Ask The Piggy Bank: How Are Health Insurance Premiums Figured?

I got this great question recently from a reader:

I really don’t use my health insurance that much, beyond preventative care visits and a couple of regular prescriptions. What is it that is causing my health insurance premiums to go up?

This is a common question that many people are asking right now. After all, the cost of health care has become expensive — prohibitively so in some cases. Indeed, I just received notice that my health insurance premium is being increased by $70 per month, starting in July.

But why is this happening? Lucky for me (and my questioning readers) there are answers. Several of them. My health insurance company was kind enough to provide a list of reasons why health insurance premiums go up. Let’s have a look:

As you can see, the insurance company highlights rising claims costs. Not just yours, but people in your “group.” I have individual insurance through a group plan. This means that if costs go up for most of those in my group, so do my costs. This is similar to employer health plans. If a few people in your company have a lot of claims, your insurance premium goes up as well. (As one of my friends says, “Who says we don’t already have socialized health care?”)

Of course, the kind of coverage you have matters as well. I have maternity coverage on my health insurance plan, which means that the base premium is a little higher. But it kind of annoying that my health status doesn’t qualify me for a lower premium. After all, I take preventative measures and live a relatively healthy lifestyle.

Wouldn’t it be nice if health insurance premiums truly factored healthy lifestyle into account? Maybe premiums could be incentivized so that you get a lower premium if your blood pressure is lower, or if you exercise regularly, or if you keep your cholesterol under control.

Age matters as well to health insurance premiums. As you age, regardless of how healthy you remain, premiums go up. After all, something is more likely to happen to you when you get older. In 2009, I find from this handy guide, I can expect two premium increases, one at the regular annual adjustment (the insurance rep assured me that, technically, my premium could go down — of course she did confide to me, in a lowered voice, that it was highly unlikely) and one when I turn 30. Happy Birthday to me, in December of 2009.

The insurance company was kind enough to offer some suggestions to help lower health insurance premiums: Switch to a different plan (based on eligibility, of course), or increase the deductible.

What I really want to know, though, is where “executive compensation” is on the list of factors. I mean, there are insurance company CEOs that make in excess of $150 million per year. And don’t forget that there are other corporate officers that enjoy large salaries and generous bonuses. Don’t tell me that supporting executive perks don’t figure into the cost of health insurance premiums. We are in an economic slowdown. Why should CEO compensation go up again (which it continues to do, in general, for most CEOs across a variety of industries). We’re to tighten our belts, but CEOs are protected from inflation by their compensation?

It’s true that this election should have some major impact on health care in this country. John McCain and Barack Obama have two very different solutions to health care in this country. (And neither of them — even Obama’s — is completely universal health care.) If health insurance premiums continue to rise, soon there will be very few people who can afford health care at all.

image credits: my scanned letter from my health insurance company