The premium is probably the simplest of the terms we will discuss. This is a monthly rate which you pay the health insurer.
Generally, these premiums are the revenue that health plans use to help pay for the healthcare of their members. The pricing levels used by a health plan can indicate a handful of factors behind the scenes.
If the members of a health plan are relatively healthy, then the health insurer can expect to pay care providers less for these peoples’ treatments. Less chronic conditions or risky actions that would cause medical conditions and the need to see a doctor or get some treatment means that the insurer needs less revenue to cover the plan, and thus it can justify keeping premiums lower.
However, if the cost of covering members starts to go up, then premiums typically have to rise as well. One particularly concerning phenomenon is when the premiums become so high that the healthiest members of the plan decide it’s not worth the higher premiums to stay in the health plan. If the healthiest members leave, then that reduces revenue and makes the average cost of care per person higher, because the health plan has a greater number of less healthy members.
The implications of this are the infamous “insurance death spiral”
, wherein the lowest-risk members of a health plan (AKA the healthiest) continue to leave a health plan. Due to a smaller but more medically expensive member base, the plan has to continue to raise premiums.
On the other hand, higher premiums for a health plan may indicate that the plan itself requires less out-of-pocket (OOP) spending from the members. If the member of a health plan is paying less out-of-pocket, then someone has to still pay the care provider. Low OOP spending must be compensated with higher reimbursements from the insurer to the provider, and so, the insurer needs higher premiums to pay for the plan.