Why Is Your Health Insurance Premium So High?
If you’re worried about rising health insurance premiums, you’re not alone. Even with employer-sponsored coverage, higher deductibles and premiums are becoming the norm, leaving many wondering, “Why is my premium so high?”
The components of your health insurance premiums include:
Claim costs: Charges from healthcare providers, facilities, equipment, drug costs and direct care management costs
Administrative expenses: Costs to operate the insurance company
TPA and PBM Fees: Payments made to third parties to administer health plans and prescription plans
Commissions: Payments to brokers, agents and intermediaries
State Premium Taxes and Regulatory Fees
Risk and Profit Margins: Charged by insurers to take on health risks
Inflation: Rising healthcare costs over time
Claims: A Key Driver of Premiums
Claim costs make up the largest portion of your premium, reflecting the overall health status of everyone covered by your plan - family, neighbors, colleagues, even strangers in your coverage group. Health insurance operates on the principle of shared risk, balancing costs between low, medium, and high-risk members.
Assume you belong to an employer-sponsored health group (XYZ) with 120 members and the following is the summary of claims from members the last calendar year:
82% of members had no claims or only routine care like primary care visits and annual checkups
10% had chronic conditions requiring regular treatments and medications
5% faced emergencies for injuries from accidents or illnesses
1% experienced major health events like cancer, major organ failure, or other dread disease diagnosis
2% used mental health services
While most members contribute predictable, low to moderate claims, high-cost cases such as emergency care from group 3 and specialized treatments from group 4 significantly impact overall group expenses. At year-end, the insurance company evaluates total premiums collected and total claims paid. If claims outstrip premiums, your group may face higher rates or plan adjustments in the following year.
The Bigger Picture
Now, multiply this scenario by hundreds or thousands of employer groups. Each has its unique health profile — some healthier, some less so. Insurers often combine these groups by area, state, or region to determine necessary rate adjustments. Ultimately, your premium reflects not just your health status but the health landscape of the broader community.
Claim costs are undoubtedly influenced by the overall health status of the population, however several additional factors contribute significantly. These include variations in facility, equipment, and drug prices, which can differ substantially depending on the location where services are rendered. For instance, a prescription might cost $70 before the member’s cost share at one pharmacy, yet only $20 when utilizing platforms like GoodRx. Similarly, the same imaging service might be priced at $5,000 in one facility, while another may offer the same service at a fraction of that cost. Furthermore, inefficiencies within care management programs may result in higher costs for the plan than any savings they might generate.
Some argue that these challenges may stem from unintended consequences of regulation or overregulation of the health insurance industry.
Seeking Affordable Alternatives
Is there a way to make healthcare more affordable and accessible? Many individuals, groups and employers are exploring alternatives such as Direct Primary Care (DPC), Accountable Care Organizations (ACOs), Individual Coverage Health Reimbursement Arrangements (ICHRAs), and Self-Insured models.
I’ll delve into these options in my next post. In the meantime, I’d love to hear your thoughts, questions, and experiences in the comments below!
