Whether this is the first time you’re purchasing health insurance, or you’re trying to choose the most economical plan for your needs, understanding how health insurance premiums are priced is an important step to choosing the best plan for you. In this post, we’ll explain the various factors that affect how a health insurance plan is priced and then show you how to choose the best one for your individual circumstance.

A brief overview

Like many of our daily expenses, where you are purchasing your health insurance plan has a big effect on how much it costs. That’s because of two location-based factors. First, insurance is regulated on the state level, so different states will have different rules that can change how health insurance plans are priced. Second, health plans are created based on geographic areas, known as “markets”. So where you are in a state, can further alter the cost of your plan. Other factors include: family size, your age and that of anyone else on your plan, the type of plan it is, and whether or not you qualify for an Affordable Care Act (ACA) subsidy.

Per the ACA, there are a few things health insurance companies are not allowed to use to determine the price of your health plan. The factors that are off limits include:

• Gender

• Medical history (e.g. pre-existing conditions)

• Current health status

Family size

It’s logical that the more people covered by a health insurance plan, the more expensive it will be. But most health insurance plans aren’t priced per person. Instead, they’re divided into “individual” plans for one person, and “family” plans for multiple members of the same household.

Typically, the biggest jump in cost when moving from an individual plan to a family plan is when you add another adult. The cost for adding each additional child under the age of 14 usually results in a lower increase in the overall cost of the plan. In 2021, the average annual premium workers paid for an employer-sponsored family health plan in the U.S. was $5,969 (roughly $500/month).

Age

While some states like New York and Vermont don’t allow health insurance companies to consider age when pricing health insurance premiums, many states do allow this practice. When health insurance companies use age as a factor in pricing premiums, they typically use 21 as the “base age” which receives the lowest pricing. Then they adjust upwards starting at 30, 40, 50 and 60. Around age 53, the premium can be more than double what it is for those in the base age category. At age 65, you qualify for Medicare.

Tobacco usage

While health insurance companies aren’t allowed to consider your current health status or medical history when pricing your health insurance plan, they can consider your tobacco use. Health insurance companies can't outright deny you coverage based on tobacco use, but they can charge you more than nonsmokers. In fact, they charge you up to 50% more.

The ACA allows health insurance companies to charge smokers more than nonsmokers because the use of tobacco has been linked to adverse health outcomes. So smokers present an increased risk to health insurance companies.

Plan type

Perhaps one of the biggest factors that will affect your premium pricing is the type of plan you choose. Health insurance plans are broken into metal tiers: Bronze, Silver, Gold and Platinum, and as you go up in “preciousness” of the metal, the greater percentage of cost the plan covers. And the more the plan covers, the more expensive it is.

Bronze plans are typically the least expensive from a premium perspective, but they cover the least amount of your medical costs. Conversely, Platinum plans are typically the most expensive from a premium perspective but will cover more of your medical expenses than any other plan.

Other plan-specific factors that affect its pricing include:

• Deductible

• Coinsurance

• Copays

• Network type (PPO vs. HMO)

Network type and deductible amount are two factors that often intersect. Usually, the higher your deductible, the less you pay in premium. And the more restrictive your network (i.e. an HMO), the less expensive your premium. HMOs also tend to have little to no deductibles attached to their plans. The exception to this is the High Deductible Health Plan (HDHP).

HDHPs are most often PPOs but they have a deductible that reaches the qualifying level determined by the ACA and IRS, which are adjusted annually for inflation. HDHPs typically have the lowest premiums of all the plans as well as the added bonus of being able to contribute tax free to a Health Savings Account (HSA). You can use your HSA contributions to pay for a wide range of qualified medical expenses like deductibles, copays, coinsurance and any other approved out-of-pocket medical expense.

If you purchase a Silver health plan in the healthcare marketplace and make a qualifying annual income, you could qualify to receive an annual subsidy to help you purchase health insurance. This will lower the cost of your health plan. To see if you qualify for an ACA health insurance subsidy visit Healthcare.gov.

Location

As we said above, the cost of your health plan will be driven largely by the location in which you live and will be seeking health care. That’s because private market forces determine how much medical care and insurance costs consumers. If you live in an urban or suburban area where there are many health insurance options as well as multiple medical care providers, that competition will work to keep consumer costs low. But if you live in a rural area where there is little to no competition (e.g. one health insurance provider and one or two medical or hospital groups), then you will likely pay higher prices.

The Kaiser Family Foundation lists average prices state by state to help you understand how prices compare for your area.

How to find the best coverage for your needs

The best coverage for your needs is the plan that sits at the intersection of appropriate coverage levels and budget-friendly cost. Choosing the cheapest plan won’t always serve you if it doesn’t cover the regular medical care or prescriptions you need. It might also not serve you to automatically sign your family up for your employer-sponsored health plan.

While employer-sponsored plans are typically the most cost-effective way to go, there are many things you will need to consider before signing up your family.

• How much does it cost to add dependents? Some employers help with family plan premiums, but many don’t. If you will have to pay out-of-pocket for your family’s premiums, you might be able to find a better, more economical plan in the private marketplace.

• Does your employer’s plan meet the medical needs of your family? For instance, if your employer offers an HMO, but your child needs to see a specialist for a chronic condition and that specialist is out-of-network, it might be better to choose a plan that includes that provider.

Choosing the right plan for your family is important and can’t be rushed. Take a look at your budget, catalog the ways in which your family uses the medical system and include any upcoming costs you know you’ll have (e.g. birth of a child), then look for a plan that meets your coverage needs and fits within your budget.

Get started with Lively

Lively is your partner in health and savings. We provide participants of our savings accounts with an opportunity to pay for out-of-pocket medical expenses with tax free money, as well as a way to grow those savings at the rate of the market. If you have questions about opening a new account, reach out today.