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Where Does Your Health Insurance Premium Go? – OpEd


AHIP, the trade association for health insurers, has a nifty infographic answering the question: “Where does your premium dollar go?”

Obviously designed to defray accusations that health insurers earn too much profit, the infographic shows “net margin: of only three percent. A full 80 percent of our premium dollar goes to paying medical, hospital, and prescription claims.”

Fair enough. However, the elephant in the infographic is the 18 percent of premium that goes to “operating costs.” Lest you think that’s a synonym for “overhead” or “bureaucracy,” AHIP helpfully explains: “Operating costs include consumer-centric activities such as communicating with members, running customer service operations, quality reviews, and data analysis, among other activities.”

Well, readers have to judge how “consumer-centric” those operations are.

In 2015, average premium for a single worker in an employer-based plan was $6,251. So, $1,125 of that contributed to the insurer’s “operating costs.” How much health spending did the average insured person in an employer-based plan incur? $5,141, of which $813 was out of pocket. In other words, insurers’ “operating costs” added 22 percent to actual spending on health care.

Let’s compare this to auto insurance. For a sedan, annual cost of ownership amounts to $8,558 for a sedan, including $1,222 insurance. So, operating costs (excluding insurance premium) are $7,336 – 43 percent more than average annual health spending for someone in an employer-based plan. Yet, the entire premium of auto insurance is less than the operating cost buried in the premium of health insurance!

Another way to look at it: About 25 percent of the premium of auto insurance covers operating costs (see here and here). That would be $305 for a sedan – a mere four percent of the operating costs.

The reason? We do not expect auto insurance to cover almost every penny of spending we incur every year to run our cars. If only that were true of health insurance.

The real question is not where our health insurance premium dollars go, but how much of our health dollars go to premiums.

This article was published by The Beacon

John R. Graham

John R. Graham is Senior Fellow at the Independent Institute and a Senior Fellow at the National Center for Policy Analysis. Formerly Vice President at the Advanced Medical Technology Association (AdvaMed), he previously directed health-policy research at the Pacific Research Institute and the Fraser Institute. In prior positions he served as Assistant Vice President at Kidder, Peabody Securities Company; Associate at Goldman Sachs and Company; Political and Military Analyst for the United Nations Operation in Somalia; Development Consultant for Covenant House Vancouver; and Captain in the Canadian Army. He received his Bachelor of Arts (Honors) in economics and commerce from the Royal Military College of Canada and his M.B.A. from the University of Cologne, Germany. He is also Senior Fellow at the Fraser Institute as well as Adjunct Fellow for the Mackinac Center for Public Policy.

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