Premiums: Keeping the Pool Full
If your employer offers you health insurance coverage, your premium payment is probably taken out of your paycheck without much notice.
But what exactly does that premium do, and why do you pay for that, in addition to deductible and co-payments when you get care?
Spreading the Risk
“What you do with insurance is your spread risk,” said Debra Muller, Chief Administrative Officer of Avera Health Plans. “You collect a monthly premium, the premium goes into a pool and then the money is used to pay medical expenses for people who received services during the time the policy was in effect.”
The money that everyone contributes to the pool, their monthly premium, would have to be a lot higher if you didn’t have deductibles, co-payments and coinsurance that you pay when you receive services. So when you head to the emergency room, for example, you’ll still have additional costs.
“You’re paying a monthly premium to make sure that when you do need it, you have coverage for those services,” Muller said.
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The co-pay is a fixed rate used to defray part of the cost of a service such as a doctor’s visit and sometimes even a stop at the ER. The deductible is the amount that must be paid before the insurance company starts taking money out of the pool to pay for your doctor or ER visit.
As co-pays have become more popular, Muller said people have gotten used to paying that fixed rate for services and are sometimes taken by surprise when a deductible is introduced.
“We have led people to believe that health care costs $20, when in reality it costs much more than a co-pay” Muller said. “It’s the co-pay when you go to the doctor’s office, it’s what you pay when you get prescription drugs. Most people don’t experience the full breadth of the health care delivery system costs until they have an accident, they’re sick or have a child. That is when you learn about deductibles and out-of-pocket limits.”
So what exactly makes up the cost of a premium? It includes the costs of services — inpatient, outpatient, physician services and pharmaceutical services, Muller said. Administrative costs and premium taxes paid to the state and federal governments also must be factored in.
Federal subsidies help cover the cost of individual plans for those who are eligible for tax credits and employers typically cover 70 – 80 percent of the total cost of a premium for a single employee. “When you start adding in what others, the government or an employer contribute to the cost of a monthly premium, I think that individuals would be floored by how much the actual cost of a premium is,” Muller said.