Medical Insurance Rate - Why Does It Change And How Is It Decided?
Many people often wonder how medical insurance rates are decided. What are the criteria they use to decide if the price should go up or down? Where do these numbers come from? Is it scientifically possible to predict how much medical care will cost in a year, or beyond even that, and is there really any limit to what insurance companies can charge for premiums. In this article we hope answer all these questions and more! The following is an article that provides an in depth look into the context of medical insurance rates.
The biggest, most common question that everyone has, is why do rates change. The answer to this question is 2 fold. Why do they increase and why do they decrease? It's a simple answer at the end of the day and it's simply because of the risk versus the reward. In laymen's terms this means that if you have a lot to gain from providing a certain service or product but you also have a high chance of not making money because people will use your service and not pay for it then you'll charge more. If someone has something that is very risky, yet has a good chance of gaining money, then we can decrease our prices. There are 3 main factors we look at when we consider rate changes. These are: the type of medical bill, the patient's health and age and the number of insureds. When we look at a healthcare bill we don't just look at one feature. We look at all features and try to calculate the risk to cost ratio. For example, let’s say you make a little bit of money from providing diabetic test strips for diabetics as they are able to get a discount for buying them. People will usually rather pay $5 versus $10 for a $50 test strip that will tell them if they have diabetes. If we look at this we can calculate the risk to cost ratio. The doctor will look at 300 diabetics, 300 tests and all the test strips he or she used. They would then have to calculate their profit and what their cost for supplies are (pens, paper, etc). So then they divide that amount by the amount of revenue they got from selling diabetes test strips. This calculation should be around 1:4. It should be more than 4 and less than 1 so it means that people will buy the diabetes test strips because they know that it is a good deal as opposed to paying $10 for a $50 strip when they do not have diabetes. As we can see, the risk is less than 4 and because of this reason we can probably charge customers less. On the other hand if the risk was more then 4, then they could charge more than $5 for that strip. When we look at every patient's health and age from a risk to cost ratio perspective, we try to do the same calculations as in the previous example; however, when it comes to age, we have to take it into consideration. The older you get the more expensive your treatment becomes. The reason for this is because there is a chance that you will not survive after going into surgeries, after having surgeries or if you have a heart condition while you are younger. In older age you also have a risk of not being able to work for the rest of your life which means that you will not be able to pay for anything regarding medical bills. Insurance companies want to be sure that they will actually get an income from you while you are still alive and working so they have to calculate that into the equation. They do this by looking at the current insurance rates and how much money they make from each person who has insurance versus the amount of surgeries, doctor visits, procedures, etc. Not only do they look at this but also try to figure out if those services will continue in a year. This is done by looking at the population itself. For example if there's a lot of people who are diabetics then doctors will have to base the number of diabetes test strips they will use for the next year, on the amount of diabetics in that population. The last thing they take into consideration from a risk to cost ratio point of view is the number of people with insurance. If a lot of people are insured then there's more likelihood that you will make more money by providing services because you won't have to spread your income amongst everyone. You'll be able to calculate your income based on only those insured. This is why insurance companies usually try to offer customers their medical coverage in packages (policies) so they can keep profits higher and rates lower.
The next thing insurance companies have to look at is the cost of healthcare. Obviously no one can predict what type of costs will come out in the future; however, companies can predict what the cost is now and then decide if those costs will rise or fall in the long term. The best way to do this in order to make sure that rates are not going to go up is by studying trends over time and extrapolating those trends for a few years into the future. The main reason for this is because people are living longer lives. People are living longer and expenses will probably increase with their longevity. As a result, this means that in the next 3 to 5 years healthcare costs should go up. There are many reasons for this but the main one is because people are living longer lives and more of them have chronic conditions. Each year we see 10,000 people who live to 100 years old instead of 1,000 in the past.
These factors are the main reason rates go up. However, there are other reasons for rates to go up as well. The main reason is that some insurance companies found innovative ways to lower their costs. For example some companies will look at how many people die from cancer, heart failure, lung disease and other serious conditions an insurance company sells policies for. If they see those numbers going up then they will figure out different ways to help the insureds in order that the healthcare system can be run more efficiently and effectively. These innovative strategies include more treatment options (such as broader coverage of less costly drugs or more cooperation between doctors), better care coordination among providers and hospitals, new clinical guidelines, etc.
Conclusion
Insurance companies are not always the ones who set costs for healthcare. Most people believe it's the business of healthcare providers but is not. They are mostly just a middle man between patients and other parties involved in payments for services. The insurance company does not want to pick up the cost of something new that is super expensive so they will try to get the doctors and providers to work together in order that more people can get insured, who have higher risk, and lower premiums. As a result, they will continue with their strategy of analyzing profit margins for each type of policy.
The last thing insurance companies have to do is look at trends in demographic data and cost data.