Health insurance premiums are fees that you pay in exchange for health insurance coverage. These fees are paid directly to an insurance company. The insurer has many policyholders, just like you, who also pay premiums. Because the insurer collects premiums from thousands, perhaps millions, of policyholders, it is able to calculate the premium rate necessary to function as an insurer.
Where Does The Premium Go?
Health insurance companies manage the risk associated with health care. When you file an insurance claim, the premiums are used to pay for your health care expenses. However, when you don’t need health care services, the insurer invests those premiums so that it can grow its cash reserve. The reserve will later be used to offset inflation and pay for future health care services.
What determines the Premium Rate?
The premium you pay is determined by a number of factors. For starters, the insurance company has certain, fixed, operating costs that it must cover. The insurer also has to determine the risk of you filing an insurance claim and juxtapose this against the risk for all of its policyholders. If it is a public company, it must calculate its target profit margin to meet investors’ demands. Finally, the insurer may need to take into account your individual health status if you are purchasing an individual health insurance policy. For group policies, it must calculate the group rate based on either a “community rating” or the collective risk of all of the group’s participants. Finally, if the insurance policy offers a deductible or coinsurance, your policy’s premiums will be offset by these amounts. A deductible is the amount of money you must pay before the insurer pays any money on your insurance claim. Coinsurance refers to the amount of money you pay after the insurer has paid its contractually obligated coverage amount (which may be less than 100 percent of the cost of health care services).
“DEFINITIONS OF HEALTH INSURANCE TERMS.” Bureau of Labor Statistics. United States Department of Labor, n.d. Web. 9 Oct. 2012. <www.bls.gov/ncs/ebs/sp/healthterms.pdf>.
“Insurance Basics | HealthCare.gov.” Home | HealthCare.gov. N.p., n.d. Web. 9 Oct. 2012. <http://www.healthcare.gov/using-insurance/understanding/basics/index.html>.