Last week when I wrote about the relationship between health care premiums and obesity rates, a number of people both on BenefitsPro and in person mentioned to me how premiums are much more a function of claims paid than of the relative health of the participants.
Of course, there is a relationship between premiums and health, but as we saw last week it's one that's unexpectedly not inverse.
This week I took a look at whether premiums can be used to predict claims. Unfortunately, claims paid are only required to be reported on health policies that use experience related contracts, which represent a very small minority (around 7 percent) of health plans filed. More on this shortcoming of the 5500 next week.
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What I did find was not particularly surprising, but it can be useful.
The values used in the graph above represent claims per participant and premiums per participant. The line is determined by a linear regression of Claims = 0.8856*Premiums + 178.11. That equation yields an expected value for claims per participant that only deviates from the actual claims paid by 7 percent on average. To get premiums, the equation would be Premiums = 0.5326*Claims + 2451. The variance there is only 5 percent.
What does this all mean? It means that not only do plans with higher claims end up paying higher premiums, but that the relationship between the two is fairly linear and can be used in mathematical fortune telling.
For example, if my carrier wants to charge me $5,000 per participant (not an unusual amount), I can bet that they're going to be paying out around $4,606 in claims for that participant (wait a minute…). Conversely, I know that if $6,000 in claims were paid out this year, I know that next year I'm going to be charged around $5,646 in premiums.
Health insurance! What a racket!
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