The Business of Insurance: Demystifying Health Insurance Rates

In the last year, health insurance premiums and health insurer administrative costs have been under intense attack. To many, it seems the process to determine insurance rates is vague and mysterious. We explained the administrative cost issue in our papers “Medicare’s Hidden Administrative Costs: A Comparison of Medicare and the Private Sector,” and “How High Loss Ratios Undermine Affordable Health Insurance.” Given the attention, it is past time to explain

the health insurance rate-making process. 

The rate-making process is not all that mysterious. Mathematical experts called actuaries apply probability, statistics and risk theory to craft real-world premium rates. Insurance companies combine risks to create an average rate (usually

called a community rate) but also modify those rates to reflect certain individual factors including demographics (region, age, gender, etc.) and underwriting (a person’s health status). Understanding the interplay of all these factors (pooling, demographics, and underwriting) is important to understanding health insurance premiums. Similar to the mortgage market, too many policymakers want to ignore economic realities to promote a perceived social good.

Click Here to read the full article and learn: What drives health insurance prices?