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Where Does the Health Insurance Premium Dollar Go?

In early March, America’s Health Insurance Plans (AHIP), the national association of private US health insurers, released an interesting report that presents, for insured patients younger than 65 years, financial statistics for 2014 of commercial and nonprofit health insurance companies.

According to the report, “Where Does Your Premium Dollar Go?,” an average of 79.7 cents per premium dollar is spent by insurers on health care proper and 17.8 cents on the insurers’ “operating costs,” leaving only 2.7 cents per premium dollar as profits.

What are we to think of these statistics?

We should note first that all of the AHIP’s numbers are reported to be simple averages. And that means these numbers can be misleading because in calculating them, every insurer, large or small, is given the same weight. A more representative figure would be a “weighted” average, in which each company’s numbers are adjusted, taking into account the company’s revenue as a percent of total revenue generated by the entire sample of companies.

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