Introduction

The predominant form of health coverage in the United States is, and historically has been, private health insurance. Americans generally obtain private health insurance coverage through either—or occasionally both—of the following sources: an employment setting (group plans) or directly from an insurer (nongroup plans). See Appendix A for private health insurance enrollment data.

Congress frequently considers legislation aimed at modifying the current health insurance system. A knowledge of various core topics related to private health insurance may help in assessing the potential impact of such proposals. These topics include common types of plans, key features of plans (e.g., premiums, cost sharing), how consumers obtain and finance plans, and how the federal and state governments regulate plans. This report discusses these topics and provides other information on private health insurance, including on different types of private health insurance stakeholders (e.g., consumers, employers), the concept of risk, and enrollment and premium data.

This report focuses on plans offered by private-sector employers and plans sold by private health insurers directly to consumers. This includes health insurance offered through the federal and state health exchanges (also known as marketplaces). Although governmental employers also may offer private health insurance, this report does not focus on such plans.¹

This report also does not address public programs such as Medicare and Medicaid, which are health coverage programs administered by the federal and/or state governments for eligible individuals. Some beneficiaries in public programs obtain their coverage through commercial insurers contracted by those programs (e.g., Medicare Advantage, Medicaid managed care plans), but such plans and programs are not private health insurance.²

A companion to this report is CRS Report R45146, Federal Requirements on Private Health Insurance Plans, which describes federal statutory requirements related to the topics explained below (e.g., premiums, covered benefits) as well as other topics (e.g., price transparency).

Private Health Insurance Overview

Generally, a health insurance plan is an agreement that a plan enrollee will pay specified amounts in return for coverage of certain health care benefits (often, as furnished by certain health care providers).

Because the need and cost for future health services cannot be perfectly predicted, consumers seek health insurance to obtain financial protection against future expenses. By obtaining insurance, a given consumer transfers part of the risk of future health expenses to the insurer. This risk transfer means an insurer has accepted responsibility for covering some portion of future health care costs for the consumers enrolled in its health plans. Consumers and insurers each continue to hold some risk under insurance, which still may lead to financial loss. For a discussion of insurance risk in the context of health care, see Appendix B.

Private Health Insurance Stakeholders and Roles

The private health insurance landscape involves numerous stakeholders and interrelationships. This includes, but is not limited to, the following examples:

• Consumers, or enrollees (both individuals and families), obtain health insurance coverage to help pay for routine and unexpected health services.³
• Most group plan sponsors are employers, which offer and usually subsidize health benefits to attract and retain employees. Other entities (e.g., unions) also may sponsor coverage.
• Insurers sell insurance plans through which they help pay for enrollee health benefits,⁴ in return for premium amounts collected, with the objective of operating a viable business.⁵ Insurers set the terms and conditions of their plans, subject to applicable requirements.
• Federal and state governments have overlapping, but not uniform, authority to regulate private coverage (e.g., by imposing solvency, consumer protection, and other types of requirements), administer health insurance exchanges, and provide tax benefits related to private health insurance.
• Health care providers furnish benefits (i.e., health care services and items) to enrollees in return for payments, with the objective of operating a viable business. Plan and/or enrollee payments to providers depend, in part, on whether the furnished benefits are covered by the enrollee's plan. Providers include individual practitioners, such as physicians; facilities, such as hospitals; and other entities, such as pharmacies and labs.⁶
• Other types of stakeholders also are relevant to the private health insurance landscape. For example, drug manufacturers and medical equipment companies produce and supply health care items (e.g., prescription drugs, insulin pumps, hearing aids) to health care providers or, in some cases, directly to consumers.

Types of Private Health Insurance Plans

With the array of stakeholders and variety of insurance needs, the insurance industry has developed a diverse range of coverage options. Plans may vary in several ways.

