Where does my health insurance premium actually go?

In all my years in the health insurance industry—on both the insurance carrier side and the employer brokerage side—I’ve seen one major misconception come up time and time again: the belief that health insurance companies are making massive profits at the expense of everyday Americans.

Ask the average person how much they think insurance companies make in profit, and you’ll often hear numbers like 50% or more. This perception is fueled by media reports, political debates, and a general gut feeling that insurers are the enemy, driving up the cost of healthcare for their own gain. But this couldn’t be further from the truth.

Where Does Your Health Insurance Dollar Actually Go?

It’s important to understand that health insurance companies don’t keep the majority of the money they collect from premiums. In reality, most of the dollars paid into health insurance plans go directly toward covering medical expenses—things like hospital visits, prescription drugs, surgeries, and doctor appointments.

According to America’s Health Insurance Plans (AHIP), for every dollar spent on health insurance premiums:

• 80-85 cents goes directly to paying for medical care, prescription drugs, and hospital services.
• 3-5 cents covers administrative costs, such as customer service, claims processing, and compliance with government regulations.
• Only about 3 cents is actual profit for the insurance company.

While this 3% profit margin does amount to billions of dollars across the entire industry, it is nowhere near the level of profiteering that many assume. By comparison, other major industries have significantly higher profit margins:

• Pharmaceutical companies: 15-20% profit margins
• Hospitals: 8-12% profit margins
• Tech companies (like Apple, Microsoft, and Google): 20-30% profit margins

When you look at these numbers, it’s clear that health insurers are not the primary driver of high healthcare costs.

The Real Cost Drivers in Healthcare

If insurance companies aren’t pocketing huge profits, then why are health insurance premiums rising every year? The answer lies in the ever-increasing costs of healthcare services.

Here are some of the biggest contributors to rising healthcare costs:

1. Hospital Pricing – Hospitals often charge astronomical fees for routine services, and prices can vary widely between facilities. A single night in a hospital can cost thousands of dollars, and many procedures cost significantly more in the U.S. compared to other developed countries.
2. Prescription Drug Costs – The cost of medications in the U.S. is among the highest in the world. Drug manufacturers set their own prices with little regulation, leading to expensive treatments that drive up insurance claims.
3. Specialist and Physician Fees – Visits to specialists, diagnostic tests, and advanced medical procedures all contribute to rising costs. A single MRI scan can cost anywhere from a few hundred to several thousand dollars, depending on the provider.
4. Medical Equipment and Technology – While advancements in medical technology have improved patient outcomes, they have also driven up costs. Hospitals and clinics pass these expenses along to patients through higher bills.
5. Increased Utilization – With an aging population and higher rates of chronic conditions like diabetes and heart disease, more people are using healthcare services, which raises overall costs.

Who’s Really to Blame?

When premiums go up, it’s easy to point the finger at health insurance companies. After all, they’re the ones sending the bills. But in reality, they are acting as intermediaries, collecting premiums and using those funds to pay for the actual cost of care.

The real issue is the cost of healthcare services themselves. Hospitals, pharmaceutical companies, and medical device manufacturers set the prices, and those prices continue to rise year after year. If we truly want to lower healthcare costs, we need to focus on reducing the cost of medical care itself—not just blaming the insurers that help manage the system.

What Can Be Done?

Addressing high healthcare costs requires a multi-faceted approach, including:

• Increased transparency – Many hospitals and providers do not disclose pricing until after services are rendered. More transparency in pricing would allow consumers to make informed decisions.
• Regulating drug prices – Implementing price controls or negotiation mechanisms (as seen in other countries) could help lower prescription drug costs.
• Encouraging preventative care – Investing in wellness programs and preventative care can reduce the need for expensive treatments down the line.
• Reforming billing practices – Medical billing is notoriously complex, leading to errors, inefficiencies, and unnecessary costs. Simplifying the system could reduce administrative expenses.

The Bottom Line

Health insurance companies are not the enemy. They operate on razor-thin profit margins compared to other industries, and the vast majority of your premium dollar goes toward actual medical care. If we want to address rising healthcare costs, we need to focus on the price of medical services, prescription drugs, and hospital fees—not just the insurers processing the payments.

The next time you see your premiums increase, take a closer look at where the money is really going. The problem isn’t the insurer—it’s the cost of care itself. That's why working with a broker to focus on cost-containment and proactive measures to lower claims is beneficial.