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I'm Healthy. So Why Does My Health Insurance Premiums Increase Each Year?

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Updated November 07, 2011

Question: I'm Healthy. So Why Does My Health Insurance Premiums Increase Each Year?
Toward the end of each calendar year, we begin to hear from our employers' human resources departments, or from the insurers and payers who oversee our health coverage about how much we'll have to pay for coverage the next year. Each year those premiums increase, sometimes by double-digit percentages. Why is health insurance so expensive? And why do I have to pay more every year, even if I'm healthy?
Answer:

Health insurance premiums go up because medical costs increase. Doctors need to be paid more, drugs are more expensive, testing technology gets more sophisticated and expensive, and so forth.

If we understand how health insurers determine their annual premiums, then it's easier to understand why it gets more expensive, even when we are healthy.

How health insurance premiums are determined:

Each year, the insurer will develop profiles of its patients, then figures out how much that profiled patient will cost. For example, one profile might be for male children, age 2 to 6. The insurer will determine an average number of doctor visits each child will need, how many vaccinations he will need, how many times he'll fall and need stitches, etc.

Another profile might be for a woman age 45 to 55. This woman will need a checkup, a mammogram, perhaps a colonoscopy or a bone scan. She'll need a blood test for diabetes or cholesterol. If she's fairly healthy, she may still need to take one or more drugs, perhaps a statin to prevent heart problems.

The insurer will also expect a certain number of surgeries, medical tests, accidents, and other possible medical needs for each of its profiled patients.

Using those profiles, multiplied by the number of patients they expect to insure for each, the insurer can estimate what its costs will be. Additional amounts for expenses and profit will be added to the total. Then they'll do the math to find an average cost per patient or family. That will be your annual premium.

Each participating individual or family will pay the same premium amount, regardless of the health of the individual or family.

If you are employed, then you and your employer may share your premium cost. If you don't have an employer to help you pay your premiums, the entire cost will be yours. That's assuming, of course, that you don't have a pre-existing condition that might eliminate the possibility of being insured.

If you are healthy, then your premium cost will be far more than it would actually cost you to get care over the course of a year. You might pay thousands of dollars, and need only one visit to the doctor or one prescription. You spend the money on the premiums because you don't want to risk footing the bill for a major accident or illness.

If you are less healthy and a bit older, meaning more screenings are recommended each year, then you might come out about even. Your several thousand dollars in premiums might be close to the actual cost if you paid out of pocket for those tests and doctor visits. Still, you spend the money on the premiums because you don't want to risk major expense should you be diagnosed with a difficult disease or be hurt in a fall or other accident.

If you are sicker, especially if you are older and sicker, then your insurance premiums will be a real bargain. For those with a chronic disease like diabetes or heart problems, or for someone diagnosed with cancer or any debilitating disease, your actual cost of care, if you paid from your own pocket, could be hundreds of thousands of dollars.

If you are over age 65 and receive Medicare, your care coverage will be a real windfall. You'll get the care you'll need based on the fact that you are past retirement age. For most, you will have paid into that fund throughout your working career. But if you have a chronic disease or are diagnosed with any debilitating disease, your return on that lifelong investment will be huge.

Now let's look at the bigger picture -- the population of the entire country. Our population is aging, and as the entire group ages, then the entire group needs more health care. Older people have developed chronic diseases over a lifetime. They are more prone to life threatening diseases like cancers or Alzheimer's disease than younger people are.

New babies are being born, of course. But we are also dealing with higher incidences of children with autism and other problems which contribute to the cost of care across the population.

More and more people can't afford the cost of insurance. Especially in difficult economic times, fewer people purchasing insurance will mean higher expense for those who do purchase coverage.

What can we do to lower the cost of insurance premiums?

First, know that lowering the cost of insurance is not the same as lowering the cost of health care in general for us as individuals or families. The cost of health care is spread across the entire population as described above.

Second, if you are in the "sicker" category described above, or in the over age 65 group, then you probably can't get health coverage less expensively than what you pay now.

Those who are fairly healthy, or who have access to more than one plan through their employers can have some control over individual costs of insurance, including the price paid for premiums, deductibles and co-pays, as follows:

  • Each year during the health insurance enrollment period for the next year, or at the time you change jobs or for any other reason change insurance coverage, take some time to do the actual calculations to choose the best plan for you. Depending on your needs, the premiums may not even be the most expensive part of your care.

  • Consider high-deductible, catastrophic care insurance. These plans have much lower premiums and work well for people who are mostly healthy. If you choose one of these plans, you can also choose to use a Health Savings Account which is a way to make your health expenses tax-deductible and helps you save the money you may need later for health expenses. It also helps you limit the amount that gets sent to the insurer in the form of premiums.

  • Figure out whether you are eligible for a state-run healthcare subsidy program like Medicaid or others. Each state has different programs.

Learn Why "Follow the Money" Is the Answer to More Health Insurance Questions:

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