Healthcare costs and the resulting higher health care premiums have recently resumed their seemingly intractable upward ascent. Health premium increases of more than 12% on average have ricocheted throughout the system in the last year.1 During the early 1990s, in the United States, while the absolute amount spent on health continued to grow, the rate of increase in these costs temporarily slowed. 1996 marked a turning point, and healthcare cost increases have experienced a steep trajectory upwards since that time. Average consumers tend to regard the pharmaceutical industry and direct advertising to patients as the main villain behind this problem. Unfortunately, while increases in drug prices and usage are part of the reason for the surge in costs, they are not the main problem. Consumer demand in terms of both more and better health services overall is the major driver. However, reduced competition in both the provider and insurance industry have allowed these players to increase their prices and hence their profits in some markets.2

In the tight labor market of the late 1990s, most employers shouldered the vast majority of insurance premium increases. However, as the job market has tightened, employers have been emboldened to pass on at least some of the increased healthcare costs to their employees. Employees have had to bear a higher percentage of the premium and pay higher co-payments and deductibles. Most people in the United States obtain their health care through their employers, so when unemployment goes up, it isn't surprising that the number of uninsured also goes up. However, the number of employed without insurance is also increasing because they are unable to afford their share of their employers' health insurance premiums.3

Why is inflation going up so much faster in health care than in the overall mix of goods and services? In the early 1990s, healthcare costs slowed down their upward trajectory by moving more people into managed care options. These programs were able to exert considerable control over costs both on the provider side and on the consumer side. Hospitals and physician groups were eager to sign contracts with managed care organizations during these years because they feared being shut out of a large part of an area's market. HMOs offered lower prices for health care for two reasons. First, their supply costs were lower due to the eagerness of the providers to reduce their per unit costs for their patients. Second, in an effort to gain market share, they were temporarily willing to settle for lower profit margins. Consumers signed up for HMOs because they thought they were buying unlimited health care for lower cost. The backlash against HMOs began when consumers understood that these programs, by definition, limit people's choice of provider and healthcare facilities and treatments.

While the lower costs were popular, the reduced set of choices available to consumers was not. To attract or keep customers, insurance programs have felt compelled to do away with some aspects of managed care that burden consumers, such as extensive gatekeepers and restricted numbers of healthcare choices. Yet enrollment in more traditional types of managed care such as HMOs declined from 2000 to 2001.4 These programs typically offered the lowest price health coverage.