Many of us look at the amount our insurance premiums costs today, compared to the amount we use, and think, “Somebody at the insurance company must be getting rich off me!”
The insurance companies would like you to know: If anybody’s getting rich, it isn’t them.
Risk Distribution
Part of the concept of any kind insurance is that risk is averaged across the insured population (or “pooled”) so that no one person bears the brunt of his or her risk. If one hundred people are insured, and one has a heart attack, the insurance premiums from the other ninety-nine in the pool cover the cost of that one person’s medical care. If ten people have heart attacks, then the amount that everyone pays in premium has to rise to cover the costs. This is why, on individual and small-group plans, health insurance carriers used to underwrite applications to assess the medical risk that each person is bringing to the pool. However, since the Affordable Care Act was passed, carriers can no longer underwrite individual risk in the individual and small-group markets, but they still commonly increase premiums due to a person’s age because that generally correlates with higher medical risk. But remember that anyone can break a leg at any age.
So although your premium may seem excessive when compared with your own usage, the pooled ratio of medical premium to medical expenses is kept as close as possible by the health insurance actuaries who project likely medical risk.
More information about pricing methodology can be found at AHIP.org.)
Reducing Future Risk
You may think that “Net Margin” equals the insurance company’s profits, but it also covers any unused funds which the carrier can push forward as an operating margin for the next year. This can be important, as legislative efforts to reform and then re-reform the healthcare market can change insurance companies’ performance drastically from year to year.
For instance, in both 2014 and (especially) 2015, individuals who had not been able to purchase individual health insurance in previous years due to pre-existing conditions were allowed, by the provisions of the Affordable Care Act to purchase insurance at premiums no greater than a healthy person of similar age and location would pay. Those individuals then incurred medical expenses far beyond what the insurance companies had projected for the year. In Utah, the result was that, for every dollar of premium collected, a full $1.26 were expended for medical expenses (the part which, in 2014, accounted for 80 cents of your premium dollar). One major local carrier lost $400 million and had to be rescued by an allied business’ infusion of cash. Another local carrier folded entirely.
Insurance Premiums For Insulation
Because of the insulation of the individual consumer from the total expense of medical services — especially when you aren’t the one incurring the expenses in any given year — it’s easy to feel that you, individually, aren’t getting your money’s worth from your health insurance. But remember that one of the major functions of insurance is to intentionally insulate you from medical expenses, so that you don’t bear the full brunt when a major illness or accident comes along.
