How Your Premium Dollars Are Spent

By Ryan Schuster

Have you ever wondered how your health insurance premiums are used by your insurance company? You might be surprised by the answers.

Premiums are what people pay in exchange for receiving health insurance coverage. If you receive health insurance through your job, your premiums are likely automatically deducted from your paycheck with the premium amount displayed on your paystub.

How does Blue Cross Blue Shield of North Dakota use the premiums it receives from its members? Roughly 90 percent of member premiums (or  90 cents out of every premium dollar collected) are used to pay for medical care and services used by members. The rest goes to pay for the cost of running the business (see the full 2012 premium dollar breakdown below), including processing claims, taxes and regulatory fees. If anything is left over, it is kept in reserves to pay unexpected costs, such as higher than anticipated member medical claims.

People sometimes grumble about health care costs and blame insurance companies. Increases in the cost of premiums are generally in response to rises in medical claims from members, which are in turn driven by overall health care costs. Here is an explainer of how health care costs impact premiums.

We have been asked if premium increases are leading to us posting hefty profits. The answer is no because we are a non-profit insurance company. That means that if there is anything left over after paying our members’ medical claims and our bills, it is kept in reserves — not distributed as profits to benefit shareholders. Our administrative costs of 7.4 percent and reserves of 1.3 percent in 2012 remain among the lowest in the nation. We are governed by a 13-member board that is elected by our members and we try to remain as responsive as possible to the needs of our members.

The exact percentage of how your premium dollars are used varies slightly from year to year because of a number of factors, including the amount and value of the medical claims we receive each year. Here are the premium dollar breakdowns from 2011 and 2010.

What do you think of how your premium dollars are spent? Are you surprised? We’re listening and would love to answer any questions you may have.

Ryan Schuster is an editor in the Communications department at Blue Cross Blue Shield of North Dakota.