The United States healthcare system is nothing if not complex. In many ways, it’s like one of those Rube Goldberg machines — comically complicated and meticulously designed to perform a seemingly straightforward task. But by most indicators, America’s Rube Goldberg needs some additional tinkering.
According to the Centers for Medicare & Medicaid Services, the U.S. spent $4.1 trillion on healthcare in 2020 — averaging about $12,530 per person. Comparable countries spent, on average, about $5,700 per person. Despite spending significantly more on healthcare than our international peers, Americans generally have worse health outcomes and far more medical debt.
So why does the U.S. spend so much on healthcare if its citizens aren’t gaining comparable health benefits? And where does that money come from? This multilayered machine isn’t easy to take apart in a single blog post. For the purposes of this article, let’s focus on the effects of rising insurance premiums on Americans’ healthcare spending and medical outcomes.
How Are Health Insurance Premiums Calculated?
To better understand the various levers in the American healthcare system (and how they work together), let’s start with the basics. So first thing’s first: What is an insurance premium, and how are health insurance premiums calculated?
An insurance premium is the amount of money a policyholder pays in exchange for coverage. Premiums are typically paid monthly, with factors such as age, type and amount of coverage, medical history, and more influencing the premium price. Insurance is a risk-based business; the more risk a policyholder presents, the higher their insurance premium will likely be. If you use tobacco, for instance, insurance companies can charge you up to 50% more for your insurance premium.
For employer-sponsored coverage — which 50% of insured adults in the U.S. are enrolled in — insurance companies calculate a premium for each plan participant (plus the cost of dependents, if applicable). Companies then aggregate the group’s premiums to determine its total insurance premium.
This is the amount a business pays each month for coverage — though most companies don’t cover those premiums in full. Instead, they usually pay a portion of the premium and then deduct the remainder from plan participants’ monthly paychecks. Some insurance providers require employers to cover at least 50% of the premium cost for enrolled employees, but they can shift a bigger portion (or all) of premium costs for dependents back onto employees.
Alternatively, businesses can opt for a policy with lower premiums while sharing more costs with employees through vehicles like copays (a set amount enrollees pay at the time of care), deductibles (a set amount they pay to become eligible for benefits), and coinsurance (a portion of the bill that’s charged to enrollees after they meet their deductible). In general, the higher the cost sharing at the time of care, the lower the insurance premium.
Who Really Pays for Healthcare?
Now that you have a better understanding of insurance premiums, let’s tie it back to the rising costs of healthcare. A typical employer health insurance benefit has an 80% paid-to-allowed ratio. In other words, the insurance company covers 80% of the cost of a member’s medical care. That means the insured patient is on the hook for the other 20% of the bill via their deductible, copays, and coinsurance.
Most medical debt is owned by folks who don’t have the funds to pay for it, but insurance companies are more likely to pay their portion of the bill than individual patients. In an attempt to keep the lights on, hospitals, clinics, and other providers increase the cost of their services to recoup more overall money from insurance companies.
To illustrate the domino effect this creates, let’s say ABC Medical Clinic — apologies to any alphabet-themed clinics in the real world — needs to collect $1,000 for a specific service to balance the books. Since it expects a portion of that billed amount to be uncollectible because of patient financial issues, it decides to increase the cost of this service by 15% to recoup the $1,000 it needs from the insurance company. Because the insurance company’s costs increased by almost 15%, their customers’ insurance premiums will follow suit. Eventually, these cost increases always work back to individuals in the form of higher premiums.
When we talk about rising insurance premiums and throw big numbers around, it’s easy to assume the issues present in our healthcare system are too complicated to fix. But we can’t lose hope simply because the system has some unfortunate consequences for millions of Americans.
We don’t yet know how our healthcare system might evolve or reform. In the meantime, employers can help ease the burden of the high cost of healthcare by offering a benefit like Paytient. Employees can use their Paytient cards to cover out-of-pocket medical, dental, vision, and even veterinary expenses and then set up interest-free payment plans. To learn more about how Paytient works, click here.