Where Does Your Premium Go? The Hidden Costs of Traditional Insurance

The $100 Premium and Where It Disappears

Most organizations think insurance works like this: you pay a premium, the carrier pays claims, everyone moves on. The reality is more complex and far less aligned with your interests.

Here is exactly where your $100 monthly premium goes in a traditional fully insured plan.

The medical claims payment: Approximately 85–88% of premiums go to actual medical claims in the fully insured group market. According to the National Association of Insurance Commissioners (NAIC), the simple loss ratio across all fully insured group health plans in 2024 was 88%, meaning insurers paid out 88 cents on every premium dollar in medical claims.

This sounds good. It is not. An 88% loss ratio means 12% of every premium vanishes before it reaches your employees’ care. That 12% covers administration, profit, and shareholder returns.

Administrative overhead and commissions: The health insurance industry reports an administrative expense ratio of 11.2%, representing direct overhead costs like claims processing, IT infrastructure, compliance, and marketing. This is built into your premium.

But there is another layer. Health insurance brokers typically earn between 4% to 6% commission on your premiums—money that comes directly from your health insurance budget. For a 100-person company with $1,200 per-employee annual premiums, that is $48,000–$72,000 annually paid to brokers, not to claims.

The profit margin: After claims and overhead, carriers keep profit. The health insurance industry reported margins around 2.2% in recent years, but this understates shareholder extraction because it excludes investment income on reserves that carriers hold and manage for profit.

When you add it up: roughly 12% of your premium never reaches claims. That is $1.2 billion in industry-wide rebates issued annually, according to CMS data—rebates that exist only because insurers overcharge to hit the ACA’s minimum medical loss ratio thresholds.

How the System Creates Misaligned Incentives

The core problem is structural, not a failure of individual carriers. Traditional insurance carriers have one legal obligation: maximize shareholder return.

This creates a direct conflict with paying your employees’ claims. The more claims the carrier denies or delays, the more profit they extract. The higher your premiums, the larger their margin. Your interest in lower costs and faster claim payment directly opposes their interest in higher margins.

This is not speculation. This is how the business model is designed.

Cooperatives flip the equation. When your employees are the members—and members own the plan—the organization has one incentive: lower costs through better health outcomes. There is no shareholder competing for your premium dollars.

The MLR Fraud: How Carriers Game the System

The ACA’s MLR requirement was supposed to cap insurer profits by mandating they spend at least 80–85% of premiums on medical claims. It did not work.

Instead, it incentivized carriers to find ways to inflate their reported medical spending without actually delivering more care. The mechanism is called cost-shifting, and it works like this.

The vertical integration loophole: Large carriers own clinics, pharmacies, and provider networks. When a patient goes to an independent doctor, the carrier pays $100 for a service and records it as medical spending. When the same patient goes to a clinic owned by the carrier, the carrier can charge its own insurer $200 for the same service.

The extra $100 counts as medical spending for MLR purposes—so the carrier reports higher medical losses and avoids issuing rebates. But that $100 stays inside the same company and flows back as profit to the provider subsidiary.

According to the Medicare Payment Advisory Commission, vertically integrated plans consistently pay more for drugs purchased at their pharmacies than for those bought at independent outlets. This is not better care. This is profit shifting hidden inside the MLR.

The Center for American Progress documented that insurers also reclassify administrative expenses as quality improvement initiatives to artificially inflate their MLR, manipulating the very metric supposed to protect you.

The result: the MLR rule created a compliance checkbox, not consumer protection. Experts estimate that vertically integrated insurers have skirted MLR rules through transfer pricing schemes, allowing them to pay rebates that appear substantial while actually retaining far more profit than the system intended.

Cooperatives do not have this problem. There is no parent company to shift costs to. There is no incentive to game metrics. Claims simply get paid, and surplus returns to members.

Why Traditional Carriers Built This System

You might ask: why do carriers charge this much if it is so obviously inefficient?

The answer is that they do not have to compete on total cost. Brokers are incentivized to sell traditional plans because commissions are higher and enrollment is easier. Employers compare “apples to apples”—traditional plan to traditional plan—and never see the 12% inefficiency because it is industry-standard.

The system is not broken. It is working exactly as designed.

Pooled Risk Without Ceding Control

Association health plans and industry trusts pool risk across many employers with similar profiles. The result: buying power without ceding governance to shareholders.

When employers pool together, claims become more predictable. A single large claim that would spike a small group’s renewal by 15–20% is absorbed by the pool. This reduces volatility pricing and allows for more accurate cost projections.

You still own your data. You still control your plan rules. You are just borrowing the buying power of a larger group.

Level-Funded Plans: Direct Alignment

Level-funded plans operate differently. You pay a monthly contribution. At year’s end, if claims come in lower than expected, the surplus returns to you.

In a fully insured plan, the carrier keeps any year-end surplus. In a level-funded plan, you capture it.

This single change reverses the incentive completely. If your monthly contribution is $900 per employee and claims average $850, that $50 difference comes back to your organization. Wellness improvements directly reduce your future contribution.

The math is direct: lower claims equal lower costs for your organization. Not for a shareholder somewhere else.

The Conclusion: The System Is Rigged, But There Is an Exit

You are not choosing between “good insurance” and “cheap insurance.” You are choosing between a system designed to extract value from your health budget and a system designed to spend it on care.

Cooperatives are not new. They are proven. They exist because the math works, not because of goodwill.

The only reason you have not heard more about them is that traditional carriers and brokers profit from keeping you where you are.

Groundwork Insurance Agency connects organizations with cooperative, nonprofit, and level-funded health plans backed by the data. Get in touch to see the actual numbers for your team.

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