One major distinction, including for purposes of federal regulation, is that private health insurance includes group plans (largely made up of employer-sponsored insurance) and nongroup plans (i.e., plans a consumer purchases directly from an insurer). Group plans may be fully insured or self-insured, and fully insured plans may be purchased in the large- or small-group markets. The nongroup market (also called the individual market) and the small-group market include plans sold on and off the health insurance exchanges—the individual exchanges and Small Business Health Options Program (SHOP) exchanges, respectively. All of these plan types are discussed further in the "Obtaining and Financing Private Health Insurance Coverage" and "Federal and State Regulation of Private Health Insurance" sections below.

Some terminology distinguishes plans according to certain features. These distinctions generally can apply to both group and nongroup plans. Following are explanations of some terms that commonly appear in policy or trade discussions (this selection of terms is not intended to be comprehensive). See the next section of this report, "Common Features of Private Health Insurance Plans," for further discussion of general concepts mentioned here, such as provider networks; covered benefits and medical management approaches; and cost sharing, including deductibles.

• Plans may provide self-only coverage (i.e., covering only a single enrollee, or policyholder) and/or may provide coverage for a policyholder and his or her dependents (i.e., different variations of family plans, including, for example, coverage for a policyholder and spouse).
• Plans vary in terms of how they cover enrollees' access to providers and services, including through the use of provider networks and medical management approaches. For example, preferred provider organizations (PPOs) generally provide coverage for enrollees to see out-of-network providers, whereas health maintenance organizations (HMOs) may not.⁷
• Major medical plans provide comprehensive health benefits, as compared with limited benefit plans. The specific covered benefits may vary across major medical plans.⁸
• Some plans are high-deductible health plans (HDHPs; i.e., plans that have higher deductibles than other health insurance plans). When certain requirements are met, HDHPs can be combined with health savings accounts, which are tax-advantaged accounts that individuals can use to save and pay for medical expenses that insurance does not cover.⁹

Health insurance companies also may offer services and products other than private health insurance plans. For example, insurers may offer an administrative services only arrangement (e.g., enrollment and consumer support functions) to plan sponsors that directly finance the health benefits they offer. Insurers also may offer other products and services to employers and other insurers, including management of certain "carve out" benefits, such as prescription drugs;¹⁰ assistance in developing provider networks; and more.

Common Features of Private Health Insurance Plans

Most private health insurance plans include premiums, covered benefits, cost-sharing requirements, and provider networks. In each of these areas, specific details (e.g., required cost-sharing amounts) may vary across plans, subject to federal and state requirements.

Federal requirements may apply in each of these areas and may differ by plan type (e.g., large group, small group, self-insured, and nongroup). State requirements also may apply in each of these areas, with regard to the types of plans that states may regulate.¹¹

Premiums

A premium is the price consumers and others (e.g., employers) pay to obtain health coverage. Premiums can vary across plan types, by geography, and by other factors. Premium variation also may reflect the roles of the federal and state governments in regulating private health plans. Given all of the factors that affect the calculation of premiums, an average premium provides limited insight into premiums across plans at the national or even state level. However, Appendix A discusses certain premium data for group health plans and individual exchange health plans.

Premiums are paid to insurers (see the "Obtaining and Financing Private Health Insurance Coverage" section below).¹² Insurers use premium revenue to pay health care providers, which furnish covered benefits to plan enrollees. Often, providers submit medical claims to insurers containing information about the services and items provided and the amount requested for payment. Insurers also use premium revenue to pay for expenses associated with administering the plans, including taxes and fees. In simple terms, premium revenue that exceeds the sum of medical claims and administrative expenses would result in profit; revenue that is insufficient in covering those costs would result in a loss.¹³ Of the various expenses paid using premium revenue, medical claims is the largest component.¹⁴

Because a given premium is the price for coverage, the premium amount reflects plan features such as covered benefits, cost-sharing requirements, and provider networks (see discussions below). As the majority of premium revenue pays for medical claims, the relationship of plan features to potential claims costs may directly affect a given premium. For example, a plan that covers many benefits—which has the potential to lead to numerous medical claims—likely would have a higher premium than a plan that covers few benefits, all else equal.

