How Does The Concepts Of Premium Covered Services And Cost Sharing Apply To Health Insurance?

Every year, you have the chance to choose another health insurance plan for yourself and your family. And every year, you probably notice your premiums have increased or decreased. But why? And why do some plans cost much more than others?

Since the Affordable Care Act (ACA) – otherwise known as Obamacare – went into effect, the factors insurance companies use to determine premiums for each insurance plan have changed. As you choose a plan for the upcoming year, it helps to know what's driving the price you pay and whether you have any control over your monthly premiums.

Factors That Affect Your Health Insurance Premiums

When you purchase an individual or family health insurance policy through the HealthCare.gov marketplace, directly from an insurance company, or through your employer, the premium is the amount you pay each month for the policy.

Even if you never go to the doctor or use any health care services, you have to pay your premium to keep your coverage. In the past, insurance companies could use a lot of information about you – including your weight or body mass index, your family history, and your profession – to determine what to charge you.

Now, thanks to the ACA, insurers can use only five factors when deciding how much your premiums will be.

1. Your Age

Mother Daughter Hugging Smiling Sofa Living Room

As you get older, you'll likely see your insurance premiums start to climb. My mom used to complain that her health insurance premiums were in the $700 range compared to the $300 premiums I was paying as a 30-something.

HealthCare.gov notes that older people often pay premiums that are three times higher than those charged to younger people.

Although it might seem unfair, charging older people a higher premium makes sense from an economic standpoint. Older people tend to use more health care services than younger people, as there's an increased chance of developing a chronic condition as you age. Of course, if you're a healthy 60-year-old who only ever needs to see your doctor for your annual check-up, it's natural to feel disgruntled about having to pay $700 or so per month.

2. Your Location

Just as a person living in San Francisco or New York is likely to pay more in rent than a person living in Kansas City or Memphis, where you live also affects how much you pay in health insurance premiums.

The rules of your state or municipality affect your premiums, as does the amount of competition in the area. If many health insurance companies are competing for your business, better premiums are usually available compared to if you lived in an area where there's only one option.

3. Who's Covered by the Plan

Family Plan Medical Health Insurance Coverage House

The more people your health insurance plan covers, the higher your premiums are. Don't let a higher monthly premium keep you from getting the coverage your family needs, though.

You also don't necessarily want to have each person purchase their own plan. You and your spouse will probably pay less overall if you purchase a family plan instead of individual plans.

4. Your History of Tobacco Use

Although the ACA dramatically limited the things insurers could charge more for, one of the surcharges it kept was the tobacco surcharge. If you smoke, use tobacco, or have used tobacco within the last 12 months, an insurance company can increase your premium.

Depending on the company, the surcharge can be up to 50% of the cost of the premium. For example, a policy might cost someone who isn't a tobacco user $300 per month. With the tobacco surcharge, the same plan would cost a smoker up to $450 per month.

The tobacco surcharge is controversial. Its goal seems to be to encourage people to quit smoking for financial reasons, but a study published in the journal Health Affairs suggests that hasn't happened. Instead, people who smoke seem less likely to purchase insurance in the first place.

5. The Health Insurance Coverage You Choose

Health Care Insurance Benefits Coverage Blocks

When choosing a plan, there are typically several categories available. Health insurance plans are rated based on the amount of coverage they offer and your total out-of-pocket expenses. Generally, the less you pay out of pocket for health care services, the higher your premium.

Under the ACA, there are four categories of health insurance plan:

Bronze Plan. Bronze plans have the lowest monthly premiums but the highest out-of-pocket expenses. Deductibles are often over $6,000 if you purchase a bronze plan. That said, if you rarely or never need to see a doctor for anything beyond preventative care, a bronze plan usually makes the most sense.
Silver Plan. Silver plans have a somewhat higher monthly premium than bronze plans but also have slightly lower out-of-pocket expenses. If you do see a doctor for anything beyond routine preventative care but don't have a chronic condition, a silver plan is often the most cost-effective option. For example, if you typically see your doctor when you have a sinus infection or sore throat, you might choose a silver plan.
Gold Plan. With a gold plan, monthly premiums are quite high, but out-of-pocket expenses are much lower when you go to a doctor or need other forms of health care. If you need a lot of medical care or have at least one chronic condition, a gold plan might be the right pick.
Platinum Plan. Platinum plans have the highest premiums but the lowest deductibles and out-of-pocket expenses. In some cases, your medical costs are entirely covered by your premium payment under a platinum plan. You might want a platinum plan if you see a doctor for multiple conditions or have above-average medical expenses.

A fifth category – catastrophic plans – also exists, but it's only available to people under age 30 or people with a documented financial hardship. If you're in your 20s, are in generally good health, and don't have a lot to spend on a health insurance plan, a catastrophic plan might be a good option. Catastrophic plans have the lowest monthly premiums but the highest deductibles.

Factors That Don't Affect Your Health Insurance Premiums

Once upon a time, insurance companies had a lot more control over how much they charged you for your health insurance. Luckily, some of the criteria used in the past no longer have any effect on your monthly premium.

