Health Insurance Is Unaffordable Because It Outpaces Incomes

Male nurse pushing stretcher gurney bed in hospital corridor with doctors & senior female patient

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Researchers at Rice University — Vivian Ho, professor and chair of health economics, and Salpy Kanimian a Ph.D. candidate in economics — took on an interesting topic: why healthcare insurance premiums have risen nearly three times the rate of worker earnings over the past 25 years.

Anyone who pays for health insurance may not know the specifics, but the general sense of health insurance running away compared to pay is nothing unusual.

To set the stage, here’s a graph from the Federal Reserve Bank of St. Louis comparing the Consumer Price Index for healthcare services (in blue) to the general CPI for all items.

So, no, it’s not in your imagination.

The researchers said that insurance premiums can rise as the costs of medical services they cover increase. No argument there. Interestingly, they looked at CPI indices for services provided in clinics and hospitals and also administration expenses, based on federal data and additional data from the Kaiser Family Foundation. Hospital service costs increased the most, while physical services and prescription drugs rose more slowly.

They said that some of the premium increases are due to an increase in hospital outpatient visits and coverage of GLP-1 drugs. But that’s only part. The real jump comes from health care system consolidations — mergers and acquisitions — and the trend for hospitals to jack up prices “well above their costs.”

The prices have hiked up so far because hospital CEOs have personal incentives to do so.

“One study found that for nonprofit health systems, the greatest pay increases between 2012 and 2019 went to hospital CEOs who grew the profits and size of their organizations the most.”

Unfortunately, there’s a decline in the financial reward of delivering above-average quality of care. Apparently, it doesn’t make personal financial sense to CEOs to provide better care. And increased free or discounted care that nonprofit hospitals provide to people who can’t afford care wasn’t significantly tied to CEO compensation.

The mechanism for when CEOs make more money in their job has to do with hospital board members who determine the conditions that set base salary and bonus payments. As Ho and Kanimian wrote, more than half the board members at top hospitals have backgrounds in finance or business. “As a result, researchers and advocates have raised concerns that financial success is the dominant priority at these institutions,” they wrote.

If the costs keep climbing, of course premiums are going to increase. The cost to provide healthcare continues to climb.

What to do is complex. One step is to require nonprofit hospitals, 58% non-government not-for-profit and 18% state and local government, according to the American Hospital Association, to require boards to disclose executive compensation guidelines, such as happens for for-profit healthcare companies.

Another suggestion from some economists is to regulate hospital prices, capping prices at the most expensive hospitals and regulating price growth for all hospitals.

Will that happen? Who knows? But if citizens start putting pressure on their legislators, it couldn’t hurt.