Covered Benefits

Covered benefits are the health services (e.g., physician visits, surgeries) and items (e.g., prescription drugs) that a plan will help enrollees pay for. Covered benefits may differ by plan, subject to applicable federal and state requirements. For example, most major medical plans cover inpatient hospital stays, but coverage details may vary widely across plans. Common variations include whether and what cost-sharing requirements apply to a given benefit and whether a benefit is covered both in network and out of network. The following sections discuss these concepts. Benefit coverage also can vary in terms of frequency, such as a maximum number of hospital days or provider visits covered within a certain time period, or in terms of setting, such as inpatient versus outpatient facilities.

Medical management requirements (also called utilization management requirements) are another common component of plan design as related to benefit coverage. In general, medical management requirements include different types of standards or processes through which plans aim to ensure appropriate use of covered benefits and to control costs. Examples include the following:

• Some plans require enrollees to obtain prior authorization from the plan, or approval of benefit coverage before receiving care (such as a routine hospital stay), as a condition of covering specified benefits.
• Some plans require that primary care physicians provide referrals for certain specialty care before the plans will cover such specialty care.
• Before some plans will cover certain benefits (e.g., a certain brand-name drug), the plans may impose a step therapy requirement (sometimes called a fail first requirement) that an enrollee first try certain other benefits (e.g., a generic version of the drug).

Even without specific medical management requirements such as those described above, a plan's coverage of a given benefit generally will depend on the benefit being deemed medically necessary for a given enrollee. Plans may defer to a health care provider's recommended treatment plan as an indication of medical necessity and permit coverage of a benefit for an enrollee. In some cases, plans may conduct reviews of the medical claims that providers submit for payment. If the plan makes a determination that a service or item was not medically necessary, it will deny payment for the service or item.¹⁵

Cost-Sharing Requirements

Whereas premiums are the amounts consumers pay to obtain health coverage from insurers, cost-sharing requirements (or out-of-pocket costs) are the amounts consumers pay to their providers as consumers use the benefits covered under their plans. Private health plans generally include the following cost-sharing requirements for enrollees: deductibles, coinsurance, and co-payments, up to annual out-of-pocket limits (see Table 1).¹⁶

In general, for a given benefit, an enrollee may have cost-sharing responsibility for some, all, or none of the payment to the provider. The plan is responsible for the rest of the costs of the covered benefits, in the form of payments to the provider based on medical claims the provider submits to the plan.

Just as plans may vary in their coverage of benefits, plans also may vary in their cost-sharing requirements (overall or with regard to a given benefit), subject to applicable federal and state requirements. For example, cost sharing for a given benefit (e.g., a minor procedure) may vary depending on the provider or the setting in which the benefit is furnished (e.g., inpatient or outpatient). In addition, a cost-sharing requirement for a given benefit can include more than one component, such as physician fees, facility fees, and the costs of items provided. A hospital stay, for example, may involve cost-sharing charges for physician services as well as facility fees, among other charges as relevant to benefits provided.

In some cases, including where required by law, plans are named or identified in ways that help differentiate the relative generosity of their coverage. For example, certain plans use metal levels (bronze, silver, gold, and platinum) to indicate their actuarial value (AV). AV is an estimate of the "percentage of total average costs of covered benefits" that a plan will pay and thus is the counterpart to average enrollee cost sharing.¹⁷ In other words, the higher the AV percentage (e.g., 90% AV for a platinum plan versus 60% for a bronze plan), the lower the cost sharing for plan enrollees overall. AV is not a measure of plan generosity for an enrolled individual or family, nor is it a measure of premiums or benefits packages.

Provider Networks

Most plans have a provider network, which refers to a set of health care providers and facilities that the insurer has contracted with to furnish covered benefits to plan enrollees at specified prices. For each provider where such a contract exists with a particular insurer, that provider is considered part of that insurer's provider network (i.e., is an in-network provider). In instances where such a contract does not exist, the provider is considered an out-of-network provider.

