How Health Insurance Premiums are Determined
By Maryalene LaPonsie on May 29th, 2010
For families faced with the prospect of buying their own health insurance. the number of policy options available can be overwhelming and intimidating. While employers can negotiate discounts based on their large group size, individual health insurance does not offer policyholders that luxury. It pays to know the criteria used to determine premiums when you shop for health plans and compare health insurance quotes .
State Regulations and Individual Health Insurance Premiums
According to the Department of Health and Human Services, approximately two-thirds of Americans receive their medical coverage through employer group insurance. For those who are self-employed or do not receive health benefits from an employer, medical insurance must be purchased through the individual health insurance market.
Whether they offer group or individual policies, all health insurance companies must follow state regulations. Each state has an insurance oversight office that is responsible for reviewing rate schedules, approving premium increases and ensuring the financial stability of the insurance companies within that state.
Although the state insurance office does not set policy premiums for individual policies, it does determine the amount of money a company can charge overall for individual plans. The premium amount approved by the state is intended to cover the claims a company expects to pay, as well as funds to pay for the company costs and a reasonable profit.
Once the health insurance company has had its premium rate approved, it sets individual policy premiums based upon criteria such as:
- ZIP code
- Lifestyle choices
- Pre-existing conditions
Private health insurance companies are allowed to charge one plan participant a larger premium than another plan participant for the same level of coverage. However, state insurance regulators often limit those price differences.
Location, Location, Location
Fred Bean is an insurance advisor and former board member for the Life and Health Foundation for Education (L.I.F.E.). According to Bean, the primary criteria used to set individual health plan premiums are age and ZIP code. He stresses that "location is so important."
With health care costs varying widely throughout the nation, private health insurance companies make calculations based upon the state and county in which you reside. The insurer takes into account how likely you are to visit the doctor or hospital in a given year, as well the cost for health care in your area.
For example, according to a Forbes report, residents of Miami-Dade County in Florida have the most expensive health care in the nation. Not only are residents more likely to access expensive medical treatments, the cost of treating a Medicare patient in Miami-Dade is roughly twice the national average -- a whopping $16,351 per year.
Including Miami-Dade, the following areas represent the top 10 regions in the nation in terms of health care costs:
- Miami, Florida
- McAllen, Texas
- Bronx, New York
- Manhattan, New York
- Harlingen, Texas
- Los Angeles, California
- East Long Island, New York
- Dearborn, Michigan
- Newark, New Jersey
- Corpus Christi, Texas
The ultimate goal of health insurance companies, as with most companies, is to make a profit. Therefore, people living in area with expensive health care costs should expect to pay higher health insurance premiums. To remain profitable, the company estimates your annual medical cost and then sets your policy premiums accordingly.
Health Insurance Coverage Options
Health insurance for individuals is priced not only on your health and lifestyle choices, but also on the level of coverage you select. Although federal health care reform changes how policies are written in years to come, private health insurance companies currently have wide latitude to set deductibles, co-payment amounts and coverage caps.
When reviewing health insurance quotes, it is important to compare policies that offer the same health insurance coverage. As Bean puts it, "You can buy a suit at Armani and a suit at Dillards. Both are suits, but they are valued differently. Obviously if you want all the bells and whistles, you will pay a little more."
One common feature of cheap health insurance is a high deductible. The deductible represents the amount of money you must pay out-of-pocket before your health insurance plan begins to pay for covered medical expenses. Some health plans exempt prescription drugs and preventative care costs, such as physician office visits, from the deductible. The deductible is most often applied to hospitalizations. However, according to Bean, statistics show that, on average, you only visit the hospital every 11 years and most people never meet their deductible.
In addition to the deductible, co-payments can impact the cost of your premium. The co-payment is your share of the total bill. Co-payments are usually applied to office visits, out-patient care and prescription drugs. As you compare health plans, check to see if the co-payment is a fixed dollar amount or a percentage of the total cost of your bill.
Many affordable health insurance plans limit the amount of medical coverage. These plans impose an annual cap or a lifetime cap on the amount of medical expenses they are willing to pay. Anything exceeding that amount must be paid out-of-pocket by you. As the recently passed federal health care reform is phased in, these caps are no longer allowable.
Finally, your premium may be affected by the type of overall coverage you select. Traditional health insurance, such as an indemnity or fee-for-service policy, allows you to go to the doctor of your choice and covers a broad range of services. Managed care plans, such as preferred provider organization (PPO) and health maintenance organization (HMO) plans, may limit your freedom to pick a doctor, but these plans also offer family health insurance at cheaper rates.
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