How Health Insurance Premiums Are Calculated: What Drives Your Monthly Cost

What Is a Health Insurance Premium?

A health insurance premium is the amount you pay your insurance company each month to keep your coverage active. It is due whether you visit the doctor or not, whether you file a claim or not, and whether you are healthy or dealing with a serious illness. Think of it as the price of admission to your health plan.

Your premium is just one piece of your total cost of care. The full picture includes your deductible, copays and coinsurance, and the out-of-pocket maximum. These components tend to move in opposite directions — a plan with a low monthly premium usually has higher deductibles and out-of-pocket costs, while a plan with a high premium typically gives you lower costs when you actually use care. Understanding how your premium is calculated is the first step toward making a smarter choice during open enrollment.

The Five ACA-Allowed Rating Factors

Before the Affordable Care Act took effect in 2014, insurance companies could consider dozens of factors when setting your premium — including your health status, gender, and medical history. The ACA simplified this system dramatically. Today, insurers in the individual and small group markets are limited to exactly five rating factors:

1. Age — Older adults can be charged up to three times more than younger adults (a 3:1 ratio).
2. Location — Your state, county, and zip code affect your premium based on local healthcare costs and insurer competition.
3. Tobacco use — Tobacco users can be charged up to 50 percent more than non-users (a 1.5:1 surcharge).
4. Plan category (metal tier) — Bronze, Silver, Gold, and Platinum plans have different actuarial values that directly affect the premium.
5. Individual vs. family enrollment — The number of people on your plan changes the total premium, with specific rules for how children and adults are counted.

These five factors — and only these five — determine what an insurer can charge you for an ACA-compliant plan. No other personal characteristics are allowed to influence your rate.

Age and Premiums

Age is the single most influential factor in determining your health insurance premium. The ACA uses a system of age bands that assign a specific multiplier to each age from 0 to 64. A 21-year-old serves as the baseline (1.0 multiplier), and premiums increase incrementally from there. The maximum ratio allowed under federal rules is 3:1, meaning the oldest adults at age 64 can be charged no more than three times the rate of the youngest adults.

In practice, if the base rate for a 21-year-old is $300 per month, a 40-year-old might pay around $400 (a multiplier of roughly 1.33), a 50-year-old might pay approximately $530 (multiplier around 1.77), and a 64-year-old would pay up to $900 (the full 3.0 multiplier). Children aged 0 to 14 are assigned the same lower rate regardless of specific age, and ages 15 to 20 have slightly increasing rates below the baseline.

The 3:1 limit was a compromise — insurers argued that actual cost differences between age groups are closer to 5:1, while consumer advocates pushed for community rating where everyone pays the same. Some states, including New York and Vermont, have adopted stricter limits and do not allow age-based rating at all.

Location and Premiums

Where you live has a dramatic effect on your health insurance premium. A benchmark Silver plan that costs $350 per month in Minneapolis might cost $700 or more in rural Wyoming. Your premium reflects the cost of delivering healthcare in your specific geographic rating area, which is typically defined at the county level.

Several forces drive these geographic differences. The cost of medical services varies widely — hospital stays in major cities cost more due to higher labor and operating expenses. Provider competition also matters, as areas with many hospitals competing tend to have lower negotiated rates, while regions with a single dominant system command higher prices. Insurer competition plays a similar role — counties with only one or two marketplace carriers tend to have higher premiums. Finally, state regulations including additional benefit mandates and Medicaid expansion status influence the local risk pool and overall cost structure.

Tobacco Use Surcharge

The ACA permits insurers to charge tobacco users up to 50 percent more than non-tobacco users for the same plan — a surcharge ratio of 1.5:1. If a non-smoker pays $400 per month for a Silver plan, a tobacco user of the same age and location could be charged up to $600 per month for identical coverage, adding $2,400 per year.

Verification varies by insurer. Most applications ask a yes-or-no question and rely on self-attestation. Some define tobacco use as any use within the past six to twelve months, while others look at current regular use. The definition typically includes cigarettes, cigars, chewing tobacco, and sometimes vaping products.

