Health insurance premiums are an integral component of the healthcare system in the United States, and their cost and affordability can markedly influence consumers’ choice of healthcare services and their financial well-being if unexpected medical expenses arise. The fair and equitable calculation of health insurance premiums plays a role in ensuring all members of an insurance pool who wish to access care are able to benefit from the pool. This essay describes the key determinants of health insurance premiums. It is intended to demonstrate that some factors may be out of consumers’ and employers’ control and, consequently, that rising insurance premiums may be a reasonable trend; while costs may be too high, insurers are incentivized to estimate premiums as accurately as possible and not engage in frequent premium volatility. Foreknowledge of these concepts, in turn, may empower patients to make more informed healthcare decisions in the current complex and consumer-driven health insurance system. This essay will discuss the factors that impact premiums. These include seasonal increases in demand for healthcare, the level of deductibles, the types of benefits, and the coverage amount purchased, as well as how these factors are translated into risks that insurers must take on. A description of the influence of health status and values on the cost of care and insurance is necessary for a discussion of these factors. Finally, we will consider trends in the healthcare industry that could result in more predictable insurance policy costs.
Key Factors Influencing Health Insurance Premiums
Health insurance premiums are determined by a wide range of factors that can act in isolation or combination, depending on the particular premium-setting policy of an insurer. Key contributors to premium prices are the age, gender, and health status of the insured person. In general, younger people pay lower health insurance premiums than older people. There are also slight pricing differences between men and women, as data show that women are more likely to access health services. Pricing is also affected by a person’s health status: people with pre-existing conditions or chronic illnesses are more likely to need health coverage and so attract higher charges.
Another factor is the type and level of coverage you buy. Generally speaking, the more comprehensive the coverage, the more expensive the premium. Likewise, the less out-of-pocket you are willing to pay, the more likely premiums are to be expensive. The location a person lives in also affects their premium, as it is based in isolation or in combination with a number of factors that may prevent competition in the local healthcare system. Finally, insurance companies must be able to set different pricing levels based on their business model and competition policy. The extent to which these factors are reflected in the premium rate varies from one insurance company to another, depending on individual company policies and on the level of competition in the national and local healthcare markets. In some cases, these factors may be more relevant to some companies and less relevant to others, or may influence the premium rate in different ways.
Age and Gender
Age and Gender
Both age and gender are correlated with health care costs. Thus, health insurance premiums will vary with these factors. Demographics influence how much a health plan will cost. Some consumers find this pricing structure inequitable. After all, many young adults have few costly medical needs and are generally assumed to be healthier than their older counterparts. Gender can also be used to predict how much a person will cost an insurance company in medical services. In , middle-aged women used an average of while middle-aged men used an average of . While in most years men are slightly more expensive than women, in the average woman costs more than the average man, likely due to the childbirth costs. While other demographics can also be used as an estimate of health care costs, they are predominantly related to age.
Insurance companies develop risk profiles that go into planning their benefit packages and pricing strategies. They use whatever sets of variables they have access to. So, all variables that are correlated with health care costs are potentially predictive of more profitable groups to enroll. Approximately percent of actuaries estimated that forecasts of medical trend based on historical data were percent effective or less. Gender and age-based cost information is used together with other demographic and health data to predict an individual’s future health, while taking into account the likelihood that the applicant’s insurance coverage included high copayments or didn’t cover certain health conditions. Based on all of this information, insurance companies then prepare a prediction of how much care this applicant will use in the next twelve months. By using estimates of how much care the applicant will use, the insurance plan can also make an estimate of how much to charge.
Health Status and Pre-existing Conditions
Health Status and Pre-existing Conditions
Over the years, health insurance premiums have typically been adjusted based on health status, which changes with age, as well as specific chronic conditions or pre-existing conditions that could make utilization of health services more likely. Therefore, these premiums can be more costly for the insurer. There have been various legislative and market-based responses to these practices, including legal restrictions. The aim of adjusting premiums within this limited scope was to prevent discrimination based on health status while still allowing some variance in premiums based on actuarially justified costs.
Consumers with significant health care needs need to be able to find affordable coverage. Insurers also need to ensure that premiums are sufficient to cover their expenses over time, or they will go out of business. Ill consumers can be a risk for insurers, but they can also stabilize the risk pool if they are charged premiums that reflect their costs. If transparently priced, this can add predictability to the insurance market. A consumer who knows that she can get a policy at the real price of her expected future health care will be more likely to buy coverage in the first place, balancing the risk of being a ‘high-utilizer’ with the likelihood that she needs ongoing care. However, to ensure that price premiums are fair and accurately reflect both risk and cost in a friendly health insurance market, another approach is to give price premiums.
