Health Care Premiums to Rise 8% Next Year

But that's where the "good news" ends. Escalating medical costs will push rate hikes into double-digit territory after that.

By Martha Lynn Craver, Associate Editor, The Kiplinger Letter

July 11, 2008

Expect health care premiums to go up 8% on average in 2009, about the same as this year. It marks the sixth straight year that the rise in premium hikes has slowed or held steady after peaking in 2003 at 14%.

But premium increases will accelerate into double digits in 2010 and beyond. Medical costs are going up at a faster pace after slowing for years because of concerted containment efforts, such as improved medical management of high-cost patients and generic substitution of prescription drugs.

One big reason for the jump is that employers are paying an ever greater share of the tab to treat the uninsured. When people without health insurance seek care in emergency rooms and elsewhere, the price of that care is at least partially shifted to the private sector as providers charge other patients more. In 2009, the amount of spending shifted to the privately insured is expected to be nearly 35%, according to a recent study by PricewaterhouseCoopers. The problem is exacerbated by underfunding by the government of Medicare and Medicaid and the fact that the number of the uninsured is increasing each year. "Cost shifting will account for nearly one in every four dollars spent by private payers on hospital services in 2009," says the report.

Another reason for higher costs: aging baby boomers, who will increase the demand for services significantly.

Booming construction of health care facilities is another factor. Because capital costs tend to be financed over a number of years, the boom will affect costs in 2009 and beyond as hospitals try to pass along the expense of that construction to payers.

Most firms will not pass the hikes on to employees. Employers will rely more on prevention and disease management programs to temper cost rather than asking workers to pay more. There's a growing concern that cost shifting may have gone too far, causing employees to shun treatment or refuse insurance, ultimately increasing costs. Many employers are now focusing on what's called "value-based design," says Jim Winkler, a consultant with Hewitt Associates. "The idea is to design a plan to make sure, for example, that the diabetic gets regular foot and eye exams, so there are no complications later on."

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