Not every state allows the full surcharge. California, New York, New Jersey, Massachusetts, Vermont, Rhode Island, Connecticut, and the District of Columbia prohibit tobacco rating entirely. Many insurers also offer cessation programs — if you enroll in and complete a qualifying program, some plans will waive or reduce the surcharge. Importantly, premium tax credits do not offset the tobacco surcharge, so smokers pay that extra amount entirely out of pocket.

Plan Category (Metal Tier)

ACA marketplace plans are organized into four metal tiers based on actuarial value — the percentage of average healthcare costs the plan is designed to cover.

• Bronze (60% actuarial value): Lowest premiums, highest out-of-pocket costs. Best for healthy individuals who want low monthly costs and catastrophic protection.
• Silver (70% actuarial value): Moderate premiums and costs. The benchmark for subsidy calculations and the only tier eligible for cost-sharing reductions if your income is below 250 percent of the federal poverty level.
• Gold (80% actuarial value): Higher premiums, lower out-of-pocket costs. A good choice if you use healthcare regularly or have ongoing prescriptions.
• Platinum (90% actuarial value): Highest premiums, lowest out-of-pocket costs. Often features very low or zero deductibles. Not available in every market.

The relationship between metal tier and premium is inverse to the relationship between metal tier and out-of-pocket costs. A Bronze plan might charge $250 per month with a $7,000 deductible, while a Gold plan for the same person charges $500 per month with a $1,500 deductible. Which saves you more depends entirely on how much care you use during the year.

Individual vs. Family Coverage

In the individual marketplace, there is no single family rate. Your household premium is calculated by adding up the individual premium for each covered family member based on their own age and rating factors.

For children, insurers charge per-child premiums for up to three children under age 21. After the third child, additional children are free. All children aged 0 to 14 are charged the same rate, and children aged 15 to 20 have slightly higher rates that increase year by year. For adults, each person aged 21 and older is rated individually on the age curve.

Consider a family with two parents aged 45 and 42 and three children under 14. The household premium equals the 45-year-old's rate plus the 42-year-old's rate plus three times the child rate. A fourth child would add nothing. Premium tax credits are calculated on the total household premium for the benchmark Silver plan compared to your expected income contribution, which can substantially offset family costs.

Factors That Cannot Affect Your Premium

One of the most important ACA protections is the list of factors insurers are prohibited from using. Before the ACA, insurers routinely denied coverage or charged vastly higher rates based on medical history. For ACA-compliant plans, the following cannot influence your premium:

• Health status: Whether you are healthy or managing a serious condition, your premium is the same for your age and location.
• Pre-existing conditions: Insurers must accept every applicant during open enrollment and cannot exclude coverage for any pre-existing condition.
• Gender: The ACA eliminated gender rating. Men and women of the same age pay the same rate.
• Occupation: Your job cannot influence your individual market premium.
• Claims history: How much you used your insurance in previous years has no bearing on your current rate.

These protections apply to all ACA-compliant plans, both on and off the marketplace. They do not apply to non-ACA-compliant products such as short-term health insurance, health sharing ministries, or fixed indemnity plans, which can still use health status in their underwriting.

How Employer Premiums Are Calculated

Employer-sponsored health insurance follows different rules depending on company size. Small group plans (typically 1 to 50 employees) are subject to ACA rating rules similar to the individual market — premiums are based on the same five factors, and insurers cannot medically underwrite the group.

Large group plans (51 or more employees) have more pricing flexibility. Insurers often use experience rating, examining the group's actual claims history to project future costs. A company with high claims may see steeper premium increases than one with a healthier workforce. Some large employers self-insure, paying claims directly and hiring a carrier only for plan administration and network access.

In both cases, employers typically pay a significant share. On average, employers cover about 83 percent of the premium for single coverage and about 73 percent for family coverage. The employee's share is usually deducted from each paycheck on a pre-tax basis. What appears on your pay stub is only a fraction of the true premium cost.