As stated above, plans' coverage of benefits provided to an enrollee may be contingent on the benefits being provided through a provider network (i.e., by an in-network provider). Some plans generally do not cover care furnished by out-of-network providers, subject to federal or state requirements.¹⁸ In those plans, covered benefits generally may be furnished only by in-network providers. (In other words, the plan generally would not cover a benefit if received from an out-of-network provider, meaning the enrollee would be responsible for the entire bill.) For plans that cover out-of-network care (in addition to in-network care), cost-sharing requirements (e.g., co-payments) typically differ based on whether the provider is part of the plan's provider network. In general, cost sharing for a service provided by an in-network provider is lower than cost sharing for the same service provided by an out-of-network provider.

To establish a network, insurers negotiate and establish contracts with hospitals, physicians, provider organizations (e.g., group practices), and other types of providers and facilities (e.g., laboratories). Given the variations in the way contracts may be negotiated, it is possible for a facility to be in network but for certain providers operating within such facility to be out of network.

Insurers establish provider networks to help control costs and to provide plan enrollees with access to quality care. The providers within a plan's network and/or the size of the network, which federal and state requirements may affect, can play a role in consumer decisions to enroll in such plan. Providers may choose to enter into contracts with insurers and generally agree to charge reduced amounts for care to plan enrollees; in turn, the plan steers enrollees toward the provider, because enrollees pay less to receive benefits from an in-network provider than they would pay to receive similar benefits from an out-of-network provider. In other words, providers typically face a price-volume tradeoff when considering whether to join a provider network.

In short, plans' use of provider networks, the number and types of providers that plans include in their networks, and plans' coverage of benefits obtained in- and out-of-network may vary, subject to federal and state requirements.

Obtaining and Financing Private Health Insurance Coverage

Consumers with private coverage generally obtain their coverage through either, or occasionally both, of the following sources: an employment setting (group plans) or directly from an insurer (nongroup plans). This section provides additional information on these sources of coverage.

This section also discusses the financing of private coverage. Who pays for coverage depends on the type of plan, if there is a plan sponsor (e.g., an employer that offers health benefits to employees and dependents), and the consumer's unique circumstances.¹⁹ Typical payers for private coverage include consumers, employers (and other plan sponsors), and/or government.²⁰

Group Plans

Group plans refer to health benefits provided by employers and other entities (e.g., unions, associations) that sponsor such benefits (plan sponsors). Eligibility for group coverage is limited to individuals who are part of the group, by virtue of either their own employment or their relationship to an employee (e.g., spouse, to the extent that a sponsor makes the group plan available to family members).

Plan sponsors may provide health benefits directly or through plans sold by insurers.²¹ Small employers—generally, those with up to 50 employees—also may be able to buy plans on their state's exchange (see text box: "Health Insurance Exchanges"). Plan sponsors purchasing coverage from insurers, including via the small business exchanges, may use agents or brokers to do so. Plan sponsors providing health benefits directly also may use agent or broker services to assist in arranging such benefits.

Payers for group plans generally include employers and employees. Although a health insurance premium typically is the price for a month's worth of insurance, employee contributions are often deducted from wages on a biweekly basis.²² For those eligible for and enrolled in employer-sponsored coverage, employers typically make contributions that cover most of the premium amount. In 2022, employer contributions covered approximately 83% of premiums for self-only plans and approximately 72% of family plan premiums, on average.²³ Employees cover the remaining share of premiums.²⁴ See Appendix A for additional premium data.

The federal government also can be considered a payer for group plans, in terms of tax exclusions and other tax policies for employers and employees.²⁵ Employer premium contributions are excluded from an employee's gross income and therefore are not subject to income or payroll taxes. As such, workers receive a tax advantage by purchasing coverage through an employer. Employee contributions are often made on a tax-advantaged basis through a cafeteria plan, which allows employees to reduce their taxable salary and instead put such money, pretax, toward a qualified benefit.²⁶ The tax exclusion and other tax policies encourage workers to sign up for (take up) health coverage within the work setting but result in forgone revenue in terms of the federal budget.²⁷

Nongroup Plans

Instead of obtaining coverage as part of a group (e.g., through an employer), consumers may purchase a health plan for themselves (and their dependents) directly from an insurer. Consumers in this instance purchase insurance from the nongroup market, also called the individual market. The nongroup market is sometimes referred to as a residual market, because it provides coverage options to individuals and families who may not be able to obtain coverage through the workplace (e.g., because their employers do not offer coverage, the consumers are not eligible for their employers' coverage, or the consumers are self-employed) and do not qualify for public programs such as Medicare, Medicaid, or the State Children's Health Insurance Program.