Coverage Type and Level
When a consumer chooses an insurance plan, they need to select the proposed way in which they will share the expenses for their healthcare with the insurer. Multiple alternatives exist. The differences between these alternatives help make coverage options affordable to consumers with many different potential needs for healthcare. Consumers who select more generous or attractive levels of insurance coverage should expect that their plans will have higher premiums than other options in the marketplace because the costs of these benefits are taken into account in the setting of premiums. The various definitions of coverage used for markets include different combinations of determining factors.
The choice of coverage type and its influence on premiums also involves how cost-sharing is defined. When consumers face a higher out-of-pocket expense before the insurer begins to make more generous payments, this often takes the form of a deductible. Additional aspects of cost-sharing include more ordinary forms of consumer expenses, like copayments, which are specific fees that need to be paid at the time healthcare services are received and are more common with simpler coverage plans, such as with more basic plans defined by the metal classification. Another variety of consumer out-of-pocket cost-sharing is the use of an out-of-pocket maximum. Once this is reached, the consumer may no longer need to pay for healthcare cost-sharing, which again will often drive up the premium level in such plans. Insurance products that offer a variety of doctors or provider options can also help make healthcare coverage more appealing. A PPO can let consumers choose to use either in-network or out-of-network providers, for example, where out-of-network care may cost more for the consumer and have fewer consumer protections. On the other hand, an HMO will typically allow lower costs than a PPO because the financial risk to the insurer is also lowered, but a network of healthcare providers will restrict where healthcare will be obtained. In the aggregate, these various factors can drive the level of premiums for insurance coverage, and understanding how this works can help consumers select a coverage type that has the right balance between out-of-pocket costs for healthcare and premium affordability. This is as true for markets as it is in the greater health insurance marketplace.
Geographic Location
Healthcare environments can differ across geographic areas. Some parts of the country have higher population health status or are “wealthier,” and others may experience provider shortages. These and other factors can impact the cost of delivering care. As a result, insurance companies may charge higher premiums in these markets. The rural environment may present fewer factors that lead to increased prices due to competition or demand for services. State-level policies called certificates of need, which regulate the addition of healthcare services based on the need for them in the area, could impact prices and create variation across rural areas, not just urban settings. State Awareness. Today, consumers can shop across state borders for health insurance, in theory. In practice, insurance markets are regulated and differ depending on the state. This can affect prices for the premium for different insurance policies. The availability of sales across state borders is also related to individual and group policies, which could have different costs associated with them. Health insurance consumers should be aware of these policies in the states where they live or are considering moving, to gain a better understanding of the true cost of the insurance policy. Urban and suburban areas tend to have more healthcare services and insurance companies to choose from than rural regions. This can result in increased prices for insurance because there are more policies to choose from for customers. This can be a double-edged sword for consumers in high-competition areas of healthcare. It means they have more plans to sift through and need to be aware of the best choices for themselves and their families. It also means that insurance companies need to change their premiums to attract customers. It may be more difficult for less than optimal plans to do so. As a result, prices tend to be less expensive in areas with many insurer options.
Insurance Company Policies and Market Competition
While all companies are underwritten to the same set of statistical results, variations in proxies, underwriting practices, claims handling, and customer service can lead to differences in pricing. These differences add up to a stable floor of several hundred dollars per person per year that insurers can compete around. Rather than cutting corners on risk selection, this competition is generally accepted as fostering increased value to the customer through easier underwriting and policy issuance, improved customer service, better financial instruments and investment performance, and competition can provide increased coverage and better care. As they hold more than $ billion of health benefits today, health insurers are also usually in the business of providing extremely high-quality routine health care, wellness services, and other related services.
Increased competition will lead to reduced premium growth. When no one is investing in new programs, what can we do to get prices down? Competition is tied to innovation. When not constrained, competition breeds ideas and more choices, and wellness value and management will also rise based on the number of available programs. Rates do not trend down, however, when competition is limited through monopolistic practices or pricing schemes. Some insurance companies in certain locations may have a “protected” clientele that guards them from competition, and, in fact, prices tend to be higher in areas served by only one or two insurers with little competition. Like service industries in many situations, low cost is often equated with low quality in health insurance, self-funding plans, TPAs, and HMOs, and in some cases this can often actually be the case.
Insurance company ratings, policies, and pricing all play roles in establishing premiums. By knowing the strengths and weaknesses of various organizations, one can select the one that offers the pricing and features that are right for the particular case at hand. It also mandates that before the contract is concluded, potential insureds are to discuss insurance company financial and operational performance through their insurance agents, brokers, or financial representatives. The best insurers have the best services and the best financial instruments as well as medical management and wellness improvement programs. Profitable insurers with little competition generally can afford to spend more providing essential care and customer services to their insureds by keeping more of any unused premiums created by healthy lifestyles. However, this advantage has reduced overall, as the profit potential will attract more players to the market. A unique strategy of low payouts might entice a few of the current excess profits in the insurance industry to make claims submission more difficult while concurrently driving business away.
