Copyright forbes
Health insurance premiums reflect both medical costs and policy choices that shape prices and coverage. If your family’s health insurance premium feels like a second mortgage, you’re not imagining things. According to new data from the Kaiser Family Foundation, the average annual premium for employer-sponsored family coverage is now just under $27,000, and that’s before deductibles and copays. But before we blame greedy “profit-driven healthcare”, it helps to go back to first principles and understand what that premium really represents. What A Premium Actually Represents Your health insurance premium is simply the insurer’s estimate of expected medical spending: the number of services you’ll use (Q) multiplied by their average price (P), plus an administrative “load” of about 15–20%. That load covers claims processing, customer service and a modest profit. Importantly, that share has barely changed in decades. Under the Affordable Care Act, insurers must devote 80–85% of premium dollars to medical care, leaving 15–20% for administration and profit, typically just 3–5% net margins for large insurers. Employers that self-insure pay even less, often reducing administrative costs to single digits. So when premiums climb, it’s not because insurers are taking a bigger slice. It’s because the underlying cost of care has grown, whether from higher prices (P), greater use (Q) or both. The “Good” Reasons Premiums Rise Some premium growth reflects progress. Consider GLP-1 drugs such as Ozempic and Wegovy, used to treat obesity and diabetes. They’re expensive, $500 or more per month, and a huge share of Americans qualify, given that 40% of US adults are obese. That’s a big hit to current spending. But these therapies also produce enormous long-term benefits: fewer heart attacks, lower diabetes complications and improved quality of life. MORE FOR YOU The same math applies to CAR-T cell therapies for blood cancers. A single infusion can run $450,000, but it delivers cure rates above 80% in children with leukemia who once faced near-certain death. Not every rise in health insurance costs is a bad thing. Paying for innovations that meaningfully extend life or reduce chronic disease is a trade-off most people will happily accept. They belong in the “good” column. Unfortunately, that column is pretty short. The “Bad” Reasons Premiums Rise Most of what inflates your health insurance bill comes from policy distortions that drive up either quantity (Q) or price (P) without adding commensurate value. Coverage Mandates Inflate Quantity (Q) Federal law requires every plan to cover a long list of “essential benefits,” not just hospital and physician care, but also screenings, immunizations and even durable goods like breastfeeding equipment. Each mandate seems sensible on its own, yet collectively they transform insurance from a safeguard against catastrophe into a prepaid health plan for routine consumption. And because every covered service carries the 15–20% administrative load, the cost multiplies. The same pattern plays out at the state level. Legislatures have added dozens of their own mandates — covering fertility treatments, chiropractic care, hearing aids and therapy for autism, among others. Well-intentioned or not, these rules broaden the definition of “insurance” and make every policy more expensive. When lawmakers add benefits, premiums inevitably rise. Market Power and Regulation Inflate Prices (P) On the price side, the biggest culprits are restricted competition and distorted payment systems: Hospital Consolidation. Over the past two decades, waves of mergers have left many metro areas dominated by a few hospital systems. Academic studies consistently show that hospital mergers raise prices 10–20% or more with little evidence of better outcomes. Site-of-Service Payment Differentials. The same MRI costs thousands more if performed at a hospital outpatient department instead of an independent imaging center, because Medicare (and, by extension, private insurers) pays more for the hospital site. These payment gaps encourage consolidation and push up prices. Certificate-of-Need (CON) Laws. In 35 states, new hospitals or surgical centers must prove to a state board — often composed of existing providers — that there’s “need” for new capacity. Imagine if Walmart had to get Target’s permission to open a store. CON laws protect incumbents and stifle competition. These misguided policies have been keeping healthcare prices high for years. Medicare’s Administrative Prices. Because Medicare is such a large purchaser, its pricing formulas spill over into private markets. When the government sets prices too low for one service, hospitals offset by charging higher rates elsewhere, often to private insurers. Each of these policies limits supply or embeds cross-subsidies that keep prices high and rising. The Bigger Picture Premium growth reflects both value creation and value destruction. Paying for transformative treatments like GLP-1 drugs or new cancer therapies may be costly but worthwhile. Paying for regulatory bloat, protectionism and misaligned incentives is not. If policymakers want to make health insurance more affordable, the path forward is straightforward. We can start by restoring insurance to its proper purpose: protection against financial catastrophe, not a payment plan for every minor expense. That means limiting expansive benefit mandates, dismantling protectionist rules such as certificate-of-need laws, and ensuring that identical services are reimbursed the same regardless of where they’re performed. Most importantly, we should trust competition and consumer choice to discipline prices and reward value. Markets work when they’re allowed to. The more we insulate consumers and providers from real costs, the higher those costs will climb. Affordable coverage won’t come from vilifying insurers or dictating prices. It will come from reducing the policies that quietly make medical care more expensive in the first place. Editorial StandardsReprints & Permissions