The nongroup market consists of plans sold through the individual exchanges (see text box) and plans sold by insurers outside of the exchanges. Whether a consumer purchases coverage on or off the exchange, he or she may do so directly from an insurer; via an agent or broker; or, in the case of the exchanges, with the help of certain publicly funded assisters.²⁸

Payers for nongroup plans generally include consumers and the government. Enrollees pay the entire premium for nongroup insurance, unless they qualify for subsidies.²⁹ Currently, the federal government provides eligible individuals and families with financial assistance in the form of a tax credit that reduces consumers' spending on premiums for exchange plans.³⁰ As of February 2022, 90% of enrollees in the individual exchanges received advanced payments of the premium tax credit.³¹ See Appendix A for additional premium data.

Federal and State Regulation of Private Health Insurance

Both the federal and state governments regulate private health insurance. Federal and state requirements may vary by type of plan.

Plan Types for Purposes of Private Health Insurance Regulation

Federal requirements on private health insurance generally are structured to apply to some or all of the following types of plans: fully insured group plans offered by large employers (i.e., large-group plans), fully insured group plans offered by small employers (i.e., small-group plans), self-insured group plans, and nongroup plans.³² Requirements for the nongroup and small-group plans apply to plans sold on and off the health insurance exchanges.

In general, state regulations also may apply to some or all of the above plan types, except for self-insured group plans.

Fully Insured Group Plans. When group plan sponsors purchase coverage from insurers and offer it to their employees or other groups, these plans are referred to as fully insured. The group market is divided into segments based on size: the small-group market and the large-group market.

• Small-Group Plans. For purposes of federal requirements that apply to the group market, states may elect to define small groups or employers as those with 50 or fewer individuals (e.g., employees) or groups with 100 or fewer individuals.
• Large-Group Plans. The definition for large group builds on the small-group definition. A large group has at least 51 individuals or at least 101 individuals, depending which small-group definition is used in a given state.

Self-Insured Group Plans. When group plan sponsors provide health benefits directly (instead of purchasing coverage from an insurer), these plans are referred to as self-insured or self-funded.³³ Employers or other plan sponsors that self-insure set aside funds to pay for health benefits directly,³⁴ and they bear the risk of covering medical expenses generated by the individuals covered under the self-insured plan. Groups of any size may self-insure, and federal requirements on self-insured plans generally do not depend on group size.

Nongroup Plans. As explained above, the nongroup (or individual) market is where consumers may purchase a health plan for themselves and their dependents directly from an insurer (i.e., not through a plan sponsor). For the most part, nongroup plans are fully insured; this report discusses them as such.

Other. Certain types of plans meet a federal definition of health insurance but are exempt from compliance with some or all federal health insurance requirements that otherwise would apply. Such plans include, for example, grandfathered plans, excepted benefit plans, and short-term, limited duration insurance.³⁵

Federal and State Regulatory Roles

States are the primary regulators of insurers, as codified by the 1945 McCarran-Ferguson Act.³⁶ Health plans offered by state-licensed insurers are subject to state health insurance requirements. Such requirements on private health insurance may apply to some or all of the following: fully insured large-group plans, fully insured small-group plans, and nongroup plans. Because self-insured group plans are financed directly by plan sponsors, such plans generally are not subject to state health insurance requirements.

The federal government also regulates state-licensed insurers and the plans they offer.³⁷ Federal health insurance requirements typically follow the model of federalism: federal standards establish a minimum level of requirements (federal floor), and states may impose additional requirements on insurers and the plans they offer, provided the state requirements neither conflict with federal law nor prevent the implementation of federal requirements.

In addition, the federal government regulates self-insured plans as part of federal oversight of employment-based benefits. Federal requirements applicable to self-insured plans often are established in tandem with requirements on fully insured plans and state-licensed issuers. Nonetheless, fewer federal requirements overall apply to self-insured plans compared with fully insured plans.

