Where Does Health Insurance Money Go

The cost of health insurance premiums can be overwhelming, and every year brings the dreaded premium increases, sometimes with reduced benefits. This begs the question: How does your health insurance company spend the premiums collected? 

Your premiums go toward the health care costs covered by your plan. According to Health Affairs (HA), published by Project Hope, the following combined expenditures accounted for 61% of total national health spending in 2019:

• Hospital care
• Physician and clinical services
• Prescription drug retail purchases

Breakdown of health care dollars

Data reported by America’s Health Insurance Plans (AHIP), a national trade association for health insurance providers, is consistent with HA findings in terms of the highest proportion of expenditures going to hospitals, pharmacies, physicians and clinics. 

Using cents on the dollar, AHIP provides an infographic that displays how plans spend your premium payments on average. The data includes employer-sponsored and private health insurance plans from 2016 to 2018. From the highest to lowest expenditure, here is how AHIP breaks it down:

1. 21.5: Prescription drugs
2. 19.8: Outpatient hospital care, excluding emergency room care
3. 19.0: Inpatient hospital expenses
4. 12.1: Physicians and clinics, including urgent care centers
5. 6.0: Outpatient care in ambulatory surgical facilities, laboratories, dialysis facilities or at home
6. 4.6: Taxes and fees paid by the insurer
7. 4.4: Administrative cost of doing business with items like rent, utilities, marketing and equipment
8. 3.2: Emergency room
9. 3.1: Fees and business expenses, including compensation to agents and brokers
10. 3.0: Profit (total revenue minus expenses)
11. 2.4: Cost containment, such as fraud prevention, the appeals process and managing networks
12. 0.8: Quality improvement, which refers to hospital readmission prevention, patient safety, wellness promotion and information technology

How insurance companies determine premiums

Following are five factors that contribute to the monthly premium amount you pay. Health care law prohibits insurance companies from pricing their policies using any other factors.

1. Age
2. Location
3. Tobacco use
4. Enrollment as an individual or with family members
5. Category of plan, which ranges from bronze (lowest premiums) to platinum (highest premiums)

Considerations

If you are applying for private health insurance, here are a few suggestions to reduce your premium: 

• Shop around, but avoid looking at price only. You want to be sure you get the coverage you need.
• With a high-deductible plan, you pay more out-of-pocket for medical expenses, but premiums are lower. If your overall health condition is good, this may be a good choice for you.
• Modifying certain lifestyle behaviors, for example, smoking cessation, allow for more favorable insurance rates, not to mention better health.