:
The type of coverage you choose
The provider network available for coverage
Your location (if you live in a rural area, for instance, your costs are likely higher)
Your health history and age
General overall market conditions (i.e., how much competitors charge)
When one or more of these factors changes, your premiums will change accordingly.
What Causes Health Insurance Premiums to Increase Each Year?
The cost of health insurance has risen at a rate that is faster than the overall rate of inflation for decades. While healthcare costs continue to rise, there are a number of factors that contribute to this phenomenon, whether you have an individual insurance plan or a group insurance plan.
Increasing Medical Costs
The number one reason health insurance costs have increased over the last few years is rising medical costs.
Many healthcare providers across the country are increasing their rates every year, which ultimately increases the costs for everyone. This means that patients see a jump in their copays and deductibles along with people who self-pay for medical care.
Why Are Medical Costs Rising?
The population is getting older. We're living longer and requiring more medical care along the way. The population over 65 years of age has increased by 34.2% over the past decade, according to the U.S. Census Bureau. This trend is expected to continue, putting even more pressure on the healthcare system and leading to increased medical costs.
Medical technology has improved greatly over the last decade or two, which means that doctors can treat more injuries or illnesses than ever before.
This new technology is expensive, though, leading to an increase in overall medical costs. Insurance premiums are rising to account for the increased costs associated with some of the most innovative technology in medicine.
Skyrocketing Pharmacy Expenses
The cost of generic drugs rose 37.6% from 2015 to 2019. That's a much faster rate than the median increase in premiums for the same period, which was only 13.2%.
This means that people are paying more for their prescriptions, and those additional costs are passed on through higher insurance premiums.
The pharmaceutical industry has become increasingly consolidated, which means that fewer players in the market are profiting on pharmaceutical sales. As a result, the companies can charge whatever they want for their products, and insurance companies need to pass along that expense to stay profitable.
What Causes Group Health Plan Premiums to Rise?
Group health insurance plans may be available through your employer. Health insurance companies consider many factors when determining how much to charge for a particular pool of participants.
Receiving healthcare through a group plan provided by your employer can mean factors outside of your own health will impact how much you pay each month on premiums. There are various reasons your group health plan rates may rise, including the demographics of the group and the amount of healthcare they utilize.
Changing Demographics in Your Group Health Plan
Health insurance companies will take into account your company's demographics, setting their premiums accordingly. For example, younger people tend to be healthier than older people, so generally speaking, the younger a company’s employees are, the lower their premium should be.
As your company hires employees and others retire, the demographics will change and impact how much you pay into your group health plan.
Employee Healthcare Utilization
Group health insurance providers will look at a company’s employees’ use of their healthcare plan in the past. They will look at the number and types of visits their employees had with medical providers. The more visits and expensive procedures the health plan covers during the year, the more this will affect employees’ premiums.
Employee Location and Zip Code
A health insurance group premium considers all of the costs incurred by a group of employees who are covered by a single health insurance policy. Health insurance premiums vary based on the region where a company’s employees live and work.
For instance, New York City has a higher cost of living than West Virginia. Companies with a geographically diverse workforce may see an increase in their group health plan premiums as employees from areas with more expensive health insurance policies join the organization.
Why Does My Health Insurance Go Up?
If you’ve ever asked yourself what causes health insurance premiums to increase, you aren’t alone. Most Americans see an increase in their health insurance premiums each year, whether they have an individual plan or participate in a group plan offered through their employer.
Ultimately, you should educate yourself about what causes health insurance premiums to increase. You should never sign up for a plan without first taking time to understand what it covers, what costs and potential out-of-pocket expenses apply, and how you can minimize your chances of paying more than you should.
With this information, you should be able to determine whether you are getting a good deal on the health insurance offered by your employer. If not, there may be other options available to you. Becoming a more educated consumer will help ensure that you play an active role in maintaining your health and wellness throughout your life.