How Health Insurance Premiums are Determined

It’s a busy time of year for the health insurance industry as many companies are in open enrollment season.

That means you – as an employer – are probably asking the dreaded questions regarding your current plan – How much will the rates increase? Should we switch plans?

To answer those questions effectively, you need to have a good foundation on how insurance companies determine health insurance rates.

A premium is the amount that policy holders pay monthly for their insurance.

Insurance carriers look at a handful of criteria to determine your premium rates.

First, we must look at:

• The size of your company
• The type of health insurance you use

Fully Insured vs. Level Funded

In a previous article, I explained the difference between Fully Insured and Level Funded insurance plans.

Here, we will discuss how premiums are determined if you are Fully Insured.

Companies under 50 Employees

For groups under 50 full-time employees, if you are fully insured, Obamacare / Affordable Care Act (ACA) permits insurance carriers to calculate rates only according to:

• Age (employees and their dependents)
• Tobacco use
• Business location

Under ACA, the group’s medical claims history or industry are not to be a factor in determining the price.

Mid-Size and Large Employers

Companies with 51 or more employees are evaluated by additional criteria such as:

• Medical claims history
• Business location
• Industry
• Occupation type
• Gender of workforce

For example, if your group had extended hospital stays or surgeries – then your premium could be higher. Or the industry of construction might have higher premiums than a computer software company.

A good agent will have done their research and know if a medical condition is a ‘one and done’ or an ongoing concern. If it is not an ongoing condition, the premium may be negotiable.

How Do Insurance Carriers Set Their Premiums?

Carriers begin building a company’s premium by anticipating claims. They consider the medical conditions and prescription drugs of the employees to create the base rate.

From here, they add in administrative costs, reinsurance (to cover a large or unexpected claim), and broker commissions.

What Makes Premiums Increase in Cost?

The most common factors that increase premium rates are:

• Inflation
• Increasing age of your employee population
• Ongoing chronic medical conditions
• Location

If you have more medical needs in your group, then it might be a good strategy to have a higher monthly premium to save your employees on medical expenses.

How Can You Lower Your Premiums?

The key to remember — If you manage your claims, then you manage your premium.

Claims are the one place the employer can effectively manage costs.

This is why wellness programs are important. The best way to control claims is to continuously educate employees and encourage them to address medical concerns early and often — before they become bigger claims.

Furthermore, it is also important that you, as a business owner or manager, can stay informed on how you can improve your employee benefits.

The more informed you are about how your health insurance works, the more you will be empowered to make the best decisions for your company going forward.