How do health insurance companies¹ develop rates?
Health insurance companies develop rates using estimates of future claim costs, administrative expenses, and profits.
• Claim costs: The amount a health insurance company expects to pay for health care (physicians, hospitals, prescription drugs, etc.) on behalf of all policyholders with similar policies. This amount does not include any deductible or copayment paid by the policyholders.
• Administrative expenses: The cost of administering a health plan. These costs can include:
-salaries of health plan employees;
-costs to maintain computer systems to pay claims;
-costs to manage the provider network (signing up doctors, setting payment rates, etc.);
-commissions for producers (agents and brokers);
-premium taxes (a percentage of premium that health plans pay to the State of Maryland); and
-other costs to administer the policy (for example, fraud detection activities).
• Profit: Money that the insurance company has left after paying for claims and administrative expenses. Some of this money (known as “surplus”) is saved to pay for claims and administrative expenses in years when the plans do not collect enough premiums to cover those costs.
¹The term "health insurance companies” used in this FAQ includes Health Maintenance Organizations (HMOs) and nonprofit health service plans.