How to determine health insurance costs

According to a survey that was done in 2006 by America's Health Insurance Plans (AHIP) the average premium for small group health insurance was $311 per month per employee and $814 per month for family coverage. In fact AHIP surveyed 21 of its member insurers that offer coverage to more than 650,000 small groups that employ 4 million workers and their 3.2 million dependents. But even knowing what the average was many companies are unaware of how these rates are actually determined. What you might not know is that there are numerous factors that go into determining health insurance costs, but one thing that varies greatly is the rules of the state that you are getting insurance in.

Insurance premiums that health insurance companies charge you are developed by projecting the amounts paid for past claims into the future to try and figure out the amount for expected claims. What this means is that they try to determine how much they are going to need to pay out in future medical costs based on what your claims have been for the last year. But there are numerous other factors that go into determining your health insurance costs besides your past and future claims, some you can control and others you just have to deal with.

Here are some of the factors that are used to determine health insurance costs, but these are the factors that are predetermined so you have no control over what they can or can't do for your health insurance costs.

• Cost of benefits used by members
• Type of health care used
• Administration costs
• Adequate reserves to pay future claims
• Legal mandates and regulations
• Quality accreditation costs

Here are some of the factors that are used to determine health insurance costs, but the good thing about these factors is that they are ones that you can actually control.

• Co-payments and co-insurance - This is where your insurance company will pay a portion of the covered expense and then you pick up the rest of the cost out of pocket. The most common one that you will see is an 80/20 plan, this is where the insurance company pays 80% and you only pay 20%. A good thing about this type of plan is that most plans with co-pay have an out of pocket maximum.

• Deductibles - amount that you have to pay out of your own pocket before your insurance coverage will kick in and start reimbursing for the care that is covered. Basically the higher the deductible the lower the insurance premiums.
• Lifetime maximums - this is the highest amount of insurance coverage that will be paid on your behalf during your entire lifetime. The higher the maximum the more coverage is potentially available under the insurance coverage.
• Annual or out of pocket limits - this is the most money that you will have to spend on health costs each year, deductibles and co-pays are included in this figure. The lower the yearly limit the higher the premium.
• Coordination of Benefits - this type of insurance plan recognizes that other forms of insurance may be available to you and will work together with those other insurance companies to pay for your insurance claims.
• Renewability/Cancellation - this type of plan is something that is offered with a non-cancellation policy or a guaranteed renewable basis, meaning you have to renew or not cancel in order to get the lower premiums.

But regardless of what factors are used to determine the cost of your group health insurance there are still only two methods that health insurance companies use to determine how much your company is going to be paying in insurance premiums each year. The two methods that health insurance companies use are medical underwriting or community rating. What method they decide to use is going to depend on the rules in your state.

Here is a look at the two different methods that health insurance companies use to determine your health insurance costs.

• Medical underwriting - this is where each employee is considered individually. What this actually means is that the overall health of everyone in your group is going to determine the final premium that is to be paid each year. The bad thing about this method is that if you are a small business and have just one employee with a history of chronic illness or with a catastrophic illness your insurance premiums can go up dramatically compared to a large company. But the good thing is that the group cannot be turned down just because of the health of one person and one person cannot be denied health insurance if the rest of the group has been accepted. Nor can individuals be charged different rates because of their health status, but they can be charged different rates within the group depending on their age and gender.
• Community rating - there are actually three types of community rating but regardless of which type is being used this method is the standard for setting health insurance premiums in some states and it actually eliminates health status from the list of factors that insurance companies are allowed to consider when they set group insurance premiums.
• Pure community rating - this type is rarely used but it is where everybody in one particular geographic area pays the same premium for health insurance
• Pure community rating - this type is actually pretty uncommon to see because it is a great deal for older people but not such a great deal for the younger people. The reason that many states don't use this type of rating is because younger people feel like they can't afford the rates so they drop out of the insurance plan and only the people who are sick or older remain which just ends up costing the insurance companies money.

• Modified community rating - this is the most common underwriting procedure among states that allow it. How it works is that it depends on the employer's ZIP code to determine the group's premium. And since most employees live a reasonable distance to their jobs the geographic area used to figure out the premiums is actually quite small. But in some cases the employee's ZIP code is used instead of the employer's ZIP code because of how far away the employee might live, such as employees who live out of state or more than so many hours away.

But another thing that really determines the cost of your health insurance premiums is what kind of health insurance plan you are going to be using. Your best bet is to find out as much as you can about the various health insurance plans and then determine from their what plan would best fit your company's needs.

Here is a look at the various health plans that are offered for group insurance plans:

• Indemnity plans - major medical plans that typically have a deductible, which in this case is the amount that you have to pay before the insurance company begins paying benefits. And then once your covered expenses exceed the deductible amount the benefits are usually paid as a percentage. Most often your insurance company will pay 80% of the covered expenses and you will have to pay 20%. The good thing about this type of plan is that they provide the most flexibility when choosing where to receive care.
• Health Maintenance Organization (HMO) plans - medical plan that usually makes the insured choose a primary care physician from a list of network providers. The primary care provider is responsible for managing all aspects of your health care. If you need to see a specialist or somebody else besides your primary care provider to receive medical care then you have to get a referral to see the other provider. In order to have your claim paid through the HMO you are going to have to stay in network, if you go out of network then you might have to pay all of the costs or they will be paid at a greatly reduced amount.
• Preferred Provider Organization (PPO) plans - major medical plan where the insurance company enters into a contract with selected hospitals and doctors to furnish services at a discounted rate. If you belong to a preferred provider organization you can usually seek care from a doctor or a hospital that is not a preferred provider but if you do be expected to pay a higher co-payment or even a higher deductible.
• Point of Service (POS) plans - this medical plan is a combination of the preferred provider plan and the health maintenance organization plans. They are more flexible than the health maintenance organization plans but they require you to pick out a primary care provider. But like the preferred provider organization plan you can go to out of network providers and pay more of the cost but if your primary care provider is referring you to the out of network doctor than your health plan will pay the cost.