The overall impact of the Affordable Care Act (aka Obamacare) has been positive. The new legislation has done what it set out to do, making health insurance more affordable and available to Americans. The total number of Americans who are covered by health insurance now stands at 12.7 million since the bill was signed into law.

One of the negative drawbacks we have seen as a result in the increase of Americans being covered by health insurance is the average amount of the monthly premium. A Gallup poll indicates that Americans’ monthly insurance premium is increasing thanks in part to the Affordable Care Act. But why have monthly premiums increased when Obamacare is intended to be affordable?

To better understand this conundrum, we need to take a look at how health insurance works.

How Health Insurance Companies Make Money

Health insurance companies make money from two primary sources. The most prominent source is from the monthly premiums they collect from each individual in their network. The other is from investments made from the premiums collected.

For example, if a health insurance company has one million subscribers and each person pays $100 a month, that’s $100 million that insurance company is making, every month. It’s with that $100 million insurance companies pay out health insurance claims.

The more claims a health insurance company has to pay out each month, the less amount of profit they see. Less claims means more profit. Simple. This is why health insurance companies love young, healthy adults. They pay into the pool of money, but they rarely take money out. So the more young, healthy people paying into health insurance, the more profit a health insurance company makes. But what happens when more people who need medical care each month are paying health insurance?

Why Health Insurance Premiums Increase Under Obamacare

Thanks to the passing of the Affordable Care Act, more Americans have access to health insurance. Since these people previously didn’t have health insurance, they never went to the doctor. When these individuals did eventually get health insurance, thanks to the Affordable Care Act, they started to use their health insurance for ailments that were previously untreated. This caused an influx of insurance pay outs, that outpaced monthly premium payments.

For the first few years of the Affordable Care Act, this increase was offset by government subsidies. Two such subsidies were the “re-insurance” and “risk corridors” subsidies.

The re-insurance subsidy reimbursed insurance companies for high-cost patients. The risk corridor subsidy compensated health insurance companies for higher than expected health care costs. Both of these subsidies are set to expire, which means the costs will be passed onto premium paying individuals.

While it’s not pleasant that health care premiums will increase, it’s still important that individuals find proper health care coverage. Even when it seems like you’re wasting money, spending money on health insurance is an investment. It will save you financial strife down the road, when an unforeseen health emergency hits.

If you have questions about your health insurance premiums and your plan, it’s best to speak with an health insurance agent. They can help you better understand everything and make sure you’re on the most appropriate plan.

Image Courtesy of Daryn Bartlett

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