Posted in Offering health benefits | by: Lauren Fifield

How Are Health Insurance Premiums Calculated in a Post-ACA World?

For many people, health insurance can feel like it’s eons away. In fact, 83 percent of small businesses believe that providing coverage for their teams is simply too expensive today. But what actually goes into the price of premiums? In this article, we’ll help you get a better handle on how the mysterious price of a health insurance premium is calculated.

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How is health insurance priced?

Before we get into the numbers, let’s first explore how insurance carriers set the price of premiums. Generally speaking, it depends on the makeup of your team and how many bells and whistles you want your plan to have. Remember, the Affordable Care Act (ACA) doesn’t allow carriers to look at a person’s gender or medical history when calculating quotes.

Here are the main factors that determine the final price of your premium as an employer:

1. Richness of coverage

The ACA has made health plans more transparent by introducing metallic tiers based on how much coverage they offer. These tiers include: Catastrophic, Bronze, Silver, Gold, and Platinum. Platinum plans usually have the most expensive premiums, the most extensive coverage, and the lowest out-of-pocket costs. In contrast, Bronze plans have the lowest premiums, less coverage, and the highest out-of-pocket costs. While these metallic tiers can be helpful in finding a range of coverage, there are still differences between plans in each one. As an employer, you get to choose which metallic tiers to provide to your group.

2. Age of your team 

In most states, a health plan can cost up to three times more for people who are older.

3. Your team’s smoking history

Depending on your carrier and state, smokers can be charged up to 50 percent more than non-smokers. Many employers set up wellness programs to help out folks who are trying to quit.

4. Where your team is located

This adds another layer of complexity to the pricing formula. Your team’s location directly affects the cost of health care services, including how much a hospital charges for surgery, how much a doctor will charge for a visit, and other factors. There can also be local aspects that influence the price for your specific geographic region.

5. How much you want to contribute to premiums

It’s up to you to decide how much you want to chip in on premiums for your employees and their dependents, if anything. Don’t worry, we’ll cover more on contributions below.

Once you pick a plan for your company, your premium price is determined (in some states) by the age and zip code of each employee and dependent enrolled in your plan. It’s important to note that for small group plans, you’ll get the same price regardless of where you go. Companies and brokers aren’t allowed to negotiate small group medical premium costs since they’re predetermined and government-approved. For group health insurance, carriers have to submit their plans and rates to the government throughout the year to get final approval.

As you can see, there are a lot of elements that go into the cost of health insurance. In the next section, we’ll shine some light on what a typical premium can look like.

 

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How much is an average premium?*

Well, it’s all over the place. It really depends on the type of plan you pick, the characteristics of your team, and where you’re located. However, you can still get a sense of the average price people pay.

As a general rule of thumb, if you want to take less risk, you can pay a higher monthly premium. That way, if something does come up and you need to utilize health care services, your insurance company will foot more of the bill. If you pay a lower premium, you will likely end up with a higher deductible and more out-of-pocket costs if a medical situation comes up.

We also dug into the data from the Kaiser Family Foundation’s 2015 Employer Health Benefits Survey to see how the average costs broke out:

 

Monthly

Per employee
PPO $548
HMO $518
All plans $521

 

Yearly

Per employee
PPO $6,575
HMO $6,212
All plans $6,251

All about contributions

At first, you might think that the prices above are all on you. But really, you can decide how much you contribute to your employees’ premiums. Most insurance carriers require employers to cover at least 50 percent of their team’s premiums. However, many choose to contribute a greater amount because they see benefits as a meaningful way to increase their workers’ total compensation. After all, the less people worry about health, the more they can focus on the other things at hand.

Inside the Affordable Care Act it states that employers offering health plans have to satisfy the minimum value and minimum essential coverage requirements, along with making sure their employees’ premium contributions don’t surpass 9.5 percent of their total household income. If a company can’t tick off each prerequisite, the plan won’t meet the ACA standards. There’s also a special enrollment period which contains no requirement for employer contributions. Yet most of the time, group health plans do require that companies contribute a minimum amount toward their employees’ premiums.

It goes without saying that the price of health insurance isn’t the most clear-cut thing to comprehend. However, with a deeper awareness of how pricing works, you’ll feel more comfortable finding a plan with a price tag you can get behind.

 

*Disclaimer: The data shown here is from the Kaiser Family Foundation, and is used for illustrative purposes only. Your specific health insurance prices will vary.

About Lauren Fifield

Lauren is a health tech veteran and a licensed producer of accident, health, and life insurance. She currently leads benefits advising and operations at Gusto. You can get in touch with Lauren here.