1. Your Sex

Women used to have higher monthly premiums than men. One report from the National Women's Law Center found that some policies charged women rates that were more than 80% higher than the premiums charged to men.

The argument was that women were more likely to see a doctor and use health care services than men, so they should pay more – a practice colloquially known as the pink tax. Along with having to pay higher premiums, women also often faced higher out-of-pocket expenses, as many women-specific services, such as maternity care and birth control, weren't covered by many plans.

The ACA prohibits charging more for health insurance based on a person's sex. As the icing on the cake, many "women-only" health services are now considered preventative care and must be provided to you at no additional charge as long as they're provided by a doctor or medical professional in your insurance company's network. Among the covered services are Pap tests, birth control, mammograms, and prenatal care.

2. Your Medical History

Elderly Woman Sitting Nurse Greeting Her

Another big change under the ACA is that your medical history can't affect your premiums or access to health coverage. Back in the day, insurance companies could either charge people more for coverage if they had preexisting conditions or could refuse to cover the costs of treating that condition. In some cases, insurers would turn a person down because they had a condition such as diabetes, cancer, or asthma or simply refuse to cover the costs of treating that condition.

Fortunately, those days are over. If you have or develop a chronic or serious condition, you don't have to worry that your insurance costs will go up. Nor do you have to worry about being denied coverage.

Other Things to Consider When Choosing a Health Insurance Plan

Premium costs matter, but they aren't the only thing to keep in mind when choosing your insurance plan. It's also important to make sure your plan meets your coverage and health care needs. Otherwise, you can end up with high out-of-pocket costs.

Other things to think about as you evaluate your health insurance coverage options include:

Network. Insurance companies typically have networks of doctors and health care providers who contract with them and agree to accept lower rates they've negotiated. Ideally, your current medical team will be in the insurance company's network. If not, you'll have to change doctors or pay more out of pocket.
Health Savings Account. Some insurance plans with high deductibles give you the option of opening a health savings account (HSA) through a company like Lively. The money you deposit into an HSA is tax-deductible, reducing how much you owe in income taxes. But the funds you deposit must be used for medical care.
Prescription Drug Coverage. If you take prescriptions, find out what sort of prescription drug coverage each plan offers and whether it covers name-brand drugs or only generics. If the coverage you choose doesn't have the proper coverage for prescriptions, you sign up for a prescription discount card from Discount Drug Network.
Plan Type. When choosing a health insurance plan, you're likely to see a lot of acronyms: HMO, PPO, EPO. We'll go into more detail on these in the next section.
Cost of Co-Pays, Deductibles, and Co-Insurance. Depending on the type of plan you choose, you might have several different types of out-of-pocket expenses. A co-pay is the amount you pay at the time you see a doctor. It can be $10, $50, or another amount. The deductible is the amount you need to pay for care before your insurance starts providing coverage. Depending on your plan, it can be a few hundred dollars or several thousand. Co-insurance is the portion of your medical costs you'll have to pay after you've paid the deductible. All three affect the total cost of your health care.
Your Health Care Needs and Medical History. Your health care needs won't necessarily always be the same. You can't necessarily predict a chronic condition diagnosis. But there are things you can anticipate, such as whether you're planning to conceive over the next 12 months. If you have a history of a particular condition, such as high blood pressure or cancer, and there is a chance of recurrence, that can also influence any decisions you make during open enrollment.

HMO, PPO, EPO: Which One to Choose?

The type of plan you choose doesn't affect just the price of your premium. It also affects the rules of your policy. A health management organization, or HMO, usually has a network of medical providers and facilities. To be part of an HMO network, a provider needs to agree to accept the prices set by the plan.

Since the cost of care is usually lower for members of an HMO compared to other plan types, the premium is often lower. The drawback of having an HMO plan is that you have to work with the providers in the network if you want coverage.

A preferred provider organization (PPO) is another network of medical providers and facilities. They agree to provide care to patients at a specific rate. If you have a PPO plan and see an in-network provider, you can take advantage of the reduced prices. If you see an out-of-network provider, you can still use your insurance but won't get the "in network" rate.

An exclusive provider organization (EPO) has some things in common with an HMO and others in common with a PPO. If you choose an EPO, you will get reduced rates if you see a provider who's in network. If you see an out-of-network provider, your treatment likely won't be covered by your insurance.

Another feature that sets an HMO apart from both a PPO or EPO plan is the need to choose a primary care provider (PCP). You see your PCP for check-ups or when you're feeling under the weather. If they think you need specialist care, they need to refer you to another provider. With a PPO or EPO, you don't have to choose a PCP. You also don't need referrals if you want to see a specialist.

Final Word

The monthly premium doesn't tell the whole story when it comes to your medical insurance and health care costs. A plan with a lower premium might have high out-of-pocket costs, while a plan with a higher premium is likely to have fewer out-of-pocket costs.

Also remember that your income influences how much you can pay for your health benefits if you don't have health insurance through an employer. You might qualify for Medicaid based on your family size or income, or you might be eligible for a premium tax credit or tax deduction. If you are over age 65, you can qualify for Medicare.

What do you look for when choosing health insurance? Would you rather pay a low premium and high expenses or the reverse?