Why do quotes from different health insurance companies vary so much?

Health insurance quotes from various companies can be drastically different, as you may have noticed, due to the way premiums are calculated. Not every health insurance company will qualify you for coverage with the same formula or gives the same value to all types of conditions. Different groups of people in different geographic locations have varying health care needs.

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According to the National Conference of State Legislatures, the cost of providing routine health care coverage to the average American family is well beyond $13,000 annually. That’s pretty substantial when you consider you can get an auto policy for under $1,500, a pretty comprehensive homeowner policy for under $1,000, and a standard life insurance policy for $1,200-$1,800.

Why does health care insurance cost so much money?

There are a variety of factors consistently driving up the costs of health insurance. We won’t get into all of them here, but one of the primary reasons is the very structure of the health insurance industry itself. This can be clearly seen when you understand the difference between “insurance” and “assurance.”

Insurance is designed to protect against financial loss in the event of a catastrophic event that may, or may not, happen. In other words, you carry car insurance to protect you in the event of a future accident. If you never need to make a claim, your car insurance company benefits.

The opposite scenario puts you on the winning side of the equation- aside from the fact that you had a car accident. Both you and your health insurance company are taking a calculated risk by engaging in an insurance contract.

By contrast, most modern healthcare plans are those of assurance rather than insurance. We pay our health insurance premiums with the expectation that we will see the doctor on a regular basis. We know we will have our children vaccinated, our wives and mothers will seek maternity care, and once in a while someone will get strep throat.

In other words, our premiums are not going toward protecting us against catastrophic loss in the event something might happen in future. They pay for medical bills that almost definitely will be incurred on a regular basis.

Essentially then, modern healthcare coverage is more of a third party bill paying system than actual insurance. All of the people involved in processing insurance claims must be paid, as do the company management, shareholders, and other employees. All of that is built into the price of our health insurance premiums.

Furthermore, because most of us never see how much a given medical procedure costs, we think nothing of going to see the doctor when it’s probably not necessary. This also adds to the cost of coverage.

How do health insurance companies determine rates?

Health insurance companies use a mathematical formula that takes the information provided by customers and compares against statistical data relating to various groups of people and geographic locations. Since not every company uses the same formula, their rates may differ accordingly. What needs to be understood is the fact that the more potential you create for generating medical bills, the greater your premiums are going to be.

Health insurance companies look at your age and sex, your lifestyle choices, your medical history, and the overall health picture of your local community and your insurance group. You might be interested to know that insurance company actuaries have become so skilled, they can predict fairly accurately how much each individual subscriber will generate in insurance claims.

How high can health insurers raise my rates?

There are a lot of government regulations for health insurance companies today. The health insurance is regulated heavily at the state level by the insurance departments of the various states. Therefore, rate increases are governed according to individual state law.

Health insurance companies can’t just raise their rates because they feel like it. Most states require insurance companies to petition them for rate increases before such increases can be implemented. The state insurance department will review the petition and issue a ruling one way or the other.

As the Cato Institute’s Alan Reynolds correctly observed in a March 2010 article, very rarely do health insurance companies get permission to raise rates as high as they’d like. How much health insurance companies charge individual subscribers and groups is up to state insurance departments. Perhaps both insurance companies and government entities need to be held accountable for rising rates.

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