Federal requirements on health plans are primarily codified in three statutes: Title XXVII of the Public Health Service Act (PHSA), Part 7 of the Employee Retirement Income Security Act of 1974 (ERISA), and Chapter 100 of the Internal Revenue Code (IRC). Although the health insurance provisions in these statutes are substantively similar, the differences reflect, in part, each statute's applicability to private plans. The PHSA's provisions apply broadly across private plans, whereas ERISA and the IRC focus primarily on group plans. The Departments of Health and Human Services, Labor, and the Treasury—given their overlapping jurisdiction over private coverage—coordinate implementation efforts with respect to these private health insurance requirements.³⁸

Appendix A. Private Health Insurance Enrollment and Premium Data

This appendix provides selected data on private health insurance enrollment and private health insurance premiums. In each case, data are provided from sources that allow for particular comparisons (e.g., across plan types).³⁹ Enrollment data are presented by self-insured plans, fully insured plans, and nongroup plans (offered both on and off the health insurance exchanges). Premiums information is presented for group plans generally and for nongroup plans sold on the individual health insurance exchanges.

U.S. Private Health Insurance Enrollment Data

Mark Farrah Associates, which aggregates health insurance data from the National Association of Insurance Commissioners and various other sources, estimated that 189.4 million individuals had private health insurance in the first quarter of 2022.⁴⁰ Most of these enrollees (124.9 million individuals) were covered under a self-insured group plan; 46.5 million individuals were covered under a fully insured group plan (large and small group).⁴¹ A much smaller population (18.0 million individuals) was covered under a nongroup plan, which includes major medical plans offered on and off the health insurance exchanges.⁴²

Overall, private health insurance enrollment has slightly increased over the past decade (Figure A-1); the total number of enrollees increased by 4.2 million from the first quarter of 2013 to the first quarter of 2022. Over this period, self-insured group plan enrollment increased by 14.2 million individuals, fully insured group plan enrollment decreased by 15.5 million, and nongroup plan enrollment increased by 5.5 million.

Various factors may have contributed to these changes over time. For example, the rates of employers offering different types of health insurance (i.e., fully insured plans and/or self-insured plans) have fluctuated over time, as have the rates of employees working for employers offering different types of health insurance. In addition, the establishment of the health insurance exchanges and corresponding financial assistance created incentives for eligible individuals to purchase nongroup health insurance.⁴³ Changes in private health insurance enrollment also may relate to broader demographic and economic factors, such as changes in overall population, changes in workforce participation, and consumers' eligibility for coverage through public programs such as Medicare or Medicaid.

Figure A-1. Private Health Insurance Enrollment, by Selected Plan Types, 2013-2022

Source: Congressional Research Service analysis of Mark Farrah Associates data, available by subscription at Health Coverage Portal, https://www.markfarrah.com/. Accessed February 22, 2023. Notes: Enrollment is associated with the first quarter of a given calendar year. Nongroup enrollment includes major medical plans offered on and off the health insurance exchanges. Fully insured group enrollment includes large-group and small-group private-sector plans. Self-insured group enrollment includes private-sector plans. See "Obtaining and Financing Private Health Insurance Coverage" and "Federal and State Regulation of Private Health Insurance" for discussion of plan types.

U.S. Private Health Insurance Premium Data

Different estimates of average premiums can provide useful contextual and trend information on such private health insurance costs,⁴⁴ but actual plan premiums depend, in part, on plan design. Caution should be used in comparing average premiums across plan types, or across different geographical areas, given potential variations in plans that would affect premiums. This includes plan variations due to applicable federal and state requirements. In addition, the group plan and individual exchange premium estimates below are calculated in different ways, which limits their comparability.

