It happens every year.
I get a notice that it’s time to start the process all over again. I drag out the year’s receipts and scrutinize where I can find any scrap of cost savings. I research available options for potential reductions. I curse that every year the bill gets higher and higher, all the while I get less and less. I wonder why Congress can’t get their act together enough to enact real change, yet rue to the high heavens the changes they have already made.
Sounds like tax time, doesn’t it. It’s not. It’s health insurance renewal time. For my family, that time is now.
Merry-Go-Round? Or a Bubble About to Burst?
Health insurance renewal goes round-and-round, the same old way, year after year. We barely run any expenses through our insurance, yet every year our insurance premium is raised an average of 12%. The choice then becomes: pay the higher premium, or lower our coverage to maintain the rate. We can’t stand paying more and getting less, so we usually opt for paying the same, and getting less…
What is the reward at next year’s renewal for us taking on more of our own health care costs, and the insurance company taking on less? The insurance company slaps us with yet again another premium increase of 12% or more.
The only way off the merry-go-round with your current company is to change insurance carriers every few years. But it really accomplished nothing long-term. The next insurance company will raise your rates just like the last one.
Switching carriers year after year is like jumping off one merry-go-round and hopping on to another. You’re on the same ride, but you never really get anywhere.
I was commiserating about the process with an insurance agent who does not sell health insurance. He was in complete agreement. He then said something about the health insurance industry that, as an active investor, stopped me in my tracks:
“Health insurance is a bubble that is about to burst.”
When you use an investment term to describe a potential future event, you have my attention.
Is Health Insurance a Growing Bubble?
There is no dispute that health insurance premiums are in inflation mode. A study released by the Kaiser Family Foundation shows that premiums for families on employer (group) health insurance was 9% higher in 2011 than in 2010. Insurance rates have doubled since 2001. These rate increases are minor compared to the rapid rate of increase of personal health insurance policies. Regence BlueCross BlueShield, which operates in Oregon, is asking for a 22% raise in premiums for policies sold to individuals. Policies sold to individuals (personal health insurance) are strikingly different than group policies in accounting for pre-existing conditions, and on raising policies after a health event. Unlike group health insurance, they can screen out on and not cover individuals with pre-existing conditions. After a health event, the insurance company may raise your premiums substantially, as there exist loopholes which allow insurance to raise rates without review by the state.
What is interesting, and infuriating, is these rates do not correlate with the inflation rate of health care costs. One study places the year rate of increase of health costs at 7%, with health care costs doubling 48% in the last 10 years. This, while insurance premium rates doubled, and according to insurance companies themselves, the usage of insurance by the policy holders has decreased.
Insurance company proponents maintain that profit margins are low, opponents say profit margins don’t matter, look at insurance companies return on equity, which is currently averaging 16.1%.
Regardless of how you look at it, we cannot escape the following facts:
· The cost of health care is rising;
· Insurance premiums rise in tandem, or above, the rate of health care inflation; and,
· Insurance premiums are rising higher than wages
Health Insurance Is It’s Own Economic Bubble
An economic “bubble” can be defined as “a trade in products or assets with inflated values”, or “a rise over that fundamental value, which must eventually return to that fundamental value”. In investment terms, it is where the value of the trade is grossly overinflated over the asset’s the instrinsic value. The “bubble bursting” is the painful process wherein the trading value of the asset deflates down to a more true intrinsic value of the asset.
When addressing health insurance we can apply the following correlations:
- The “trade value” is the price of the insurance premium
- The “intrinsic value” is, to the policy holder, the ability of the insurer to cover incurred health expenses.
- The “trade value” of premiums is inflating 9% or more per year
- The “intrinsic value” of insurance, for the policy holder, is decreasing, as policy holders as asked to take on more “risk” (higher premiums and/or lower coverage)
- The ability of policy holders to pay on the “trade value” of insurance is decreasing, as wages have not increased in step with policy increases, and health insurance inflation exceeds economic inflation.
Does all this fit neatly into the “bubble” model, with its inherent “boom” and “bust” cycle? You decide based on the definition of a bubble, and the description of the boom and bust:
- Product or asset that trades with an inflated value
- May ultimately be caused by price coordination
- Prices are inflated and fragile
- Bubbles tend to cause misallocation of resources into non-optimal uses
- Bubbles appear even when market participants are well-capable of pricing assets correctly
- Bubbles appear even when speculation is not possible or when over-confidence is absent.
- The causes of inflation are also the causes of bubbles
- Assets are irrationally valued based solely upon their returns in the recent past
A final definition: “The one true constant with all bubbles is that they create excess demand and production. Once the bubble deflates, which it always does, a contraction or consolidation has to occur to alleviate the excess”.
Health insurance does not neatly fit into the academic definition of a “bubble” like a well-worn puzzle piece. For one, the pricing aspect of insurance is based directly on the rising costs of health care. This article does attempt to address rising health care costs, which in and of itself is akin to a huge 1000-piece puzzle. Health insurance pricing, does, however, fit every anecdotal and real-life definition of a bubble:
The price of the asset keeps rising, while our ability to
pay the market price for the asset is shrinking.
pay the market price for the asset is shrinking.
At some point in the future, whether in years or generations, the lines will converge. The market price of the insurance will exceed the market’s ability to pay the market price, and the bubble-burst will begin. It may be a slow leak, or it may be a catastrophic blow-up. Either way, the bottom line is this: policy holders cannot keep paying out, ad infinitum, at the rate in increase expected by health insurers.
I for one will not be waiting with sweated brow and wringing hands for this inevitability. This year, at renewal time, I have made some decisions to get off the insurance merry-go-round. I believe these discoveries and decisions will help my readers. Therefore, a second installment will address some practical ways you can reduce your premiums (which include investment and retirement options) and for some, get off the merry-go-round of health insurance altogether.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Evelyn, this article may be just as appropriate in other sections of SA, so please feel free to share with other editors as you think best.