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Health Insurance Basics

Breaking Down Insurance Premium Costs

June 19, 2018
Most people who pay for health insurance pay a monthly premium. According to the Association of Health Insurance Plans (AHIP), that monthly payment covers medical care and costs involved with providing insurance. Here’s how that monthly cost breaks down.

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Most of Those Dollars Go to Medical Expenses…

About 80% of each dollar paid in your premium, or monthly payment, goes toward health care costs and quality improvement activities. The other 20% is used to cover the health insurance company’s administrative overhead. This is called the 80/20 rule.

This is required by law under the Affordable Care Act, which was designed to:
  • Make health insurance more affordable for more of us.
  • Expand Medicaid, jointly-funded federal-state health insurance for low-income people.
  • Encourage new methods of care delivery that lowers costs.

Here’s How Healthcare.Gov Breaks down That 80%: 

  • 2.1 cents for prescription drugs, which include outpatient, physician- and self-administered medications. This doesn't include those given in in-patient settings.  
  • 22 cents for doctor services.
  • 19.8 cents for outpatient services, like ER care, labs, imaging clinics, physical therapy, urgent care, etc.
  • 15.8 cents for inpatient services, typically hospital care.

How is the Remaining 20% Broken Down?

Two other categories represent the remaining 20%.
  • 18% or 17.8 cents for operating costs, including communicating with plan members, running customer service operations, quality reviews, data analysis and other activities.
  • 3%* of every dollar is the profit for the health plan. 

How to Reduce Insurance Premium Costs

  • Ask for help from your human resources department or your insurance broker to learn about and choose your most affordable health plan.
  • Remember that using doctors in your plan costs less than going “out-of-network.”
  • See if a consumer-driven health plan (CDHP) such as a high-deductible plan with lower premiums might be right for you.
  • Consider starting an HSA, flexible spending arrangement (FSA), or health reimbursement arrangement (HRA). These plans have tax advantages.
  • Use prevention and wellness services, especially if you've been advised by your doctor to make lifestyle changes to improve your health.
  • Use urgent care instead of the emergency department for non-emergency care.
*AHIP: "Values exceed 100% due to rounding."
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