Premium Tax Credits

Premium tax credits are federal subsidies designed to make marketplace coverage affordable. The calculation is built around the benchmark Silver plan — the second-lowest-cost Silver plan in your area. The government determines the maximum percentage of income you should pay toward that benchmark using a sliding scale. If the benchmark premium exceeds your expected contribution, the difference is your tax credit. You can apply this credit to any metal tier plan, not just Silver.

Under enhanced subsidies introduced by the American Rescue Plan Act and extended through the end of 2025, no household pays more than 8.5 percent of income toward the benchmark premium. Households below 150 percent of the federal poverty level pay $0, often making Bronze plans completely free. Whether these enhanced subsidies will be extended is subject to Congressional action.

If the enhanced subsidies expire, eligibility would revert to households earning between 100 percent and 400 percent of the federal poverty level, and the subsidy cliff would return — meaning one dollar above the 400 percent threshold eliminates all assistance. This cliff was a significant financial burden before the enhanced subsidies were enacted and could become one again.

Why Premiums Increase Each Year

If it feels like your premium goes up every year, you are not imagining it. Several interconnected forces drive annual increases.

• Medical inflation: Hospital services, physician fees, and facility costs rise faster than general inflation in most years. Insurers pass those costs through in higher premiums.
• Utilization trends: As the population ages and new treatments become available, people use more healthcare services, driving up total claims costs.
• Prescription drug costs: Specialty drugs and biologics are among the fastest-growing cost drivers. A single gene therapy can cost hundreds of thousands of dollars, and those costs are spread across the insured population.
• Risk pool changes: If healthier people drop coverage while sicker people remain, the risk pool becomes more expensive on average, pushing premiums higher for everyone.
• Regulatory changes: New benefit mandates, changes to risk adjustment programs, and uncertainty around subsidy extensions all feed into the rate-setting process.

Premium increases are not uniform. Some years see low single-digit increases while others bring double-digit jumps, and the rate varies significantly by state, county, and insurer. Shopping around every year during open enrollment is one of the best ways to avoid absorbing the full impact of premium hikes.

How to Lower Your Premium

While you cannot change your age or move to a cheaper county just to save on health insurance, several practical strategies can reduce your monthly cost.

• Choose a lower metal tier: Dropping from Gold to Bronze can save $100 to $300 per month. Ensure you have savings to cover the higher deductible.
• Claim your premium tax credit: Apply through the marketplace to see your estimated subsidy. Credits can reduce your cost to $0 for Bronze plans.
• Consider an HSA-eligible HDHP: Lower premiums plus tax-advantaged savings through a Health Savings Account can be the most cost-effective option for healthy individuals.
• Shop every year during open enrollment: Insurers change rates and restructure plans annually. The cheapest plan last year may not be the cheapest this year. Thirty minutes of comparison shopping could save hundreds of dollars.
• Quit tobacco: In states that allow the surcharge, quitting saves you up to 50 percent on your premium. Many insurers offer free cessation programs to help.
• Compare employer and marketplace options: If a spouse has employer coverage, compare total household costs. Sometimes splitting coverage produces the lowest combined premium.

The Bottom Line

Your health insurance premium is not a random number. It is the product of five defined factors — your age, where you live, whether you use tobacco, which plan tier you choose, and how many people are on your policy. The ACA ensures that your health status, gender, claims history, and pre-existing conditions play no role in what you are charged.

Knowing how these factors work gives you leverage. You cannot change your age, but you can choose a metal tier that matches your expected healthcare usage. You cannot control medical inflation, but you can shop the marketplace every year to find the most competitive rate. And you can make sure you are claiming every dollar of premium tax credit you are entitled to.

Start by getting your subsidy estimate on HealthCare.gov or your state exchange. Compare at least three plans across different metal tiers and calculate the total annual cost — not just the monthly premium. Factor in your expected medical usage, your ability to cover a high deductible, and whether an HSA strategy makes sense. The right plan is not always the cheapest one — it is the one that best balances your monthly budget with the protection you need when something unexpected happens.