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Decoding Health Insurance Premiums: Understanding Where Your Money Goes

Updated: Aug 7, 2023

Do you understand what your health insurance premium is actually paying for?

As healthcare premiums continue to rise, it is increasingly important to understand how health insurance premiums work and how insurance carriers utilize that money.

In 2022, individual coverage premiums rose from an average of $5,049 annually in 2010 to $7,911, according to the 2022 Kaiser Family Foundation Employer Health Benefits Survey. Over the same period, family coverage premiums rose from $13,770 to $22,463.

A better understanding of what your premium payments cover can help you identify ways for your business to gain control and save on benefits costs.

What is a health insurance premium?

A health insurance premium refers to the amount of money an individual or employer pays to an insurance company or health plan provider in exchange for health insurance coverage. It is typically a recurring payment made on a monthly, quarterly, or annual basis, depending on the terms of the insurance policy.

The premium serves as the primary source of funding for the insurance company, allowing them to cover medical expenses and provide the benefits outlined in your policy. Your premium is calculated based on various factors, including the age, location, and health status of the insured individuals, as well as the coverage options selected.

How Carriers Utilize Your Premium Payments

Insurance carriers utilize an employer group's premium payment in several ways to provide healthcare coverage and support to employees.

  • Claims Payments – When employees seek medical services, such as doctor visits, hospital stays, surgeries, medications, or diagnostic tests, the insurance carrier reimburses healthcare providers for those expenses from the premium pool.

  • Administrative Costs – Insurance carriers allocate a portion of the premium funds to cover administrative costs such as claims processing, customer service, maintaining provider networks, managing regulatory compliance, and investing in technology infrastructure to support efficient plan operations.

  • Provider Network Agreements – A portion of your premium payment is used to fund provider network agreements, ensuring access to a broad range of healthcare services at negotiated rates.

  • Risk Management – Carriers analyze the risk profile of the employer group by monitoring claims trends and setting appropriate reserves to ensure the financial stability of the plan. Premium funds are used to establish and maintain reserves that help mitigate the financial impact of unexpected high-cost claims or fluctuations in claims experience.

  • Profit and Capital Growth - As profit-driven organizations, insurance carriers will allocate a portion of the premium funds towards generating profits and sustaining their operations. Many carriers invest in growth initiatives, improve services, and develop innovative solutions to enhance the overall healthcare experience for members.

  • Health and Wellness and Programs - Wellness initiatives aim to promote preventive care, healthy lifestyle choices, and disease management to take an active role in employee health, ultimately reducing long-term healthcare costs.

Gain Control Over Your Premiums with Self-Funding

In a traditional fully insured plan, the employer purchases a contracted health plan that assumes financial responsibility for enrollees covered medical claims costs. You are contracted with an insurance carrier and paying predetermined premiums to transfer the financial risk of healthcare expenses to the insurer. The carrier assumes responsibility for paying your employees’ medical claims.

As discussed, those premium payments can be used for a variety of purposes, and it’s the carrier’s choice on where to allocate that money.

Conversely, with a self-funded plan, your company would directly assume the financial risk of providing healthcare benefits to your employees. Rather than paying a fixed premium to an insurance company each month, you would set aside funds to cover the anticipated healthcare costs of your workforce. Any unused premium set aside for the year can be reinvested back into the company.

Getting started with a self-funding plan takes careful consideration and planning. There are many details to consider, and it can seem overwhelming. The best place to start is with a trusted benefits advisor like Ascela.

Our team of experts can do a full evaluation to determine if a self-funded health plan is right for you—contact our team today.


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