Posted 2/23/2021 12:40 (#8853087 - in reply to #8848681) Subject: RE: Health insurance rates
Even with the changes from the ACA I think they should do better in their estimates than near 20% off.
What is the incentive? The reason for the premium refund is because they paid out less than 80% of the premium in claims. If you do the math the maximum the insurance company can keep for cost of operations and profits is 25% of the claims. Thus for every $1000 in claims they get $250 for administration if they charge $1250 or more in premiums. If they set the rate at $1250/yr and the claims goes up to say 20% they get $50 for $1200 in claims or 4.2% vs 25% had they set the rates at $1500.
It is in their best interest to set the rate high enough that they can ensure that they will have to pay some back to the insured even if there is a 20% spike in claims since it maximizes their profits. One should also note, that they get that money interest free for months prior to returning the excess premiums which adds to their profits. In the past pricing was based on what the market would bear and if when only paid out 60% their profits were higher and would offset the years were claims were higher. Now the ACA says 80% of collected premium needs to be used for claims so they change the game so the really good years and now clipped and can not offset the bad years to it is easier to charge extra just in case and refund the extra to ensure they get their 25% every year.
In all reality, the insurance company is playing by the rules to maximize their profits. You can't really blame them for playing by the rules that are written. I do find it interesting that we have been seeing premiums drop the last few years along with getting the premium refund on top of it and the only explanation I have is that high deductible plans are making individuals more a cost conscious and resulting in lower claims, thus forcing larger insurance premium refunds since claims are dropping.