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Health Insurance: How Are Rates Determined?

(5/24/2012) Health insurance is a hot topic in today's economic and political climate. With the rising cost of healthcare, insurance premiums are also rising, making it difficult for many to obtain and afford a good policy. To understand this situation, and why premiums take such a chunk of your monthly income, it helps to know how insurance companies determine their rates.

First know this. Health insurance companies and the premiums they charge are regulated by each individual state. The insurance oversight office in each state reviews rates, approves premiums and increases, and ensures the viability each insurance company in the state. The state sets a maximum that a company can charge overall for individual plans.

When an insurance company gets approval from the state on their premium rate, they then set individual premium prices based on demographic criteria, lifestyle information, and medical conditions. Ultimately, companies are looking at risk - how likely are you to require coverage for standard health services, and those services that are more expensive? To determine this they look at the following things:

DEMOGRAPHICS
Your age is a primary factor. Insurance companies put a lot of stock into statistics, and statistically and realistically older adults receive more medical care. Insurance companies need to provide more coverage, so the older you are the higher your rates will be. In addition, your zip code is crucial. Health insurance companies make calculations based on the state and county you live in, and they consider the typical amount of health care services and costs in your area when determining rates. Finally, your occupation can also dictate rates. Some industries, like nursing, construction, and teaching, are more prone to filing claims than those working office jobs. Insurance companies will therefore charge higher rates.

LIFESTYLE AND HEALTH
If you have medical conditions like diabetes, HIV/AIDS, cancer, high blood pressure, or even asthma, or you've had heart attacks or strokes in the past, you are considered a risk for requiring lots of insurance coverage in the future. That means companies will charge higher rates. But even if you don't have a diagnosed condition, but are overweight or engage in behaviors such as smoking, you are considered to be prone to medical conditions. Thinking about potential future expenses, insurance companies will raise your rates.

EMPLOYER
Are you receiving health insurance from your employer? If you're in a group plan, the insurance company will consider your health but also the health of all your colleagues. This can actually work in your favor - group plans spread risk over a wider group of people. The bigger the company, the more the risk is spread out. So rates are typically lower.

COVERAGE SELECTION
Some types of insurance plans require a deductible to be met before they reimburse policy holders. Those with higher deductibles will have lower premiums per month, and those with lower with pay more each month.