Rapid City financial advisor Rick Kahler asks — and answers: Why does health insurance cost so much?
While overall economic inflation has slowed over the past 18 months, health insurance costs keep going up. According to the latest survey by the Kaiser Family Foundation (KFF), a non-profit organization that conducts research on health policy and issues, the average annual premiums for single coverage have reached $8,435, while family coverage now stands at an average cost of $23,968. Preferred provider plans command slightly higher costs, with premiums at $8,906 for single coverage and $25,228 for family coverage. These figures represent a 7% increase from the previous year and a substantial 47% surge compared to 2013. Meanwhile, the Consumer Price Index, a measure of general inflation, has risen by 30% since 2013.
This raises two questions: One, are health insurance companies reaping excess profits while policyholders pay hefty premiums? And two, why don’t more insurance companies jump into the health insurance market, providing needed competition that would help drive down the cost of health insurance?
First, let’s look at profits. A mid-2022 report from the National Association of Insurance Commissioners (NAIC) provides insight into the aggregate “loss ratio” for various policy types. This ratio offers a rough estimate of the difference between what companies collect in premiums and what they pay out in claims (for procedures like the one pictured above in a public domain photo posted on wikimedia commons). For comprehensive hospital and medical coverage between 2018 and mid-2022, the loss ratio ranged from 67.8% to 77.7%, meaning roughly $72 was paid in claims for every $100 of income received from premiums. Loss ratios for Medicare supplement policies ranged from 72.9% to 82.4%.
It's important to note that actual profit margins are likely lower than these numbers suggest, since the loss ratios do not account for administrative and overhead expenses. Nevertheless, it is evident that a considerable portion of premium dollars is finding its way onto the bottom line of the insurance industry.
What about competition? According to KFF, there were 129 individual health insurance plans available on state health insurance exchanges in 2023. Compare that with the NAIC website that shows as of 2022, there were 3,639 licensed property and casualty insurance companies operating in the United States.
This means there is one health insurance company for every 33 auto and homeowner insurance companies. Why are there comparatively so few health insurance companies?
My research points to one major issue that sets the health insurance industry apart: it is more highly regulated and capital-intensive than other types of insurance, making it very difficult for new companies to enter the market. Health insurance companies are subject to extensive regulations at both the state and federal level. These regulations cover everything from underwriting standards to pricing practices, and complying with them can be costly and time-consuming.
As a result, the health insurance industry is relatively concentrated, with a small number of large companies controlling much of the market. The industry benefits from a relatively captive market, enabling companies to increase rates without significant fear that policyholders will drop their coverage or find it elsewhere. This concentration has been blamed for rising health insurance costs, and it has led to calls for reforms to make the market more competitive. Given the lobbying power of the existing companies, it seems unlikely that such reform would happen any time soon.
Despite these challenges, there are some new entrants into the health insurance market. These companies use technology to streamline their operations and reduce costs, and they target niche markets such as young adults and small businesses. It remains to be seen whether these new companies will be able to gain a significant market share, but they do represent a potential challenge to the established players in the industry.
Rick Kahler, CFP, is a fee-only financial planner and financial therapist with a nationwide practice, Kahler Financial Group, based in Rapid City. His co-authored books include Coupleship Inc. and The Financial Wisdom of Ebenezer Scrooge.
