Increased healthcare spending behind premium growth

For the study, researchers analyzed CMS data on large group, small group, and individual markets from 2011 to 2024. The data included information on premiums, health spending, and insurer markups for each state and year. However, the data did not include information from self-insured employers, which cover around half of the U.S. population.

In 2024, the mean premium per person was $7,151. However, the researchers noted that there was significant variation across states. Massachusetts had the lowest premiums at $5,603 while Alaska had the highest premiums at $11,438.

Between 2011 and 2024, mean insurance premiums increased by 78% or $3,143. This rate of growth was almost twice that of inflation during the same period. If premiums had grown at the same rate as inflation, they would have only increased by 39.5%, or $1,582.

However, Carol Chouinard, VP and provider technology lead at Optum Advisory*, noted that inflation measures don't account for other factors that may be driving utilization and total population cost independent of price, including an aging population and a shifting risk mix.

Premium growth varied significantly by state, with Massachusetts seeing the lowest growth (10.9%) and Mississippi seeing the highest (163.8%). According to the study, the increase in premiums was primarily due to growth in underlying healthcare spending, which made up 91% of the increase. Between 2011 and 2024, healthcare spending increased by 84.2% or $2,844. 

Growing consumer expectations and a willingness to pay for convenience, access, and premium/elective care are also contributing to increased utilization and healthcare costs, Chouinard said.

Compared to healthcare spending, insurer markups, which the researchers defined as the combined total of profits and administrative costs, declined as a share of premiums. In 2011, markups made up 18.6% of premiums but decreased to 14.9% in 2024. Although markups did grow by 47.6% or $299 in dollar terms, they made up a shrinking portion of what consumers and employers paid in premiums. 

Similarly, Chouinard highlighted the potential for AI and other technology to offset costs for healthcare organizations through more efficient care delivery, better care coordination, and improved access.

"AI in particular can expand access to first-line care — even just by giving guidance to patients willing to engage in their own care — which can head off avoidable downstream spending," Chouinard said.

Outside of organizational efforts, several states have implemented or are in the process of implementing healthcare cost controls to curb excess spending. So far, eight states — California, Connecticut, Delaware, Massachusetts, New Jersey, Oregon, Rhode Island, and Washington — have established cost control targets.

To ensure growth targets are met, some states are requiring data reporting and price transparency while others will put healthcare organizations on a performance improvement plan if they repeatedly fail to meet the growth target. Some states will also levy significant penalties if improvement plans are not properly implemented. For example, California's Office of Health Care Affordability (OHCA) recently voted to discipline healthcare groups for exceeding growth targets with penalties up to 125% of the amount overspent.

Meanwhile, some states, including Washington and Indiana, are considering price caps for certain services and payer types. Delaware has already passed legislation to cap the prices of hospital procedures at 250% of the Medicare rate by 2033 for state employee and fully insured commercial plans. Hospitals are exempt from the price cap if they adopt multi-payer, value-based care arrangements.

According to Michael Bailit, president of Bailit Health, growth targets that encourage stronger enforcement actions can help reduce healthcare costs. In a JAMA study, researchers found that cost growth programs helped reduce total medical expenditure growth by 2% from 2010 to 2020. Programs with enforcement actions or payment reforms were also more likely to see results.

Brian Frazee, president and CEO of the Delaware Healthcare Association said that while hospitals in the state "have really stepped up on these collaborative solutions" to reduce healthcare costs, " […] it's going to take all healthcare sectors for us to truly solve healthcare affordability."

*Advisory Board is a subsidiary of Optum. All Advisory Board research, expert perspectives, and recommendations remain independent.