Health insurance premium

What Is Health Insurance Premium?

A health insurance premium is the regular, recurring payment an individual or entity makes to an insurance provider in exchange for coverage against potential healthcare costs. This payment is typically made monthly, quarterly, or annually, and it ensures that the policyholder is entitled to the benefits outlined in their health insurance plan, such as financial protection against medical expenses arising from illness, injury, or preventive care. Health insurance premiums fall under the broader financial category of insurance, serving as a fundamental component of effective risk management for individuals and families. The premium amount is determined by various factors, including the type of plan, the level of coverage, the policyholder's age, location, health status, and the number of individuals covered.

History and Origin

The concept of prepaid medical care dates back centuries, but modern health insurance began to take shape in the early 20th century in the United States. Early efforts at social insurance, including health insurance, were endorsed by the Progressive Party around 1912. In 1915, the American Association for Labor Legislation drafted a bill requiring health insurance, though it was not enacted due to the United States entering World War I shortly thereafter.¹⁹

The Great Depression in the 1930s spurred hospitals and physicians to establish forms of insurance to ensure payment for services. This period saw the development of "Blue Cross" plans, which originated from individual hospitals offering pre-paid services, such as Baylor Hospital's plan for teachers in Dallas, Texas, in 1929. The advent of World War II and the growth of the labor movement further fostered the expansion of employer-sponsored health coverage.¹⁸ A significant milestone occurred in 1965 with the enactment of Medicare and Medicaid under the Social Security Act, establishing publicly run insurance programs for the elderly and the poor, respectively.¹⁷ These programs were designed to address the challenges faced by retired and sicker individuals in securing affordable coverage as private plans increasingly began to use "experience rating" to set health premiums.¹⁶

Key Takeaways

• A health insurance premium is the periodic payment made to an insurer for health coverage.
• Premiums vary based on factors like plan type, age, location, and health status.
• Paying the health insurance premium ensures access to benefits, including financial protection against medical expenses.
• In the U.S., average employer-sponsored family premiums reached $25,572 annually in 2024.¹⁵
• Under certain conditions, health insurance premiums may be eligible for a tax deduction.

Interpreting the Health Insurance Premium

The health insurance premium represents the cost of transferring financial risk from the individual to the insurance company. When evaluating a health insurance premium, it's crucial to consider not just the monthly payment but also other cost-sharing elements of the plan, such as the deductible, copay, coinsurance, and the out-of-pocket maximum. A lower premium often corresponds to higher deductibles or other cost-sharing, meaning the policyholder pays more out-of-pocket before full coverage kicks in. Conversely, a higher premium typically indicates lower cost-sharing amounts.

The premium also reflects the insurer's risk assessment of the covered group or individual, influenced by factors like historical claims data and projected medical utilization. Actuarial science plays a significant role in determining these rates, ensuring the insurer can cover claims while remaining solvent.

Hypothetical Example

Consider Maria, a 35-year-old single individual residing in a moderate-cost-of-living area. She is evaluating two health insurance plans:

• Plan A (HMO): Offers a monthly health insurance premium of $350. It has a $1,500 deductible, a $30 copay for primary care visits, and 10% coinsurance after the deductible is met. The out-of-pocket maximum is $5,000.
• Plan B (PPO): Has a monthly health insurance premium of $550. It features a $500 deductible, a $20 copay, and 5% coinsurance. The out-of-pocket maximum is $3,000.

If Maria chooses Plan A, her annual health insurance premiums would total ( $350 \times 12 = $4,200 ). If she remains healthy and only incurs routine check-up costs and a few specialist visits (say, $300 in copays), her total annual cost would be $4,200 (premiums) + $300 (copays) = $4,500, assuming she does not meet her deductible for other services.

If Maria chooses Plan B, her annual health insurance premiums would be ( $550 \times 12 = $6,600 ). With the same minimal healthcare usage, her total annual cost would be $6,600 (premiums) + $200 (copays) = $6,800.

This example illustrates that while Plan A has a lower monthly health insurance premium, the overall cost depends on the individual's healthcare utilization and the interplay with other plan features like the deductible.

