Premiums are set fees that you pay on a monthly basis to maintain coverage. They may be paid directly by you or by your employer (in a group health plan) or by the insurance company.
The premium and other costs you pay for your health care services, like deductibles, copays and coinsurance, can have a big impact on your total healthcare spending. Understanding them can help you find the right health insurance plan for your needs and budget.
How premiums are determined
Whether you are buying health insurance, life insurance, car insurance or any other type of coverage, the premium amount you pay is an important part of the overall cost of coverage. Insurers rely on a variety of information--actual, forecast and statistics--to determine the premium they want to charge.
Premiums are set by actuaries, who use these information to develop rate determination criteria and then underwrite a policy. Generally, the rate is based on class ratings, which are a statistically sound way of grouping similar risks together.
Actuarial studies also determine the pure premium, which is that part of the premium necessary to cover losses and loss-related expenses. A loading charge is added to the pure premium to help cover other expenses, especially sales expenses and to allow for a profit.
Five factors can affect a plan’s monthly premium under the health care law: age, location, tobacco use, plan category and whether the plan covers dependents. Each factor has its own price-setting mechanism, but they all together help insurers attract and retain clients.
How they are calculated
The premium amount for a health insurance policy depends on the risk covered. Insurers use data gathered from hundreds of different sources to calculate the premium.
Various factors play a role in determining the insurance premium, such as the average age of people being insured. This is because young people are less likely to have chronic illnesses than older people.
This helps to keep the premium costs lower.
It also allows the insurer to spread the cost of sick people over a wider base of healthy individuals.
Moreover, this can help to avoid adverse selection, whereby healthy people choose not to buy insurance, leading to higher premiums.
How they are paid
A health insurance premium is a monthly fee that you pay to an insurance company or health plan to maintain coverage. It's an obvious cost that most people pay on a regular basis, and it's important to understand because it can have an impact on your total health care spending.
The premium amounts you pay for a health plan vary from one insurer to another, and they can also depend on factors such as age, zip code, and tobacco use. But the biggest factor that affects your premium is your income.
If you have health insurance through your employer, your employer will often pay some or all of your premium. But if you buy your own policy or you're self-employed, you may have to pay the premium yourself. But if you're eligible for federal premium tax credits (subsidies), these can help offset some or all of your premium payments.
How they are refunded
The good news is that if you have a health insurance policy, you may be entitled to a refund. This is because a law known as the Affordable Care Act requires insurers to spend at least 80 percent of your premiums on medical claims or other initiatives that benefit you.
The rule is called the “loss ratio,” and it applies to both individual and group plans. That means if your insurer doesn’t meet that target, it must refund you the difference.
How much you get back varies by market. This year, the Kaiser Family Foundation estimates that more than 10.7 million ACA-eligible policyholders are due refunds of $2.1 billion.
You can find out whether you are owed a refund by checking your mail or calling your insurer. Your insurer will usually send you a refund check or credit toward future premiums, and it must make a good faith effort to contact you.