How do health premiums get set?

Aetna Chairman, CEO & President Ronald Williams speaks as Pennsylvania Insurance Commissioner Joel Ario and Human Services Secretary Kathleen Sebelius look on during a meeting with insurance company executives at the White House in Washington, D.C.


Kai Ryssdal: Executives from some of the country's biggest insurance companies met with Health and Human Services Secretary Kathleen Sebelius today. And she had a couple questions for them. Like, what's the deal with those huge premium increases they've announced lately? And, how'd you come up with the numbers, anyway?

The official answers are going to take a while, so we asked Gregory Warner at the Marketplace Health Desk at WHYY in Philadelphia to fill in the blanks.

GREGORY WARNER: It starts with the rating manual. Every insurance company has one. But few people are allowed to see it.

JOHN VATAHA: Highly proprietary information.

John Vataha is an actuarial consultant. He's been hired by insurance companies to review their rating manuals. It's strictly confidential.

VATAHA: They make me sign a statement that says, we're basically letting you look under the hood, but you aren't allowed to go and tell anybody else what you saw.

Let's say a small company wants to buy insurance. The insurance company will use the rating manual to assess the risk of each employee, based on various factors. So, let's say somebody in that company is like me: 35 years old, white male living in Philadelphia. Vataha chooses a round number to start with, say, a premium $100 a month.

VATAHA: So you start with that. And then you adjust and say OK, if a $100 is the average, and I'm in downtown Philadelphia, that might be a 10 percent increase factor.

Because Philadelphia is a city with lots of teaching hospitals where there are more specialists, and care tends to be more expensive.

VATAHA: So now I'm up to a $110.

But, I'm a white collar worker...

VATAHA: Which might be a 5 percent less than average.

Because my on-the-job accidents are limited to getting my ego bruised.

VATAHA: So now I'm down to a $105. Until you've exhausted all the different rating factors, and you would come out with your final rate.

You didn't think it was that easy, right? The most important rating factor of all isn't listed in any of those tables.

VATAHA: You can't look up a rating manual and see a factor that says, "adjustment for anti-selection."

"Anti-selection" is the enemy of insurance company profits.

Anti-selection is when healthy people tend to sit out and insurance companies are left covering more sick people than they planned on. It's not a big deal in large companies, where pretty much every employee -- sick or well, young and old -- is on the policy.

But small businesses have a big turnover rate with insurers and with their employees. That's a riskier bet for insurance companies. Each year an insurer is looking at 30 percent of their policyholders being replaced. Every new employee is someone who can decide whether he wants to buy into the plan, based on whether he thinks he'll need it that year.

ED KAPLAN: In essence, the buyer is more nimble than the insurance company.

Ed Kaplan of the benefits consulting firm the Segal Company says basically: You can quit them, but they can't drop you.

And so insurance companies raise the price of your premiums to insure themselves against loss in case you leave them. That's the price that more and more people can't afford.

In Philadelphia, I'm Gregory Warner for Marketplace.

About the author

Gregory Warner is a senior reporter covering the economics and business of healthcare for the entire Marketplace portfolio.
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There's also the fact that in many, and possibly all, states, insurers are required to cover lots of things, many of which are used by healthy people. If the government treated auto insurers like health insurers, auto insurance would cover checkups and replacement of worn-out parts, if not gasoline, and would eventually cost more than the car being insured. Remember that insurance is a bet on our part that we will need care and on the insurer's part that we won't; making the insurer bet against a certainty is probably the biggest cause of rate increases.

Healthy people don't join health insurance plans because of cost, yet they drive up the cost, which seems to give even less incentive to these same people to join a health plan in the first place. This starting to sound like a weird Twilight Zone episode: "How Healthy People Destroyed Health Insurance."

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