How Is a Premium Determined? A More Complete Picture

With a renewed focus on health insurance premiums, we thought it would make sense to provide some background on a number of factors that go into determining how much an individual may pay in health insurance premiums.  For each individual or family it will be a little bit different, but this overview from Aon of some of the factors of health insurance premiums is very helpful.  According to Aon “core health care trend provides the foundation for any premium increase, but the actual increase in claims experienced by a health insurance policy is subject to many additional factors beyond the core health care trend.”

So what are the additional factors?  Again from the Aon-Hewitt survey:

  • Core health care trend. This component reflects the trend of payments to health care providers and includes changes in the price of health care services, the mix of services provided, and changes in the overall level of health care utilization.
  • Changes in the covered population. Beyond the underlying force of increase for core health care trend, the claims experienced by a health insurance policy can be significantly impacted by changes in the demographics and health status of the covered population. Various changes in demographics can have an impact on health care cost, but the easiest factor to describe – and often the most significant factor – is the age of the covered population.
  • Fixed cost-sharing effects (e.g., deductible leveraging). The cost increase components discussed thus far have been largely independent of plan design. However, the cost-sharing components of a health benefit plan can have a substantial impact on health care trend.
  • Legislative and regulatory impacts. Unlike core health care trends, which drive health care costs every year, the impact of legislative/regulatory changes is often periodic. These changes generally result directly in short-term trend impacts as changes are effective, but they can also impact long-term trends, often indirectly.
  • Discretionary design changes/“benefit buy-down.” The impacts that have been discussed thus far are largely beyond the control of the party purchasing the insurance. Based on the premium increases that result from these factors, it is common for employers or other purchasers to make changes to their plan design in order to help control the impact of premium increases.
  • Additional plan-specific factors impacting premium increases. Premium increases are further impacted by a variety of factors not captured in the items above that are related to specific market, provider, or plan circumstances. For example, certain providers may o!er discounts based on participation in a health improvement program, with these discounts varying over time.

Even though health care cost growth has slowed, a full host of factors in addition to health care cost growth goes into premiums.  We’ll be talking about this more in the weeks ahead.

 

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