Where Does Your Health Insurance Premium Go?

Most of each premium dollar pays for medical care and prescription drugs. Much of the rest funds efforts to make the health care system more effective and efficient.

Health plan members are responsible for a few types of payments for having coverage and getting care.

Copays and other out-of-pocket expenses clearly contribute to the cost of specific treatments or prescription drugs. The destination of premium dollars, however, may seem somewhat mysterious.

That may be frustrating, especially since premiums have been on the rise for both employer-sponsored and retail plans. America’s Health Insurance Plans recently helped shed some light on where premium dollars go.

The vast majority — about 82 cents of each premium dollar, on average — pay for medical care and prescription drugs, according to an analysis for AHIP by the consulting firm Milliman.  Prescription drug costs now account for the biggest single chunk, at 23.3 cents, AHIP says.

Only 2.3 cents of the premium dollar goes to insurers as net profit, while 4.7 cents pays federal, state and local taxes.

Much of the rest covers insurers’ operating expenses and efforts to make the health care system more effective and efficient.

This includes staffing call centers 24/7, educating members on their health and benefits, hiring nurses and case managers and developing preventive care programs to help members quit smoking or lose weight.

Investment in technology and analytics (1.6 cents) helps keep members’ information secure and allows insurers to dive deep into data for insights that help doctors and hospitals deliver higher quality and more cost-effective care.

Another piece of the premium dollar (1.6 cents) pays for financial functions like paying claims and determining eligibility. This category also includes investigations that root out fraud, waste and abuse, which save money and prevent harm to members.

AHIP’s breakdown changes year to year as costs change. For instance, in 2017, AHIP reported 79.7 cents of the premium dollar went to medical care, as opposed to 81.8 cents in this year’s report. That growth is likely due to rising costs of prescription drugs and other medical costs.

“Plans use a meaningful part of premiums to make coverage more efficient and effective,” said Matt Eyles, incoming president and CEO of AHIP. “But as prescription drug prices and medical costs continue to rise, it forces premiums higher for hardworking American families.”

AHIP randomly selected 25 not-for-profit health plans and five for-profit health plans for the analysis. The breakdown reflects average annual profits and amounts paid for medical care and operational expenses from 2014 to 2016.

Blue Cross and Blue Shield Plans in Illinois, Montana, New Mexico, Oklahoma and Texas are not owned by investors, so profits are not paid to shareholders. That means they are able to focus on optimizing — not maximizing — their profits.

The Plans’ net gains are invested in technologies and capabilities that improve the health care experience for members. Profits also ensure appropriate reserves are available in years when medical costs are higher than expected.

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