Group Health Plan Premiums

The Kaiser Family Foundation (KFF) conducts an annual survey of private and nonfederal public employers with three or more employees, and this survey provides group health plan premium data.⁴⁵ According to the survey, in 2022, the average annual premium for covered employees with self-only coverage was $7,911 and the average annual premium for covered employees with family coverage was $22,463. These amounts represent total premiums, including both employees' and employers' contributions. Average health insurance premiums have increased since 1999, with average family coverage premiums growing at a faster rate than those for self-only coverage.⁴⁶

The distribution of health insurance premiums among covered employees is also notable. In 2022, approximately 17% of covered employees with self-only coverage were enrolled in a plan with a premium below $6,000 and approximately 25% were enrolled in a plan with a premium of at least $9,000. With respect to family coverage in 2022, approximately 26% of covered employees with family coverage were enrolled in a plan with a premium below $19,000 and approximately 21% were enrolled in a plan with a premium of at least $26,500.

As stated earlier, it is common for employers to subsidize the premiums of the plans they sponsor.⁴⁷ In 2022, KFF estimated that for the average annual premium for covered workers with self-only coverage ($7,911), employers contributed an average 83% ($6,584) and covered employees contributed an average 17% ($1,327). Covered employees contributed more for family coverage. In 2022, for the average annual premium for covered workers with family coverage ($22,463), employers contributed an average 72% ($16,357) and employees contributed an average 28% ($6,106). The percentage of premiums paid by covered workers generally has been stable since 1999, though, as noted, average health insurance premiums have increased overall.⁴⁸

Premiums for Nongroup Plans on the Individual Exchanges⁴⁹

In the individual exchanges nationwide, per preliminary estimates from the Centers for Medicare & Medicaid Services (CMS), the average total premium per month was $586.56 for plan selections made as of February 2022.⁵⁰ This amount consists of the total premiums for the month, including amounts paid by enrollees and any subsidy amounts, divided by total enrollees for the month.⁵¹ This average amount has varied—but increased overall—since first published in 2017.

Note that actual consumer premiums may vary widely based on numerous factors. Such factors include a consumer's plan selection, the factors by which an insurer is permitted to vary premiums (i.e., consumer age, tobacco use, individual versus family enrollment, and geography), and consumer eligibility for subsidies.

As estimated by CMS regarding plan selections as of February 2022, most individual exchange enrollees (90%) received a federal subsidy (premium tax credit, or PTC) to lower their premium costs. Consumers' PTC amounts depend on several factors, including income, family size, and the cost of plans in their areas.⁵² Early year estimates regarding PTC eligibility or amounts, and regarding average total premiums, may be subsequently revised.⁵³

Appendix B. Health Insurance Risk

The concept underlying insurance is risk—that is, the likelihood and magnitude of financial loss. Given the uncertainty of costs and spending in the future, risk forms the context for insurance.

Under any type of insurance, involved parties seek to minimize their own risk. An individual (or family) seeks health insurance to protect against financial losses resulting from the future use of health care. By obtaining insurance, a consumer transfers part of his or her risk to an insurer—an entity licensed by a state to sell and issue insurance policies in that state. This transfer of risk means an insurer has accepted responsibility for covering some portion of future health care costs for the consumers enrolled in its health plans, in accordance with the terms and conditions of those plans. Just as consumers purchase insurance to protect themselves from financial loss, insurers employ strategies to predict and manage risk. Such strategies are major drivers of insurance arrangements.

Premiums and the Transfer of Risk

A premium is the price consumers (and other payers, such as employers) pay insurers to obtain health coverage. An insurer accepts risk from a consumer in exchange for a premium. An insurer uses the premium amounts collected (premium revenue) from plan enrollees (and entities that provide premium contributions, such as employers) to pay medical claims for health care services and items furnished to enrollees. In addition to paying claims for covered benefits, insurers may have negotiated the prices for such benefits with certain providers (i.e., in-network providers), which can result in lower prices compared with what they would have been without negotiation. These insurer activities may reduce a given consumer's overall out-of-pocket spending on health care compared with what he or she would have spent without insurance.

