Why Does Health Insurance Cost So Much?

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While overall economic inflation has slowed over the past 18 months, health insurance costs keep going up. According to the latest survey by the Kaiser Family Foundation (KFF), a non-profit organization that conducts research on health policy and issues, the average annual premiums for single coverage have reached $8,435, while family coverage now stands at an average cost of $23,968. Preferred provider plans command slightly higher costs, with premiums at $8,906 for single coverage and $25,228 for family coverage. These figures represent a 7% increase from the previous year and a substantial 47% surge compared to 2013. Meanwhile, the Consumer Price Index, a measure of general inflation, has risen by 30% since 2013.

This raises two questions: Are health insurance companies reaping excess profits while policyholders pay hefty premiums? Why don’t more insurance companies jump into the health insurance market, providing needed competition that would help drive down the cost of health insurance?

Let’s look at profits. A mid-2022 report from the National Association of Insurance Commissioners (NAIC) provides insight into the aggregate “loss ratio” for various policy types. This ratio offers a rough estimate of the difference between what companies collect in premiums and what they pay out in claims. For comprehensive hospital and medical coverage between 2018 and mid-2022, the loss ratio ranged from 67.8% to 77.7%, meaning roughly $72 was paid in claims for every $100 of income received from premiums. Loss ratios for Medicare supplement policies ranged from 72.9% to 82.4%.