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Breakdown of How Health Insurance Premiums Are Used

Have you ever wondered why your health insurance premiums are so high and continue to rise? It may feel like the health insurance industry is taking advantage of consumers by rising premium costs across the board, but this isn’t necessarily true. A very interesting article on WashingtonPost.com shows a breakdown of exactly how much goes towards things such as doctors and hospitals. You may be surprised to learn that the insurance companies are taking a very small profit when it’s all said and done.

According to “How $1 in Health Insurance Gets Spent” by Sarah Kliff on WashingtonPost.com, health insurance companies only take about 2% of their revenue as profit. Here is a breakdown as provided by Blue Shield of California:

Hospital costs – 40%
Physicans – 28%
Pharmaceutical coverage – 12%
Other medical expenses – 5%
Admin costs – 13%
Income for Blue Cross – 2%

As you can see, most of your premium dollars goes towards medical care by a significant margin. Blue Cross of California pledged last year to cap its profits at 2% and this can be seen in many insurers across the nation. Based on a recent ranking from Fortune’s 2009 ranking of industry profits, on average, the health insurance industry takes 2.2% of revenue as profit. When you compare this to the pharmaceutical industry the difference is staggering. They make about 19.4% profit. This is a good set up since health care reform intends to require large employer plans to spend at least 85 cents on every dollar on medical costs, which is seems Blue Cross of California is already doing.

Written by Sam Tabes

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