How is health insurance priced?

I’m wondering how prices are being determined relative to risks.

In the past (10 years ago at least) I was involved in shopping for and administering our company’s group health insurance plan.

IIRC … there were only 3 rates…


I don’t recall age being factored into the equation.

Nor do I recall gender being a factor.

Nor do I recall the family size being a factor.

Am I misremembering? Wouldn’t it make sense for them to be?

Are group plans different than individual plans?

If you’re talking health insurance from your employer, ie “group plans”, a single price is figured which represents an average of all that across the people in the group.

If you work for a small company and 3 wives had kids last year & two older folks had surgeries, your rates can get stupid huge even though you’re single, male, 25, and a non-smoker.
OTOH, If you were trying to price an individual policy purchased by you directly from Giant MedicalInsuranceCorp, they’d take all those factors about you personally into account.
Most of the current flail about health insurance reform comes down to dealing with how to price a product where some customers are all but sure to cost the insurance provider $50,000 per year in and year out, while other customers are likely to cost only $50 per year.

Group plans are priced differently than individual plans.

The basic plans for groups are priced generally and are not person specific. They are simply a per person rate to the company/organization.

The basic plans for self-insured individuals/families are priced based on a small set of actuarial data but will vary from person to person and family to family. Factors like age, profession and health history would apply.

More complex or valuable plans might involve individual scrutiny by an actual actuary.

Some group policies are now taking into account family size. I pay more for 2 kids than I would if I only had one, for example. 5 years ago that was not the case; didn’t matter whether I had 1 kid or 20.

The *only *insurance person I have talked to recently claimed that the price they charged me (Medicare Advantage) was based upon their contracts with the doctors in the community and had nothing to do with me.

There is usually also ‘Single with kids’.

When I first got involved in determining the company’s health plan about 12 years ago, we were offered differential rates for men and women (women higher). That stopped a few years later and for some time all the plans I have looked at have been the same for men and women.

Interesting… can others confirm that his is now more common and wasn’t done in the past?

I’m not sure that I follow this response but now that I think about it… when shopping for group policies 10-12 years ago we did provide a census with all the pertinent gender, age, size of family info.

Those factors were probably considered even though the end result was a quote with premiums that seemed to disregard them. For example a single male age aged 25 was charged the same as a single female aged 25 or a single male aged 70.

Why would they do that rather than be more precise with regard to gender, age, size of family etc. ?

I was declined by every insurer licensed in my state (pre existing condition). In the last 10 years I have spent about $1000 (out of pocket) on treatment of this condition (one minor surgery and a few biopsies). When recently trying to get a group plan, I was told adding me would affect the rates by between $3,000 and $4,000 per month.

I am in my 30s, do not drink, do not smoke and am not overweight.

They certainly do not use any real world individual analysis to determine fees… $480,000 of premiums in ten years for something I have spent $1,000 on???

In a large group you have what is called composite rating. Basically it’s what you describe, there is simply a price that is charged per employee regardless of age. The only ratings would be employee, employee plus spouse, employee plus children or employee plus spouse and children. With a group that size the individual people’s situation isn’t as much of a factor because the risk is being spread around a lot more.

In small business policies (defined at least in CA as 2-50 employees) we have what is called age-band rating. You have the same definitions as above, plus age bands that determine the rate. The age bands being, 20-29,30-39,40-49,50-54,55-59,60-64 and 65+.

Since you’re talking 10-12 years ago, some small groups were also offered composite rating but that is mostly not the case these days.

Health insurance pricing practices differ considerably by country. In Australia the principle of Community Rating applies to health insurance, and thus the rate charged is the same for all, regardless of age, sex, health status etc.

So why not just consider everyone insured by the insurance company to be a group of say 5 million?

Because some insurance companies discovered that if you exclude the customers with the potential for high medical expenses, you can charge less than the insurance companies who don’t exclude higher risks.

It’s a race to the bottom; the most successful company will get paid premiums from people with very little risk of illness. Everybody else can go fuck themselves.

I honestly don’t know why the insurance companies oppose the public option; it would soak up all the riskiest customers who have all been turned down by private insurance the way Medicare did, and leave the young healthy ones for them to suck dry.

It would be a similar principle to auto insurance, home insurance, loans, etc. You could ask the same question about a bank. Why don’t the charge the same interest rate to everyone and consider all of the loans the same risk pool?

Although to some degree, everyone is considered to be in a big pool. There is a ‘base’ rate. That base rate is then raised for higher risk groups (very small companies, older people, families) and lowered some for others (large companies, young people).

Side tidbit; One of the quirks of the rating system is that someone in their 40’s with kids will usually pay a little less than someone in their 30’s with kids. I’m not an actuary so this is a guess, but it’s probably because someone in their 40’s has older kids and is less likely to be a risk with childhood illnesses and injuries.

I suspect they are also less likely to get pregnant; which, judging from my better half’s twice-a-week OB plus weekly perinatologist and twice-monthly hematologist visits can be damned expensive.