If you’re looking at health insurance, you’re going to have a bunch of terms to understand and decisions to make. Should you choose an HMO or PPO? What’s the difference between a small-network PPO and large network PPO? If you’re on the marketplaces, what does a Bronze, Silver, Gold, or Platinum plan mean? What’s the difference between a deductible and maximum out of pocket?
Add this to terms like prescription drug formulary, high-deductible health plans and HSAs, or healthcare sharing services, and the process of navigating insurance gets complicated. Considering that you’re going to see a bunch of different costs, fee structures, provider options, and more, and it’s easy to find yourself wandering aimlessly through an insurance selection.
But today, we’d like to look at what happens after you choose a plan and ask the question, “where is the money you pay each month going?”
Background: What Is a Health Insurance Premium?
When looking at health insurance, the first comparison you’re going to make is often based on your premium—or how much you pay each month to an insurer. Like any other type of insurance, this is based on the entity being protected by insurance.
How Premiums Work
For example, when looking at car insurance, premiums are based on the value of the entity, the likely cost of recovering after an incident, the location and consistency of driving, and the deductible. If you want a $250 deductible on car insurance instead of $500, you’re going to pay more. If you need to insure an $80,000 car, it’s going to cost more than a $25,000 one. If you drive in a no-fault state, your premium is going to increase—and if you drive 25,000 miles a year, you’re going to have more opportunity to make a claim.
Similarly with health insurance, you’re paying for what you’re expected to use, how much you’re likely to cost the insurer, and what the surrounding risk environment looks like. Smokers and people of a certain age are likely to require more care. People in states requiring additional health benefits and states with higher payments to providers are going to cost more. Plans requiring you to share less of the costs are going to cost more.
Five Things Affecting Premiums
When considering a plan either on or off the ACA Marketplace, your premium is based on five factors:
- Age: Premiums can be up to 3 times higher for older people than for younger ones.
- Location: Where you live has a big effect on your premiums. Differences in competition, state and local rules, and cost of living account for this.
- Tobacco use: Insurers can charge tobacco users up to 50% more than those who don’t use tobacco.
- Individual vs. family enrollment: Insurers can charge more for a plan that also covers a spouse and/or dependents.
- Plan category: On the ACA Marketplace, there are five plan categories – Bronze, Silver, Gold, Platinum, and Catastrophic. The categories are based on how you and the plan share costs. For example, a bronze plan will have a higher deductible and require you to share more of the costs. Non-ACA plans are similar, but will refer to plans as different names. Learn more about the different metals here.
In addition to these five factors, your monthly premium may be affected by whether you opt for an HMO or PPO and in certain non-Marketplace and short-term plans, your premium may be determined by preexisting conditions. Furthermore, your income affects your premium on Marketplace plans, capping your premium at less than 10 percent of income and offering tax credits to offset additional costs. Currently, under the recent stimulus bill, more people than ever were eligible for premium reductions.
What Happens with Your Premium?
After paying your monthly premium, you join the pool of health insurance users. In turn, each plan pools this money and the risk of the population using the plan to provide coverage for all those paying into the plan. No premium, no coverage—exposing you to the potential for millions of dollars of costs for major procedures.
One Dollar, Twelve Categories, Three Cents of Profit: Health Insurance Premium Breakdown
But you may be wondering where all this money goes. After all, many see insurance executives as big time corporate fat cats smoking cigars and sipping Pappy Van Winkle. The reality of the matter? The top executives might do this—but they’re running a giant company through a complex maze of regulations and costs, trying to bring in three cents for every dollar you spend.
This according to AHIP, who recently looked at the way that each premium dollar is spent, finding that insurers’ margins total less than three percent, with roughly 87 cents on every dollar going to the care and medication you receive. Here’s how each premium dollar breaks down:
Prescription Drugs: $0.23
The largest category of spending for insurers, 23.3 cents of every dollar goes to covering outpatient prescription medications (mostly self-administered drugs), and for prescription medications administered in a physician’s office or clinic.
