How is Your Health Plan Dollar Spent?

What’s Driving Healthcare Cost Increases?

There are many reasons healthcare premiums have been rising each year, primarily associated with the increased costs of providing medical care. Higher premiums reflect what health plans pay doctors, hospitals, dentists, pharmaceutical companies and others for providing care to subscribers like you and your employees. And prices in California are among the highest in the nation. For example, in 2011:

  • Hospital costs alone were responsible for 47 percent of all our medical expenses, yet many hospitals demand annual increases well into double-digit percentages. When we negotiate with hospitals, we seek to strike a balance between making care affordable to our members, yet preserving our members’ access to a large number of hospitals. In 2010, our hospital costs increased by 9 percent.

  • Physician charges accounted for 33 percent of Blue Shield's total medical expenses. These costs increased by 7 percent in 2010.

  • Pharmaceuticals comprised 14% of Blue Shield’s healthcare costs. These costs rose 8 percent in 2010 as drug companies charge health plans like Blue Shield for brand-name medicines at ever higher levels.

Health plans typically set rates 18 months in advance by looking at the prior years’ claims and the projected percent of medical inflation, administrative costs, and utilization of services. Other factors that affect the cost of healthcare include:

  • Advances in medical technology: As medical or pharmaceutical advances offer many life-enhancing and life-saving benefits, it comes with an increased cost.

  • Demographic changes: As an aging population, our medical costs tend to increase as a result of higher utilization.

  • Adverse selection: A consistent balance of healthy and sick people in the insurance pool is important to keep insurance sustainable for all. The more healthy people that drop their coverage, the more expensive coverage becomes for those who remain.

  • Changes in the law: State and federal governments can pass laws or mandates requiring what companies cover in their policies, such as preventive screenings or certain procedures, or even how they process claims.

  • Cost-shifting: Medicare/Medicaid pass costs to the private market by not paying the same rates.

  • Poorly coordinated care: Unnecessary medical tests or a system that treats one symptom at a time leads to higher costs. Initiatives like accountable care organizations or patient-centered medical care are collaborations working to integrate and coordinate care to improve costs and quality outcomes.

  • Personal habits: Unhealthy lifestyle choices, such as smoking, increase the cost of care for everyone. Chronic diseases – such as heart disease, stroke, cancer, diabetes, and arthritis – are among the most common, costly, and preventable of all health problems in the United States.*

At Blue Shield, We’re Focused on Making Care More Affordable

Consistent with our not-for-profit mission to provide all Californians with access to quality care at an affordable price, in 2010 we took an immediate and tangible step toward making coverage more affordable by pledging to limit our net income to 2 percent of revenue.

If in any year we exceed the net income cap, we will return the difference to our customers and the community** Learn more here.


Centers for Disease Control
** With approval by the board of directors