The payment and collection of premiums come with their own risks for consumers and insurers. Consumers generally must pay premiums to obtain coverage (with exceptions for certain individuals who qualify for full subsidies) regardless of how much or little health care they actually use. A consumer who needs (or seeks) very little or no health care may find the total sum of paid premiums exceeds the minimal cost for the few services the consumer received. However, a risk-averse consumer still may consider insurance valuable regardless of his or her actual use of health care; for such a consumer, insurance's value is in the transfer of risk to an insurer to cover a portion of potential health costs. In contrast, a consumer who needs many health services or items (or expensive services or items) may find that the insurer's payment of medical claims and negotiation of lower prices is worth the amount the consumer must pay toward premiums.

The fundamental risk to an insurer is that total premium revenue is insufficient to cover medical claims and the expenses associated with administering the plan, leading to financial loss. Given this risk, insurers employ various methods (in compliance with applicable federal and state law) to manage the risk they bear with the objective of running a profitable business.⁵⁴ Medical management is one such method that insurers commonly use to manage risk.⁵⁵

Risk Pools and Premium Setting

Insurers set the premiums they charge for their plans. A given premium amount accounts for various factors (e.g., amount, duration, and scope of covered benefits) and incorporates the insurer's estimates of future medical claims and administrative expenses.

Fundamental to the premium calculation is consideration of the applicable risk pool (i.e., the "group of individuals whose estimated medical costs are combined to calculate premiums"⁵⁶). A risk pool may be determined based on the entity seeking coverage (e.g., a large firm offering health benefits to its employees and their dependents), according to applicable law, or based on other factors.⁵⁷

Both the composition and the size of a risk pool are important considerations for calculating premiums.

To understand the importance of composition to calculate premiums, it is helpful to consider the function of insurance, which is to spread costs across plan enrollees. The proportion of high to low spenders in a given risk pool directly affects the extent to which the pool can subsidize the higher-than-average costs of relatively sicker enrollees with the premium revenue collected from healthier enrollees. There is a long-standing observation that a small percentage of health care consumers account for the majority of spending in a given year.⁵⁸ From the insurer perspective, a favorable risk pool would consist mostly of low spenders, allowing the remaining premium revenue collected from such enrollees to be spent on the higher medical claims generated by a few high spenders. As the percentage of high spenders in a pool increases, it adversely affects the ability of low spenders in the pool to subsidize the costs of the additional higher spenders. If an insurer estimates future medical claims and administrative expenses to be less than actual claims and expenses (i.e., assumes a healthier risk pool), then total premium revenue may not cover those costs. Conversely, a risk pool with very few high spenders (relative to estimates) would more likely be able to cover the claims and administrative expenses generated by the plan enrollees.

Because the higher health care costs for a few enrollees are spread over a group, the size of the pool affects the level of risk that the insurer bears. In general, the more enrollees in a risk pool, the less likely that a few enrollees' high claims costs will result in catastrophic financial loss for the insurer. For this reason, insuring larger groups is considered less risky for an insurer, all else equal.

Enrollment Considerations and Adverse Selection

A consumer's decision to enroll (or not enroll) in health coverage reflects various factors specific to the individual (or family), including health status, estimated need for future medical care, risk aversion, disposable income, and access to subsidies (e.g., employer premium contributions and government subsidies). Individuals who expect to use many health services are more likely to obtain coverage in the first place and to seek out coverage with richer benefits than individuals with few medical needs. This phenomenon, known as adverse selection, results in an enrollee population that is sicker than the general population and consequently generates higher-than-average medical claims. Because of the higher costs associated with adverse selection, an insurer may increase premiums to cover those costs.

The addition of low-risk individuals to the risk pool can counter the effects of adverse selection. Employer-provided health benefits help accomplish this aim by incentivizing broad participation in health coverage. Typically, employers offer health benefits for employee recruitment and retention purposes, but a generous employer subsidy for such coverage affects consumer enrollment decisions, which in turn affect the risk pool. Generally, employers that offer health benefits cover a majority of the premium amount.⁵⁹ This generous subsidy increases the appeal of coverage even for those who do not anticipate much use of covered benefits, prompting the addition of low-risk individuals to the risk pool. Adding low-risk individuals helps keep premiums more affordable and stable for all individuals in the risk pool.⁶⁰