The health insurance industry increased its net earned premiums by $29 billion in 20241. If your health plan premiums have gone up since your last policy period, you’re not alone. Every year, individuals, families, and employers across the U.S. experience premium rate hikes. But many often don’t know why.
If you’re shopping for a new health plan for you or your family or refreshing your company’s benefits package, your first step is understanding what factors cause insurance rates to rise. The article below will comprehensively break down the key reasons for premium increases so you can plan before renewing or changing your health coverage.
In this blog post, you’ll learn:
- What causes health insurance premiums to increase for employers and individual consumers.
- The cost drivers behind group and individual health insurance coverage.
- How adding health reimbursement arrangements (HRAs) to your benefits package can help offset premiums and other healthcare costs.
What is a health insurance premium?
First, let’s start with a quick overview of how health insurance premiums work. A premium is the recurring payment you make to your insurance carrier to keep your coverage active. Like other types of insurance, your premium payments are ongoing even if you don’t need medical care during the plan year.
Here’s how it works: First, you’ll choose your preferred health insurance policy, whether an employer-sponsored group plan or coverage sold on the individual market. When you enroll in an individual plan, your insurer typically asks you to make a binder payment. This fee is the first month’s premium for your new healthcare plan, so the policy can take effect on time.
Then, you’ll pay your premium on a set time frame for the rest of the plan period. The vast majority of premium payments are monthly. But your insurer may have an annual, quarterly, or weekly schedule.
Why do health insurance premiums keep going up?
The reasons for rising premiums depend on the type of coverage that you have. We’ll explain the three main health insurance types in the sections below.
Large group plans
Traditional group health insurance is a type of coverage employers buy from an insurance company or broker for their employees and eligible dependents. Most states consider employers with 51 or more workers a large group.
Employers and enrolled employees typically share the cost of group plan premiums, with the employee’s portion deducted from their paycheck on a pre-tax basis. In 2024, the average group plan premium was $745.91 per month (or $8,951 annually) for self-only coverage and $2,131 per month (or $25,572 annually) for family plans2.
Key factors that can determine premium costs for large group plans are:
- The age of your employees
- The number of employees participating in your group plan
- Your ZIP code
- Plan type
- Family size
- Your company’s medical claim history
- The sum insured, or the estimated amount your insurer has agreed to pay in a plan year
- Whether your company is in an industry that’s prone to health risks
- Additional benefits included in the group plan, like dental or vision coverage
Based on these factors, your group rates may rise during renewal for a few reasons. For example, the older the average age of your entire group, the higher your premiums. Similarly, premiums can rise for every enrollee if more high-claim members join your group.
Having a growing business is a good thing. Generally, having more employees lowers your monthly premiums. But, more employees enrolling in your plan can also raise premiums. This occurs if you have a higher sum insured amount. To support your growing workforce, you may add supplemental or ancillary benefits to your plan. But, if your carrier allows you to do so, it will be an added cost.
Small group plans
Small group plans work like large group plans with restrictions on medical underwriting. However, they’re typically for companies with between two and 50 workers. Insurers offering small group plans must follow ACA guidelines. This means different factors can impact their premiums.
Health insurers offering small group plans can only vary their premiums based on:
- Age
- The number of enrolled employees in your plan
- Family size
- Your ZIP code
- Whether the employee is a tobacco user
- Metal tier plan type, such as bronze, silver, gold, and platinum
The ACA doesn’t allow insurers to factor your group’s combined claims history, an employee’s medical history, or your industry into your premium amount. But like large group plans, the average age of your group and how many active employees participate in your plan can raise health insurance prices.
Additionally, smokers can pay up to 50% more in premiums than non-smokers. So, if you have employees who start smoking, they’ll likely see a raised premium price the following plan year.
Individual health insurance
An individual health plan is coverage that consumers buy without the aid of an employer or a government program, like Medicare. Individuals can buy health coverage from a public or private exchange during Open Enrollment Period. If they have a qualifying life event, they’ll open a special enrollment period to choose a health insurance plan mid-year.
For 2025, the national average benchmark plan for individual health insurance has an average monthly premium of $497 for self-only coverage ($5,964 per year)3.
