Why Is Health Insurance So Expensive?

If the pricing of health insurance, or insurance in general, is broken down into the various components of an insurer’s business model, it gives a better understanding of how carriers view us in terms of profit or loss. This article is mainly for educational purposes, but can also be served as a way for us as consumers to predict accurate pricing.

Factors Affecting Premium

Premium rates for a given benefit depend on:

(1) morbidity,
(2) provider payment arrangements,
(3) expenses,
(4) insist,
(5) interest and
(6) profit and contingency margins.

Morbidity: When dealing with mortality rates for life insurance, the only factor considered is the expected number of deaths in a year compared to the total number of people exposed in the classroom. In contrast, in a measure of morbidity, the annual claim cost for a given age-sex-occupation class is the product of (a) the annual frequency of a particular event (b) the average claim for compensation when such an event occurs. For example, the annual frequency of hospitalizations for a given age and gender may be 10 percent, the average hospital stay may be four to five days, and thus the annual claim cost for a $500 daily hospital allowance is $250 ($0.1). ) will be x 5 x $500).

In health insurance, although mortality is an issue, the primary consideration is the cost of morbidity. The annual compensation amount may vary according to factors such as age, gender, occupation class and geographical region, depending on the type and amount of assistance. Because most policies include more than one benefit, it is necessary to obtain separate annual claims costs for each benefit type. Most sickness tables used to calculate the net annual claim cost of disability income benefits exclude experience during the calendar year a policy is issued. Attempts to determine the impact of underwriting on experience by policy year, unlike the success of life insurance implementation, have not been very successful. The selected experience model under disability insurance is quite different from mortality under individual life policies.

More importantly, there is an apparently significant adverse selection by applicants for disability income policies with short elimination periods and long maximum durations. Studies show that there is a significant increase in morbidity by policy duration at age 50 to 65 that continues until insurance expires. Insured applicants in their twenties and thirties develop higher levels of morbidity after age 50 than applicants insured after age 50. Also, experience varies depending on the type of assistance involved. In the case of health expenses insurance, in the case of persistent inflation in the cost of medical services, and in the case of disability insurance, experience becomes even more complex relative to employment and personal income levels. Obviously, in determining gross premiums, attention should be paid to the relationship between elite and ultimate experience, so that insurance premiums issued at older age accurately reflect electoral savings,

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Provider Pay Arrangements: Premium rates for HMOs and other medical care organizations are affected by the degree to which providers participate in the cost. The purpose of providers participating in benefit plan cost is to both reduce the cost of plan benefits through rate concessions and provide incentives for providers to control usage, particularly in expensive specialist referral areas and hospital admissions. Under traditional indemnity insurance products, providers are paid on a fee-per-service (FFS) basis. Managed care plans typically have agreed fee arrangements with hospitals, doctors, pharmacies, and other providers.

Provider cost sharing can take many forms, each with its own subtle effects on core cost and behavioral incentives. An example of such an arrangement is capitation. Capitation is the payment that an insurer subcontracts with a provider to perform a specified range of services for a specified amount per month per plan enrollee. This arrangement represents the end of the spectrum of risk sharing, where almost all risks are transferred to the provider. The only risk remaining to the insurer is the solvency of the providers and their ability to provide services. The main purpose of these regulations is to increase the cost and usage awareness of the provider. Such mechanisms should be established in a way that is beneficial to both the providers and the insurer. Otherwise, the contract arrangement will eventually eliminate the entire program.

Expenses: In order to obtain appropriate expense ratios for the determination of premium rates, detailed cost studies should be done where various expense items can be expressed as (a) a percentage of the premium (b) an amount including premium taxes and agency commissions. an amount per policy, including the cost of underwriting and issuing the policy; and (c) per claim paid, such as the cost of researching and verifying a claim. Due to non-level commission rates, types of expenses per premium are generally higher in the first policy year, decrease over the next few policy years, and then level for the remaining policy period. The types of expenses per policy in the first policy year are much higher and reflect the policy’s cost of writing and issuing the policy. After the first policy year, the type of expenditure per policy is relatively stable, except for the effect from inflation.

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Persistence: For a policy group, the retention rate is defined as the ratio of the number of policies that continue to be covered at the premium payment date to the number of policies that are in effect at the previous maturity date. Thus, if 75 out of 100 policies are in effect on the first policy anniversary, the first-year annual retention rate is 75 percent. The retention rate generally increases with the duration of the policy, and for some types of coverage the annual retention rate will be 95 percent or higher after the fifth policy year. Naturally, other factors affect retention rates. In general, retention rates are generally higher at older problem ages and better for less hazardous occupations. Permanence is often better in conjunction with major medical expenses and disability income coverage than with basic hospital expense insurance. Persistence is important in health insurance rating for two reasons. First, expenses are higher in the first year than in subsequent years, typically due to the higher first-year commission rate. Also, damage rates under health insurance tend to increase as the insured’s age increases. Considering these factors, which vary by age and policy period, the premium rate level will depend on the default rate.

Interest: When a level of premium is used, the insurer will have, after the first few policy years, a backlog of funds resulting from the excess of premium income over the amounts paid for compensation and expenses. As with life insurance with level premiums, funds accumulated in early policy years will be needed in later policy years when premium revenues are not sufficient to cover claims and expenses. Therefore, in calculating premium rates, an appropriate interest rate should be assumed in order to reflect investment earnings on these savings. Interest rates are less important in calculating health care premiums than in calculating life insurance premiums. In the early policy years, the ratio of claims under health insurance to premiums is significantly higher than that of lower-end premium life insurance. Accordingly, more of the premium is used for claims payments immediately after it reaches the insurance company, and therefore the level premium is not suitable for investment as in life insurance. It is important to consider the interest in measuring the average claim cost under long-term disability income and long-term care coverage. The value of the disability pension can be significantly reduced due to the interest rate cut.

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Profit and Contingency Margins: As with life insurance premium rates, contingencies and profit margin must be added to the premium rate calculation. One method of doing this is to calculate a premium based on the most probable assumptions and then increase the premium by a percentage to provide some margin for contingencies and profit. Another method is to lay out conservative assumptions of morbidity, expense, permanence, and interest and set a premium on that basis. Yet another would be to develop a consistent gross premium with a certain minimum required internal rate of return.

If you would like more details on the process of pricing the premiums or would like to receive a hassle-free quote, please feel free to visit our website at http://www.health-insurance-buyer.com for more information.

About Lily Hammond

I have been working as an insurance consultant in my own insurance agency since 1998. Because I've been doing this for so long, I know every detail and I'm here to help you. You can find my e-mail address and work phone on the contact page.

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