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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. 

What Is Defined Contribution?

Being a business owner has its perks, but it also comes with a lot of responsibilities. One of these responsibilities is keeping your employees happy and healthy by offering them some kind of health benefits. Group health insurance can be quite costly, but there are other alternatives you can offer that will help your employees get the care they need. For example, offering a defined contribution plan would help keep your employees covered, while keeping costs down for you.

What Is Defined Contribution?

If you choose to offer traditional group health insurance, you will have to pay a large portion of your employees’ premiums. While your premium contributions are tax deductible, they can still be expensive, and these contributions are just not possible for some businesses. But defined contribution plans are not traditional health insurance plans. With this type of plan, you provide a fixed dollar amount towards your employees’ healthcare costs, and they are responsible for purchasing their own health insurance policy. This can also include offering pre-funded accounts or arrangements like HSAs or HRAs to your employees. By going the defined contribution route, you will be able to better control your monthly costs. 

person sitting on a chair with a suit on handing another hand a check
Defined contribution plans allow you to give your employees a set allowance every month that they can use towards their health insurance.

How It Works

If you choose to offer a defined contribution plan, each of your employees will get a fixed monthly dollar amount to spend on qualified medical expenses. Employees then select and purchase a plan for their family and you reimburse them up to the amount of their defined contribution allowance. The amount you select is locked in for a year, but you can adjust your contribution at the renewal period, and choose to provide more or less money for the following year.

The advantage of these plans is that they allow your employees to take control of their own healthcare costs. Employees can use their defined contribution allowance toward any qualified out-of-pocket health expenses, including insurance premiums and medical procedures. If they choose a plan with a premium that costs more than your defined contribution, then your employee will have to pay the difference.

Benefits

Defined contribution plans can be beneficial to both employers and employees. For employers, they provide:

  • Tax advantages–  Your contribution to your employees’ healthcare costs will mean less for you to pay in payroll taxes.
  • Flexibility- A defined contribution plan is a self-funded plan, so you can choose how much or how little you want to contribute. You can also customize benefits for an unlimited number of employee classes, meaning you can choose to set contribution amounts based on date of hire, full-time status and more.

    hallway with many white doors in a line
    Employees will have the ability to choose their own health insurance plan.

For your employees, they provide:

  • Tax advantages- Employees will not pay payroll taxes on the money you contribute. In addition, as long as they use the contribution, it is also income tax-free. 
  • Lower monthly premiums- Individual health insurance costs less than half the amount of group coverage.
  • Choices- Employees have the ability to choose the insurance company and plan that is best for their specific needs.

Need Help?

You’re running a small business, and we know that it is important for you to save as much money as possible. But we also know that employees will be more willing to stay with your company if you provide health benefits; if you don’t, you could end up losing some good workers. You need to keep your employees healthy without breaking the bank, and that means researching the different healthcare benefits you can offer your employees. EZ can help with that, and we’ll do it for free! We will compare all plans in your area and help guide you in the right direction. One of our licensed agents will work with you to ensure you get the most benefits while saving the most money. To get free instant quotes, simply enter your zip code in the bar above, or to speak directly with an agent, call 888-998-2027.

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