Trends in Health Insurance Premiums
Many factors influence premium rates, and trends on individual marketplace exchanges are representative of broader changes in the health insurance market. Premium rates nationally and state by state are influenced by changing demographics, the cost and drivers of healthcare, and both local and national policy and regulation. There are changes in healthcare costs and coverage that are happening in the background and influencing premiums in addition to more direct trends reflecting short-term needs and factors. Overall, the long-term discussion has been part of the question of whether health insurance markets are stable and insurance is sustainable. It is possible that unhealthy enrollment is impacting exchange markets, and recent rate hikes may deter healthy people from participating in the exchange markets as it becomes more expensive to gain coverage. Many insurers appeared to project higher morbidity and thus premium income to compensate for higher claims costs, and this directly impacts premium costs as well. Another overarching discussion in health insurance and our discussion on premiums, especially in regard to proposals around reinsurance programs, is about the future of health insurance and how much of healthcare costs members should bear through premiums or costs of care.
The factors influencing premiums are causing and reflecting changes in healthcare access, insurance design, regulation, and member decisions. The tools people are using, like insurance and the cost of coverage, reflect the environments and values of members. Insurance prices have a direct impact on whether someone purchases or maintains coverage, and price sensitivity for different forms of healthcare is also changing. These discussions motivate understanding premium prices in predictive modeling and the economic value of changes, but also how cost-related changes in premium rates may transition actual willingness to pay. Providing general estimates on changing insurance costs and enhancing future forecasting possibilities will have implications for the choices facing consumers.
Implications for Consumers
Consumers’ premium payments play a key role in the dynamics of the health insurance market. Ultimately, health insurance premiums, after accounting for any premium tax subsidies to help cover the costs, determine the portion of income that individuals and families with employer-sponsored coverage, who make up the majority of those with health insurance, devote to health care relative to other goods and services. Premiums also factor into the decision-making process over whether to purchase health insurance, and for those who are insured, they can influence consumers’ health care utilization and decision-making. What follows offers several implications of understanding health insurance premiums for consumers.
Perhaps the most direct implication of health insurance premiums is that they dictate the availability of affordable coverage, a current concern for many consumers. People with low incomes and communities of color were the most likely to live in places where the average benchmark premium for a -year-old was unaffordable. Moreover, low-income consumers often struggle to afford even affordable coverage. For example, deductibles, which are an essential feature of many low-premium, high-deductible plans, are particularly likely to be unaffordable for low-income consumers. Moreover, limited incomes further restrict the ability of consumers to pay for non-covered health care costs out of pocket. In fact, Americans who were insured throughout the full year prior to being surveyed were more likely to delay care due to cost than those who were uninsured at the time of the survey, largely because people with low incomes are often ‘underinsured,’ forced to use a large share of their income to access needed care. In some cases, this results in consumers depleting their savings or facing debt. Instead, individuals should enroll in coverage that fits one’s health care and financial needs and has a premium that is affordable, which data suggest will account for about % of median income nationally. Families also have the option to enroll all children in a family into the ‘uniform child-only’ benefit option at any time. But the type of insurance that individuals should seek depends on their ability to pay premiums and cost sharing. The affordability threshold can be higher, the lower one’s income, particularly if out-of-pocket costs are manageable, such as at the small number of gold plans where people with household incomes below % of the FPL are not subject to deductibles, or if one develops health problems that would heighten the value of insurance. Therefore, individuals should recognize the potential that they will need substantial medical care and premium tax credits, and enroll in coverage that, in combination with subsidized out-of-pocket costs, may at least equal the value of coverage at the bronze, silver, or gold tiers for one’s family. Additionally, premium levels and product design can vary from county to county. So individuals can determine premiums in their local market and assess quality and customer satisfaction.
This paper highlights the multitude of factors that can affect an individual’s premium, from individual characteristics to broader conditions in insurance markets. The complexities of the issues discussed suggest the importance of gaining at least some sophistication in how health insurance markets can and do work. Our context is that of today: with the ACA and today’s roughly million persons covered through employer-provided insurance. But today’s premiums and subsidies are, of course, the result of yesterday’s enrollment and yesterday’s premiums. So today’s insurance policies reflect plans and prices just before the ACA’s coverage expansions. In a sense, the ACA moved the enrollment trendline, grounding it deeper into the middle class.
We have come a long way from the simply adequate coverage people once found in affordable insurance. Designing a policy, annual plan costs, and the network of providers are all complex decisions with competing trade-offs. Some state markets are highly concentrated while others are not, and premiums range widely. A few states do a good job making premiums, quality, and other information available. Even consumers who do have access to this information may not be able to comprehend it. Consumers also receive limited help from those who are not required by law to meet high ethical standards. As health care continues to evolve, its attendant insurance challenges will continue to evolve with it. The healthcare landscape could be simplified. Regulation could force insurers to act fairly and humanely, or the courts might require it. But if neither of these occurs, we must promote a greater ability for buyers to compare available offerings. In the ideal marketplace, more fully informed, engaged, and empowered consumers are likely to find improved access and affordability.
