Health insurance premiums, which have been increasing at double-digit rates, will continue to rise in Iowa but at a more moderate pace during the next couple of years, say officials at Wellmark Blue Cross and Blue Shield. The Des Moines-based mutual insurance company provides health insurance plans for nearly one out of every two Iowans who have health coverage.

“Our basic philosophy is that we want to step (premium increases) down in 2004 and 2005,” said Clifford Gold, Wellmark’s group vice president for marketing and external relations. “But we don’t want to do it all in one year, because what we hear from our customers is they’d love to have predictability in their rates. We’re in fact acknowledging we had a good year last year and are starting to trend down.”

The average individual policy premium increased by 10.5 percent this year, while large-group and small-group premiums averaged increases of 11.8 percent and 10.6 percent, respectively. There was no policy increase in 2004 for Medicare supplement policies. Small-group rates for the first quarter of 2005 will be determined by mid-August; large-group rates will be fixed in September and October.

According to a front-page article in the June 21 issue of The Wall Street Journal, earnings among the Blue Cross and Blue Shield plans across the country more than doubled in 2003 “thanks to a rise in premiums of anywhere from 10 to 16 percent, as well as stock market gains on invested capital.” At the same time, reserves for the Blues overall increased by about one-third last year, which the Journal said has put pressure on the Blues in many states to cut premiums.

Wellmark’s cutback in premiums is in part a move to level out earnings, Gold said, and not a reaction to any backlash from consumers or regulators over its premiums or reserve levels. The health insurer’s profit margin was just over 4 percent in 2003; its goal is to maintain an average 2 percent earnings margin over time. When averaged out over the past eight years, Wellmark’s profit margin was just over break-even, at 0.15 percent.

At the same time, increases in health-care spending are moderating. According to a national study released earlier this month, health-care spending for privately insured Americans increased by 7.4 percent last year, the first major slowdown in spending growth in nearly a decade. Though the growth has slowed, medical spending is still increasing twice as fast as the overall economy, which in comparison grew by 3.8 percent in 2003.

“It’s just really a question of whether you can continue to have the utilization (of medical care) continue to grow and be sustainable,” said David Southwell, Wellmark’s treasurer and chief financial officer. “I’d say at 10 to 11 percent increases in costs, it’s still high. It’s good that it’s eased off a little bit.”

Though each of the Blues is an independent licensee, some are structured as publicly traded companies, while others are not-for-profits or mutual companies. Wellmark is among about a dozen Blue Cross licensees that are organized as mutual companies.

As a mutual insurer, Wellmark is not bound by specific reserve level requirements. Instead, it follows guidelines established by the National Association of Insurance Commissioners and the Blue Cross and Blue Shield Association, using a risk-based capital management formula.

Wellmark’s reserves fall within the conservative “safety net” range, probably in the upper one-third of reserve levels, Gold said. According to its balance sheet, the company’s total surplus at the end of 2003 was $714 million, up from $517 million in 2002.

In terms of how each premium dollar is spent, many people are surprised when they hear that about 85 percent of Wellmark’s premiums are used to pay claim costs. A survey completed for Wellmark indicated that its policyholders believed that about only about half of their premiums paid for medical care, with the remainder split between business expenses and profits. In fact, actual administrative expenses have averaged about 9 percent over the past five years, with broker commissions and taxes making up about 6 percent of how each dollar is spent.

Some of the Wellmark’s cost-containment strategies appear to be having some effect in dampening increases in health-care spending, Gold said. For instance, the company’s aggressive advertising campaign advocating the use of generic drugs as a lower-cost alternative to name-brand pharmaceuticals has resulted in more generics being used and a resulting cost savings, he said.

Internally, Wellmark is working to reduce administrative costs, which last year were $11.53 per member per month; its goal for 2006 is to cut that to $10 per member per month or less.

PERCEIVED SPENDING OF PREMIUM DOLLARS

Medical Expenses: Wellmark members believe that 49 percent of their premium dollar goes to pay physicians, hospitals, pharmacies and other health-care professionals.

Health Plan Business Expenses: Wellmark members believe 26 percent goes to cover costs associated with processing and paying claims, customer service and other administrative costs.

Health Plan Profits: Wellmark members believe 25 percent of their premium dollar goes to health plan profits.

ACTUAL SPENDING OF PREMIUM DOLLARS

Medical Expenses: On average, 84 cents of every premium dollar goes to pay physicians, hospitals, pharmacies and other health-care professionals for care.

Administrative Expenses: On average, 9 cents of evry premium dollar goes to cover administrative expenses.

Commissions to Brokers and Premium Taxes: Just over 5 percent of every premium dollar goes to cover taxes and pay commissions to brokers and representatives.

Health Plan Profits: Less than 1 cent of every premium dollar goes to Wellmark’s operating margin.