How Do Health Insurance Companies Spend Our Premiums?

Premiums taken in by health insurance companies are spent in two generalcategories: (1) direct health care costs—paying medical claims from doctors, hospitals,pharmacies, etc., and (2) non-medical costs, such as insurance company administration, marketing, taxes, and profits. In most states, including Texas, there are no minimum standards on how premiums are used, and it is difficult to get information on how your insurance company uses your premiums.

A U.S. Senate inquiry into how health insurance companies spend our premiums dollars has reached the same conclusion as a CPPP report on the same subject: when compared to large business, a greater share of premiums from small business go to non-medical, administrative expenses.

The Senate’s analysis looked at nation-wide business for the 6 largest for-profit health insurance companies and found that on average, 80% of premiums paid by small businesses were spent on medical care.  Our analysis used data on Texas-based business reported by insurance companies to the Texas Department of Insurance and found that on average, 73% of premiums paid by small businesses were spent on medical care.  A couple of companies reported spending less than half of premiums from Texas small employers on medical care in some years.

Senator Rockefeller, who is leading the Senate inquiry, asked whether health insurance companies spend premiums “to make people well when they are sick and keep them healthy? Or is the money they charge going to profits, to executive salaries, and to figuring out how to deny care to people when they really need it?”  These are good questions that health reform could help answer.  The House health reform bill contains a requirement that companies spend at least 85% of premium dollars on medical care.