Health insurance was born on the concept of neighbors ‘pooling’ their money together to take care of one another. It was this idea - formed in the early 1900s – that brought communities together to help each other pay for medical treatments they couldn’t afford otherwise.
As is today, usage of this pooled money varied among members – some were sicker than others and needed more care. But everyone supported each other.
Like you, I budget to pay my bills – mortgage, food, utilities, child care, and even health insurance. So when my premium goes up (yes even though I work for a health insurer that even happens to me!) I want to know why.
So I did some research. Here’s a great summary that helped me understand it in a few easy steps:
START with the average amount of claims paid out in the previous year,
ADD doctor, hospital and facility rates, medical trend costs (such as an aging population), then
SUBTRACT adjustments for shock events like pandemic flu or hurricanes and that number
EQUALS the average claim costs expected for the upcoming year. Now,
ADD insurer administrative costs (like how much it costs to run Customer Service lines), and
DIVIDE BY the number of members the health insurer has, which
EQUALS the premium amount to be paid by members
Want to learn more? Visit WhatsTheRealCost.org and be connected to Policy Pricing 101.