The only factors that can affect premium rates for ACA-qualified individual coverage are:
- Age
- Your ZIP code
- Tobacco usage
- Family size
- Metallic plan type
Like small group plans, insurers who sell ACA-compliant healthcare plans can’t use medical underwriting, sex, or pre-existing health conditions in their premium calculations. But your age and tobacco status are still factors that can impact health insurance rates.
Additionally, if you’re starting a family, switching from a self-only plan to family coverage will cause your prices to rise. Lastly, all ACA-compliant plans must cover ten essential health benefits. But any extra benefits or medical services on your plan may result in higher premiums.
Other reasons why health insurance premiums rise
The factors insurers consider when calculating health plan premiums are just one reason why your insurance costs may spike during renewal time. Other health-related factors can affect how much you may pay.
Here are several other reasons why your premiums may rise from year to year:
- Medical inflation. The cost of healthcare services and other medical items rises year over year. When providers charge more for care, health insurance companies may raise annual premiums to offset the increase.
- Increased use of healthcare services. Whether people seek more medical care due to age, chronic health conditions, or an emergency, insurers pay more claims. To balance these healthcare expenses, they may increase premiums.
- Higher provider-insurer rates. Insurers partner with doctors, hospitals, pharmacies, and other healthcare providers. These partnerships allow expanded service offerings and broaden networks. But if high-demand medical providers negotiate higher rates, premiums may go up to counteract the increased health insurance costs.
- Prescription drug costs. The cost of new prescription drugs and even raised prices for current medications can impact total healthcare spending and lead to higher premiums for consumers who need them.
- Smaller insurance markets. Depending on your location, you may not have many insurers to choose from. When fewer insurance companies are in the market, there’s less competition, and insurers can get away with charging higher premiums.
- Technology improvements. Medical advancements and the availability of more complex treatments contribute to higher premiums. That’s because upgraded tools can impact medical spending and cause overutilization of costly technology.
- Changes in federal or state regulations. New laws and government regulations, such as requiring certain covered services and limiting cost-sharing amounts, can lead to rate increases.
How an HRA can help individuals pay for their health insurance premiums
If you want to help your employees control rising medical costs, there’s a personalized health benefit that may be the solution. A health reimbursement arrangement (HRA) is an employer-owned and -funded benefit that allows you to reimburse employees tax-free for qualified out-of-pocket costs.
With an HRA, you give your employees a defined monthly allowance that they can use to buy healthcare services and items. Then, you reimburse your employees up to that allowance once they prove they bought an eligible medical expense. Unlike group health insurance plans, HRAs have no annual rate hikes, so you and your employees have more control over your budgets.
Below are the two types of HRAs that can cover your employees’ health plan premiums:
- The individual coverage HRA (ICHRA). The ICHRA is for companies of all sizes and industries. It has no minimum or maximum contribution limits, and you can design your ICHRA to reimburse health insurance premiums only or premiums plus other medical costs. You can also vary allowances and eligibility by employee classes. Your staff must have a qualified form of individual health coverage to receive reimbursements.
- The qualified small employer HRA (QSEHRA). A QSEHRA is for companies with fewer than 50 full-time equivalent employees (FTEs). The QSEHRA has annual maximum contribution limits but no minimum limits. Like the ICHRA, you can only make premiums eligible for reimbursement or other healthcare costs as well. Employees must have an insurance policy with minimum essential coverage (MEC) to use the benefit.
A group coverage HRA (GCHRA) can only pair with a traditional group health plan and can’t reimburse employees for premiums. But if you already have group coverage, a GCHRA is a great way to help your employees who participate in your plan pay for other out-of-pocket costs. Plus, you can switch to a high deductible health plan (HDHP) to save money on premiums. You can then use a GCHRA to reimburse employees for their deductible costs.
Conclusion
It may seem like health insurance premiums rise randomly. But once you understand why they increase, you can take control of your healthcare and finances. Whether you’re running a business or reviewing your individual coverage, knowing the key drivers can help you make better choices.
Many factors that influence premium increases are outside your control. Luckily, benefits like HRAs are a flexible, tax-advantaged solution that can help you manage health costs. If you think an HRA is right for your company, contact us, and we’ll help you design your benefit.
1. NAIC 2024 U.S. Health Insurance Industry Analysis Report
