» What’s Really in a Health Insurance Premium?
March 14, 2022
We talk about them all the time, we seem obsessed with them, but what actually goes into a health insurance premium?
While you’ve likely been paying health insurance premiums for as long as you remember, you may not have ever seen one broken out. And in our role as benefits consultants to health plans, we obsess over the premium and claims costs for a group. Our work is focused on reducing health plan costs because premiums are a burden on many Americans and businesses today. As a top 3 line-item expense for most companies, health insurance costs are a drag on business growth.
Therefore, it is vital for us to properly understand how a health insurance premium is constructed. Let’s break it down and see how a health insurance premium really works.
We’ll look at three key components of a health insurance premium. These areas are small claims, large claims, and admin costs.
Small claims are the doctor’s visits, labs and imaging, low-cost prescriptions, and other day-to-day claims that members incur and will be paid for by a health plan. They are frequent and can usually be anticipated ie 50 percent of the group is going to see their PCP at least once this year.
When we see a claims breakdown for a group, we may expect small claims to represent 40 to 60 percent of their overall premium or plan cost.
No single small claim is that significant – this is a situation where 100 employees may incur 150 doctor’s visits in a year, so rather than look at reducing the cost of any single claim, we consider large, plan-wide cost reduction strategies like immunizations, wellness, primary care, mental health care, and more.
Our goal is to keep a population healthy to reduce the number of total claims and reduce the cost per claim of these various interactions with the healthcare system.
Large claims are more likely single-event claims or on-going expensive treatments incurred by a minority of the members on a plan. This may be traumatic injuries, cancer or other diseases, and expensive prescription drugs (especially as more gene therapies come on to the market).
These claims may be anywhere from 25 to 40 percent or more of the annual premium and are the most likely way that claims will actually be higher than plan premiums or that the plan will hit a specific deductible if self-funded. The Pareto Principle or the 80/20 rule is in effect here, as we typically see a minority of members account for the majority of spending due to large claims.
In one situation, I saw a 300+ life group where 5 members accounted for 55 percent of the claims costs!
One tricky issue with claims is that many small groups get no claims data at all at renewal time, while some large groups may learn about only their largest claims.
With large claims, we may have trouble reducing the total number of these claims, as they are chronic diseases or anomalous events that can’t be predicted. But we can address the cost of each claim.
We may be able to change the site of a procedure to a lower-cost site of care, contract with a Center of Excellence for higher quality outcomes and lower costs, find a lower-cost similar drug, and more. Say, conduct a pharmacogenomic analysis to find underperforming drugs in the member population to reduce unnecessary spending and transition members to more effective treatments.
Administrative costs are the portion of premium used for underwriting, marketing, operating expenses, broker compensation, and profit.
The ACA was designed to cap carrier profits through the use of MLRs or Medical Loss Ratios. This policy limits carrier admin costs to 20 percent of small-group premiums and 15 percent of large-group premiums. Carriers must rebate to groups any excess earned above what they are allowed.
One byproduct of MLR requirements is that carriers can only grow their earnings by increasing their total premiums collected. This can lead to pernicious premium increases year after year, as most carriers are publicly traded and focus on growing their EPS or earnings per share each year.