Myth: Higher health care costs are the result of continually rising insurance premiums, inflating the price of health care.
Fact: Just the opposite is true. Because insurance is a means of financing health care, premiums have to track the underlying cost of health care services. Those underlying costs have been rising and insurance premiums have simply kept pace.
Health care costs drive insurance premiums, not the other way around. Over the last decade, health care costs have risen about 7.7 percent a year on average, and insurance premiums have also risen at 7.7 percent.1 The overall rise in health care costs is a result of higher rates of chronic conditions such as obesity, diabetes and heart disease, more expensive technologies and procedures becoming available, and “cost shifting by the government” – that is, doctors and hospitals charge privately insured patients more to offset the losses that come from Medicare/Medicaid underpayments that do not cover costs. In fact, about 11 percent of the average family commercial Preferred Provider Organization (PPO) premium stems from government cost shifting.2 Other drivers of cost include waste in the system and how providers are reimbursed for delivering health care services; they are paid by procedure, which many believe leads to unnecessary care.
When Aetna sets its premiums for the year, it looks at how such costs are expected to grow and prices accordingly. The primary factors responsible for price increases can and should be addressed through health care reform that emphasizes, for example, the importance of wellness and preventive medicine, administrative simplification, investment in health information technology (HIT), emphasis on evidence-based medicine and health delivery payment reform.
Aetna wants to slow rising costs, “bending the cost curve” of medical treatment. To draw more national attention to this issue, Aetna and the Aetna Foundation, along with the Commonwealth Fund, sponsored the September/October 2009 edition of Health Affairs, the leading journal of health policy, focused exclusively on cost drivers in health care.
More information is available about the special edition of Health Affairs and the real drivers of rising health care costs 
(PDF).
Myth: Health care companies reap huge profits and benefit from the status quo.
Fact: The average profit margin of health care companies stands at only 5 percent, lower than many other industries and other players in the health system. It is better for everyone if we get and keep all Americans covered.
While there’s plenty of talk about “insurance company profits,” the truth is that health insurance companies’ five-year average profit margin is about 5.3 percent. That means for every dollar of revenue Aetna takes in, we make about 5 cents in profit. This is significantly less than drug companies (18.4 percent), cigarette manufacturers (13.4 percent) or computer software companies (22.5 percent).3 In fact, in 2008 Aetna paid about as much in taxes as it made in profit.
It also means that language casting health insurance companies as the villains in rising health care costs is inaccurate. In fact, Aetna has taken the lead in trying to bring down costs in health care through various initiatives, such as by investing $1.8 billion in health information technology since 2005 much of it to help patients interact more effectively with their doctors and to help doctors have access to information that greatly improves patient care. Health insurance companies in general, and Aetna in particular, are investing constantly in helping to improve American health care.
Myth: Medicare is more cost-efficient than private insurance because its administrative costs are half as much as private plans.
Fact: Comparing Medicare’s claim costs and private plans’ administrative costs is an apples-to-oranges comparison. In areas of similarity (e.g., claims processing, actuarial and underwriting services), Medicare and private plans are much closer together on equivalent costs.
Private health insurance administrative costs have led some to claim Medicare is a much more effective system and that a similar government-run program would be the most cost-effective option for Americans under 65. A closer look at administrative costs for Medicare and private plans paints a very different picture.
First, it is important to recognize that Medicare and private plans serve different populations. Medicare patients are older and require more care than the general population, which means that the average claim in Medicare ($10,003 in 2007) is two-and-a-half times more than the average claim for the under-65 population ($3,946).4 Consequently, Medicare’s administrative costs represent a much smaller percentage of total Medicare costs than does administrative costs in the non-Medicare world. Also, traditional Medicare does not provide the full spectrum of services that private plans do. For instance, Medicare does not promote care coordination, wellness, or disease management. As a result, Medicare may face higher overall costs — due to unnecessary care or erroneous payments — for reasons beyond the age of Medicare’s population. This means that as a percentage of claims, Medicare administrative costs are relatively small and comparisons to non-Medicare are misleading. The result is the same whether you look at total spending or total premiums paid. Add to this the fact that Medicare’s numbers only include claims processing, and the comparison is truly apples to oranges.
The bottom line: When you look solely at those administrative functions traditional Medicare performs, private plans perform them at lower cost. A new study found that when comparing based on functions performed by Medicare and private plans, Medicare has higher administrative costs of $13.19 per member per month versus private plan costs of $12.51 per member per month.5
Learn more about the value private insurers bring to Medicare by reading a Medicare Advantage summary prepared by America’s Health Insurance Plans.
Myth: Paying more for health care guarantees better treatments and better outcomes.
Fact: People who spend more often do not get better results, and in many cases, higher costs lead to worse results.
People often assume that because a procedure or medication is more expensive, this signifies that such a treatment is newer, more advanced or better than some cheaper alternative. The truth is that what is effective and what is expensive are not always the same, and in many cases, can be quite the opposite. Studies have shown that states that spend the most per person on health care generally have the worst results. Texas and Louisiana have the most expensive health care in America. They are also two states with lower quality care than other states.
Research shows that when regional differences in spending and outcomes of care are examined, the higher-spending regions (compared to lower-spending regions) experience worse adherence to evidence-based care guidelines; higher mortality following acute myocardial infarction, hip fracture and colorectal cancer diagnosis; worse access to care and greater waiting times; worse inpatient experiences; and no difference in patient-reported satisfaction with ambulatory care.6
High-cost treatments need to take a back seat to high-value treatments; those procedures and medicines that provide the best medical results for the lowest cost. This doesn’t mean random cost-cutting of expensive procedures. It means intelligently examining what works and what doesn’t and directing our money there. In many cases, true cost-effectiveness studies on treatment aren’t done. When they are, the results are not always used by doctors. It is essential that health care reform put the emphasis on evidence-based medicine.
1 CMS, National Health Expenditures Data, 2009.
2 Milliman, “Hospital and Physician Cost Shift,” December 2008.
3 www.thestreet.com Ratio Comparison Chart for Industry, published March 2009.
4 Centers for Medicare and Medicaid Services, National Health Expenditures, historical series, 2008.
5 Sherlock Company, “Administrative Expenses of Health Plans,” 2009.
6 The Dartmouth Institute for Health Policy & Clinical Practice, “Health Care Spending, Quality and Outcomes: More Isn’t Always Better,” 2009.