Health Insurance Premium

A health insurance premium is the price of holding a health plan, billed monthly or per pay period, and owed whether or not you use any care. The general idea of a premium as the cost of holding coverage is common to all insurance; what is distinctive about health premiums is how tightly the Affordable Care Act constrains how they are set. For plans sold in the individual and small-group markets, an insurer may vary the premium on only four permitted factors, and is barred from using the health-based factors insurers once relied on. This page is about how health premiums specifically are determined and what they do and do not buy.

Under the ACA's community-rating rules, at 42 USC 300gg, an insurer setting premiums for individual and small-group coverage may consider only four things. The first is whether the coverage is for an individual or a family, which is a single distinction rather than a per-member charge; the statute does not permit scaling premiums by the number of people beyond that, so "family size" is not an independent rating factor. The second is the geographic rating area, because medical costs differ by region. The third is age, limited to a ratio of no more than 3 to 1 between the oldest and youngest adults, so an older adult's premium cannot be more than three times a younger adult's for the same plan. The fourth is tobacco use, limited to a ratio of no more than 1.5 to 1.

What an insurer may not use is as important. Health status, pre-existing conditions, prior claims history, gender, occupation, and disability are all prohibited as rating factors. This is why a person with a serious medical history pays the same premium as a healthy person of the same age in the same area, buying the same plan, a reversal of how the individual market worked before the ACA.

In employer-sponsored coverage the arithmetic looks different because the employer usually pays a large portion of the premium. The amount withheld from your paycheck is your share, not the plan's full cost, and the employer's contribution is real money spent on your behalf that does not appear on your pay stub. That is worth remembering when comparing an employer plan to a Marketplace plan, where you face the full premium reduced by any premium tax credit you qualify for.

Finally, the premium is not the total cost of the coverage. It buys access to the plan; using care still triggers the deductible, copays, and coinsurance, up to the out-of-pocket maximum. A low premium often pairs with high cost sharing and the reverse, so the premium alone is a poor measure of how much a plan will cost you in a year you actually need care.

An insurer files rates for each plan in a rating area, then applies the four permitted factors to a given applicant: individual or family coverage, the applicant's location, age within the 3-to-1 band, and tobacco use within the 1.5-to-1 band. Nothing about the applicant's health, gender, or occupation enters the calculation. In an employer plan, the employer's contribution is subtracted before the employee's payroll share is set.

A hypothetical example of the age band. Suppose an insurer's plan is priced at $300 a month for a 21-year-old in a given area. The ACA's 3-to-1 age limit means the oldest adult, near 64, cannot be charged more than $900 a month for that same plan in that area, regardless of health. If the applicant uses tobacco, the premium could rise by up to another 50%, to as much as $1,350, but no health condition can push it higher. These figures are hypothetical and illustrate the ratios, not any specific plan's prices.

What the rating rules protect

• A serious medical history cannot raise your premium, because health status and pre-existing conditions are barred as rating factors.
• Age and tobacco surcharges are capped, so an older or tobacco-using applicant faces a bounded increase rather than an open-ended one.
• Gender and occupation cannot be used, ending forms of pricing that predated the ACA.

The trade-offs and blind spots

• Age can still triple the premium across adults, so coverage is meaningfully more expensive for older buyers.
• The premium says nothing about cost sharing; a cheap premium can hide a high deductible.
• These rating rules apply to ACA individual and small-group plans; large-group and self-funded employer plans follow different rules.
• In employer coverage, the payroll deduction understates the true premium, because the employer pays much of it.