Doctor Services: $0.22
Whether it’s a primary care provider or surgeon, the second largest category of spending goes to doctor services—payments for all non-drug related inpatient and outpatient services provided by a physician. The 22.2 cents spent includes the doctor’s time and expertise spent diagnosing and treating a condition, as well as the work done by surgeons and specialists including radiologists, pathologist, and anesthesiologists.
Additional Services: $0.20
In addition to the doctor services mentioned above, another 20.2 cents goes into paying for nursing and assistant salaries, equipment or supplies during your office or clinic visit—as well as clinic administrative costs including rent and electricity.
Hospital Stays: $0.16
Used less often than traditional clinic and office visits, hospital stays go into their own category and cost 16.1 cents of every premium dollar. This category includes payments for all services provided during a hospital stay, including the administration of prescription drugs, but excluding payments to physicians. Room and board, equipment, supplies, salaries of nursing personnel and hospital overhead are taken from this as well.
With health plans making little profit on each dollar, the taxes paid by each dollar paid into each health plan totals 4.7 cents. As health insurance companies profit in other ways, the amount of taxes in this category appears low, but includes federal, state, and local taxes paid by any business, as well as taxes that are unique to a health plan, like taxes paid on insurance premiums.
Fees and Business Expenses: $0.03
To sell to customers, many health plans rely on brokers to help customers select the plans that are best. Part of a larger category paying for commissions, licensing, depreciation, premium rebates, and debt, 3.3 cents on every dollar is spread across these business expenses.
Customer Engagement: $0.018
Health plans need find customers, serve them, and to evolve to meet their needs. Therefore, 1.8 cents of every dollar is spent on customer service, new product development, market research, marketing, advertising, and account management. Whether this goes into staffing a 24/7 call center, negotiating coverage and costs for new drugs, or providing benefits to patients, this money is spent fighting for you and trying to lower your out of pocket costs.
Finance, Claims, & Special Investigations: $0.016
To keep costs low, insurance companies need to spend a decent part of their internal operations ensuring that they’re getting what they pay for. Therefore, out of the 13 cents that goes to the insurer after paying for provider services, 1.6 cents goes towards fraud and abuse monitoring and detection, benefit coordination, billing preparations, processing payments, eligibility and benefit verification, adjudication, auditing, training, and education.
Care Management: $0.016
Care management can help you to recover faster, and help insurers get value for the services they are paying for. That’s why a healthy portion of the insurer share goes to care management, including payments to hire nurses and case managers. This also includes disease management, health coaching, behavioral health, community affairs, and wellness program—as well as steps to improve these.
Technology and Analytics: $0.016
Another key provision is all about protecting the patients and improving access. Therefore, 1.6 cents of each dollar goes to investments in cybersecurity, programming, analytics, and data exchange to protect and improve patient care. IT infrastructure.
Insurers need to provide their own benefits, and less than one cent goes towards funding their own human resources, legal, facilities, purchasing, compliance and risk management, executive offices, public policy, and communications.
Provider Management: $0.005
Part of facilitating their relationships with providers and expanding coverage, half of each cent you pay goes toward provider education, provider service calls and appeals, contracting and credentialing. This might include answering questions from doctors and hospitals, helping providers with best practices, and ensuring proper credentialing for quality care.
Finally, after 97.7 cents of each premium dollar is paid, the company can pay itself. This 2.3 cents is invested or paid to shareholders, making this one of the lowest-margin businesses to exist.
Helping You Make the Most of Your Dollar: Insurance Broker Hub
Getting the most out of your premium requires you to understand a lot more than how it’s spent. Premiums affect your deductibles, out-of-pocket costs, and access to care—and the more you pay in premium dollars, the less you pay directly to doctors and hospitals.
If you’re looking for help making the most of your health insurance, it pays to find a plan that is tailored to your specific needs. And that’s where Insurance Broker Hub comes in. With the help of our national network of licensed brokers, shopping for insurance doesn’t have to be complicated. Insurance Broker Hub has helped over 10,000 consumers find the coverage they need at a price they can afford.
Our free service gives you access to an independent network of national brokers who have the experience and expertise to design a plan around your needs and budget. Ready to get started? Simply request a no obligation health insurance quote here.