Health insurance rates and premiums demystified

Aug 26 2014
Top

No matter what you call them, health care premiums, rates, “bills,” are made up of the same things. Like many other critical services, health care costs are based primarily on how much the service costs and how much you use it. But, like anything as complicated as health care, there’s more to the story.

Rates submitted by health plans, and how those rates impact the premiums people pay, will receive significant attention. To fully understand why premiums may go up or down in 2015, consider the following factors:

Rates reflect medical costs: Medical costs make up most of the costs that go into the premiums people pay. By law, health plans must spend at least 80 cents out of every $1 of premiums on medical costs. Medical costs are higher in some places than others. Costs are higher when doctors and hospitals charge more, or when people go to the doctor more often, have more tests or fill more prescriptions. Medical costs also go up when drug prices go up and often when new treatments are found.

Medical costs continue to increase faster than the general rate of inflation and wage growth, and continue to be the driving force behind rate increases.

Risk pool and changes to government programs: The ACA includes financial protections that were in place in 2014 to maintain a stable marketplace and affordable premiums. The need for these programs is clear given reports from HHS and other organizations that exchange enrollees are older and will likely use more services than expected. If these programs go away too early, premiums would need to rise even more.

Mandated Benefits: Under the ACA there are new rules for what insurers must cover. That means today’s health plans must cover more services (even if you don’t want or need them) than the plans many people chose to buy before the ACA. And some states require even more services to be covered. These richer plans mean higher premiums.

 Taxes and fees: The ACA includes a number of new taxes and fees, such as the Health Insurer Fee, designed to fund portions of the law (e.g. new health insurance exchanges). Those will add about $170 to an individual’s 2015 premium on average. Those taxes and fees are on top of state taxes and fees, as well as extensive corporate and income taxes.

In addition, normal costs of operating the health plan are also part of the picture. These costs include answering customer’s questions, negotiating with doctors and hospitals to get more affordable rates, investing in new technologies and other innovations that are improving health care. Find more details about cost drivers here.

So how do we make premiums more affordable? You can start by reading what Aetna is doing to build a better health system.