Health insurance companies make their money primarily through premiums paid by policy holders. The premiums are based on an insurer's estimated healthcare costs, administrative expenses, and the risk of policy holders filing claims for coverage.
One way insurers minimize their losses and make a profit is to thoroughly review applications for policies, selecting policy holders with a low risk of filing claims. This means that people with any pre-existing medical conditions or risk factors might not be eligible for coverage.
In addition to premiums, some health care providers will also include a deductible and/or copayment to help offset the cost of providing coverage. Deductibles are flat fees that policy holders must pay before the insurer pays anything. Copayments are a portion of the cost of healthcare expenses that the policy holder must pay.
Another way that insurance companies make their money is by investing the money they collect in premiums and the money they don’t have to pay out in claims. They invest this money in the stock market, bonds, and other forms of investments to earn additional income.
Finally, insurers also make money by charging fees for additional services, such as processing claims or providing enrollment materials.
Ultimately, health insurance companies balance the risk they take on by providing coverage with their expected profits. This is why they scrutinize every policy application and why premiums can be expensive.