In the Absence of Regulation, What Factors Do Insurers Use to Set Premiums?

Without laws that limit how much insurers can charge, insurers typically charge higher premiums to people who buy individual health insurance policies based on the factors listed below. For groups such as small employers who purchase insurance, while insurers cannot charge higher premiums to particular group members or employees, they can and do examine the characteristics of group members and use these same factors to charge the group a higher premium.

• Health status: Known as “medical underwriting,” many insurers use information reported by the individual, as well as medical records, to charge higher premiums to people whom they believe will have higher health care expenses. And because many states exercise little or no oversight over insurers’ underwriting decisions, consumers do not have much recourse when challenging the insurers’ judgments about their health status and premiums.
• Prior health care claims: At renewal, an insurer can raise its premium based on the amount of health care the person used the previous year. To avoid these increases, people sometimes delay or forgo seeking certain types of treatment, such as therapy.
• Age: Insurers charge older people higher premiums than younger people and can raise their premiums as enrollees get older.
• Gender: Insurers often set higher premiums for women of childbearing age than they do for men. However, for older individuals, insurers may charge more for men than women.
• Particular types of business or industry:  For example, insurers often charge people in higher-risk occupations, such as the construction trades, higher premiums than they charge to people in lower-risk occupations, such as office workers.
• Geographical location: Insurers charge higher premiums for residents and workers in locations where health care expenses are typically higher.
• Group size: The smaller the group or company seeking insurance, the higher the premiums.
• Family composition: Insurers often set lower premiums for a parent with a child than they do for a couple. Similarly, they may set different premiums for other kinds of families.
• Duration of insurance: Insurers may set higher premiums for people who have been insured by a company for a longer period of time. Insurance companies reason that if an extended period of time has passed since they initially set their premiums based on a person’s health status, the person’s health has likely worsened over time, and he or she should thus be charged more.
  Lifestyle or participation in wellness activities: Insurers have long charged higher premiums to smokers than nonsmokers. In recent years, they have also begun to charge higher premiums for obese enrollees and lower rates to people who participate in health plan “wellness programs.”
  

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