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Ask a Zenefits Advisor: How Do Carriers Determine Insurance Rates?

Bud Bowlin has been advising business owners about health insurance and benefits for more than 35 years. For his 70th birthday, we gave him his own advice column. Got a burning benefits question for Bud? Send it to [email protected].

Hi Bud,

I’m an engineer, and I like understanding how things work. I’ve had health insurance everywhere I’ve worked, but I always pay a different premium. I realize this is partly due to the percentage my employers cover. But generally speaking, how do carriers determine insurance rates?

Please Explain Those Enigmatic Rates

Dear P.E.T.E.R.,

I once asked a sausage maker to tell me the secret to making good sausage, and he sent me a ton of links. Ha! But all jokes aside, making sausages and determining insurance rates are both processes—and a lot goes into them. Insurance carriers deny this, but rate setting is more of an art than a science.

Age and location are the main metrics that insurance carriers use to calculate rates. So, based on the following information and similar benefits, who’s paying the highest premium? Jack is 28 and lives in San Francisco, CA. Sally is 35 and lives in San Francisco, CA. Todd is 55 and lives in New York, NY. Fiona is 42 and lives in Stowe, VT. Colin is 55 and lives in a town you’ve never heard of. From highest to lowest: Todd, Sally, Jack, Fiona, Colin. But why?

In his 50s and living in an urban area, Todd ticks both the age and location boxes for highest insurance rates. As people age, they tend to require more medical care. Consequently, older individuals have higher insurance rates than younger, healthier people. The caveat to that is: location can trump age. In densely populated and affluent areas like New York, providers charge more for medical care—which increases rates. Although Colin is also in his 50s, his “off-grid” location qualifies him for the lower rates. Fiona, at 42 in a (lovely) small town, pays the second lowest insurance rates.

Now, back to San Francisco, where Jack and Sally live and work. Young, healthy men tend to pay the lowest insurance rates of all, but by living in a big city, Jack’s rates go up. (If Jack shacked up with Colin or Fiona, his rates would go down.) Sally pays slightly more than Jack due to gender. The one great medical cost difference between men and women under 40 are the maternity benefits that a woman incurs with childbirth. That said, any employee can save on premiums by choosing plans with higher deductibles, copays and out-of-pocket maximums. (See last week’s column for a refresher on insurance vocabulary.) So, healthy young Sally in SF might choose a High Deductible Health Plan with HSA to reduce her monthly insurance expenses.

There’s a certain amount of negotiation that goes on, but it’s not really between carriers and brokers—as some traditional brokers would have you believe. Rather, carriers negotiate rates with providers to influence sales and increase market size. Providers, thinking their patient volume will increase, are willing to accept a lower payment per patient. In a crowded city like New York, some healthy competition could bode well for Todd’s high rates.

Insurance companies will also artificially lower rates when they’re entering a new area. This helps them capture market share and build a bigger block of business. They hope this allows them to further reduce rates, but instead, they often have to raise rates to offset the bad (high loss ratio) business they attract. So, when the carriers find Colin on the map and decide to enter that area, his already-low rates could decrease…but not for long!

As you can see, there’s a lot that goes into determining insurance rates. There are both fixed and variable factors. On top of that, factors can be further negotiated and manipulated based on research, legislation, or pure profit. So, a cautionary word about selecting insurance carriers that provide the lowest quote: this is only good for the initial period (usually 12 months). After which, the carrier typically has to raise rates, and then at your insurance renewal date, you have to move to another carrier (or go live with Colin).

Ideally, you want a carrier that gives you great rates and excellent service. I know this next part might be getting repetitive, but hey, it goes with the territory: Find a good, honest broker who’s sensitive to your needs and helps you do your job faster and better. If your broker doesn’t make your job easier: you don’t have the right broker.

Got a question about benefits and insurance? Send it to [email protected].

The answers on Ask Bud serve as basic guidelines and are for informational purposes only. Bud is a treasure trove of knowledge, but is unable to provide legal, tax, or fact-specific human resources advice. Once a question is submitted, Bud and Zenefits reserve the right to accept, reject, edit, modify, or otherwise change it. All content on the Zenefits website, including questions received and answers provided by Ask Bud, are Zenefits property.

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