Practical Applications

Health insurance premiums are a cornerstone of financial planning and are encountered in various real-world scenarios:

• Employer-Sponsored Plans: Many individuals receive health coverage through their employers, where a portion of the health insurance premium is typically subsidized by the employer, and the employee pays the remainder through payroll deductions. In 2024, the average annual employer-sponsored health insurance premium for single coverage was $8,951, while for family coverage it was $25,572.¹⁴
• Individual Marketplaces: People without employer-sponsored coverage can purchase plans through health insurance marketplaces established by the Affordable Care Act. Premiums on these marketplaces can be offset by federal subsidies based on income.¹³
• Self-Employed Individuals: Self-employed individuals often pay the full health insurance premium themselves. These premiums may be tax-deductible if certain IRS criteria are met, particularly if the individual reports a net profit on Schedule C or F.¹² The Internal Revenue Service (IRS) generally allows individuals to include medical and dental insurance premiums as part of total medical expenses for potential itemized deductions, provided these expenses exceed 7.5% of their adjusted gross income.¹¹,¹⁰
• Government Programs: Programs like Medicare and Medicaid also involve premiums for certain parts of their coverage. For instance, Medicare Part B and Part D often require monthly premiums.

Limitations and Criticisms

Despite their essential role in providing access to healthcare, health insurance premiums face several limitations and criticisms:

• Affordability: One of the most significant challenges is the rising cost of health insurance premiums, which can strain household budgets and business finances. Small businesses, in particular, face difficulties managing these rising expenses due to limited bargaining power compared to larger corporations.⁹ Average family health insurance premiums nationwide increased by 95% from 2008 through 2023, more than double the pace of inflation.⁸ These increases are often attributed to escalating healthcare costs, higher prescription drug spending, and increased utilization of healthcare services.⁷,⁶
• Complexity: The calculation and variation of health insurance premiums can be complex due to the intricate underwriting processes and risk modeling employed by insurers. This complexity can make it challenging for consumers to understand how their premium is determined or to compare plans effectively.
• Impact on Access: High premiums can act as a barrier to healthcare access, leading to individuals delaying or foregoing necessary medical care, or even remaining uninsured. Projected increases in premiums, coupled with the potential expiration of enhanced premium tax credits, could lead to more people becoming uninsured.⁵

Health Insurance Premium vs. Deductible

While both the health insurance premium and the deductible are crucial financial components of a health insurance plan, they represent different types of costs. The health insurance premium is the regular, recurring payment (typically monthly) made to the insurer to maintain active coverage. It is the price paid simply for having the insurance policy, regardless of whether healthcare services are utilized.

In contrast, the deductible is the amount of money the policyholder must pay out of their own pocket for covered medical services before their insurance plan begins to pay for a significant portion of the costs. For example, if a plan has a $2,000 deductible, the policyholder is responsible for the first $2,000 in covered medical expenses each policy year before their insurer starts to contribute. Payments towards the premium do not count towards meeting the deductible. Confusion often arises because both are initial costs associated with the policy, but the premium secures the policy itself, while the deductible is met through actual medical service utilization.

FAQs

Q: Are health insurance premiums tax-deductible?
A: Health insurance premiums can be tax-deductible under specific circumstances. If you are self-employed, you may be able to deduct 100% of the premiums you paid for yourself, your spouse, and your dependents. For others, health insurance premiums can be included as part of your total medical expenses, which may be deductible if the total expenses exceed 7.5% of your adjusted gross income and you itemize deductions.⁴,³

Q: What factors influence the cost of a health insurance premium?
A: Several factors influence the cost of a health insurance premium, including your age, geographical location, tobacco use, the type of plan (e.g., HMO, PPO), the level of coverage chosen, and the number of people covered under the policy. Insurers use complex underwriting processes and actuarial science to determine these rates.

Q: Why do health insurance premiums increase each year?
A: Health insurance premiums typically increase annually due to a combination of factors, including rising healthcare costs, increased utilization of medical services, advancements in medical technology, higher prescription drug prices, and inflationary pressures within the economy.²,¹ Insurers also adjust premiums based on the claims experience of their covered population and their risk assessment.