Breaking Down Insurance Premium Costs

In order to keep your health insurance plan active, you need to pay an insurance premium every month. Premium prices depend on variables such as your age, the area where you live, and the amount of coverage you choose. But what actually happens to the money you give to your insurance company every month? How is it broken down and used?

Medical Expensesperson's hand over a bill and the other over a calculator

Health insurance works on a risk-sharing model: insurance companies collect premiums from all of their customers so that they have enough money to pay any claims made. What they do with that money is regulated by the government. The 80/20 rule, also known as the medical loss ratio, is a law created by the Affordable Care Act that requires insurance companies to spend a set amount of the money they collect from customers on medical care. It was meant to make insurance more affordable for everyone, and encourage insurance companies to put more money towards improving care. According to the rule,  80% of each dollar you pay per month has to go towards healthcare costs and quality improvements. The other 20% can be used to cover the health insurance company’s administrative and marketing costs. 

How Is Each Premium Dollar Broken Down?

The 80/20 rule requires insurance companies to spend at least 80% of the money they take from premiums on healthcare costs and quality improvement, and the other 20% can go towards administrative, overhead, and marketing costs. According to Healthcare.gov, the breakdown of the 80% and 20% is as follows:

The 80% is broken down per dollar in the following way:

hundred dollar bill broken down into pieces
Insurance premiums are broken down by a 80/20 rule.
  • 21.5¢ for prescription drugs, which include outpatient, physician- and self-administered medications.
  • 22.2¢ for inpatient hospital costs and emergency room costs.
  • 19.8¢ for outpatient services, like ER care, labs, imaging clinics, physical therapy, urgent care, etc.
  • 12.1¢ for doctor visits.
  • 6¢ for other outpatient care.

The 20% is broken down per dollar in the following way:

  • 17.8¢ for operating costs, including cost containment, taxes and business expenses, quality improvement, data analysis and other activities.
  • 3¢ of every dollar is profit for the insurance company.

If your insurance company does not meet its 80/20 targets for the year, then you will get a rebate on some of the premium dollars that you paid. 

Lowering Your Monthly Premiums

Insurance companies tend to raise their monthly premiums every year, which can become a bit too much sometimes. But there are ways to lower your premiums, such as choosing a high deductible plan with lower monthly rates. You can also come to EZ and let us help you find a new plan that can offer more coverage for less. 

Don’t get stuck paying more money for the same amount of – or even less – coverage. EZ can help you find a plan with more coverage and flexibility for less money. We have highly trained, licensed agents who work with the top-rated insurance companies in the country. We have access to hundreds of plans that we can compare for you in minutes. Let us do the hard work for you and save you money. There is no obligation, just free quotes. To get free instant quotes, simply enter your zip code in the bar above, or to speak directly with one of our agents, call 888-350-1890. 

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