How are health insurance premiums calculated?

The ACA restricts how premium rates can be set, based on factors like the number and cost of plan benefits, your age, geographic location, family size and tobacco use.

The cost of health insurance factors in state and federal rules, as well as mathematical and statistical methods to assess risk in the insurance industry. Companies selling health insurance are businesses. They need to set premiums at a level that at least covers the costs of selling the policy, administering the policy and maintaining adequate funds to pay claims relating to the medical benefits provided to subscribers. If these costs are not covered, the company may not be able to pay their own bills. Premiums are used to cover the costs insurance companies need to stay open. An Affordable Care Act (ACA) provision requires that insurance companies use the money collected from premiums to primarily cover direct health care related costs, not on their advertising or other overhead costs.

The largest factor in determining how much a premium will be are generally the number and cost of benefits provided in that specific plan. The ACA is also restricting how premium rates can be set. Beginning in 2014, policies cannot charge you more based on pre-existing conditions such as diabetes, asthma, pregnancy or a disability.

Health care plans are only allowed to adjust the price of the premium based on these factors:

  • Age (the most expensive premium can only cost 3 times more than the least expensive premium based on age)
  • Geographic location (premium prices in the marketplace may vary depending on where you live)
  • Individual-only or family enrollment plans (the number of people covered on the plan will affect the premium costs)
  • Tobacco use (premium costs for tobacco users can be no more than 1.5 times higher than premium costs of non-tobacco users)

States can make modifications to these factors so that the premium prices would have even less variation.

Keep in mind that the best choice for your personal situation may not be the least expensive policy. Several tools are available to help you make a decision, such as worksheets that help you consider your healthcare needs and ability to pay.

For more answers to your questions about health insurance, go to healthcare.gov Q&A or the Health Insurance FAQs - eXtension. Also see previous news articles about health insurance choices at the Michigan State University Extension website.

MSU Extension plans to provide education about health insurance basics this fall, including the why, what and how for making a smart decision. Delivery will include online webinars with access by all Michigan residents as well as group presentations.

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