Health insurance premiums represent a contractually agreed upon amount to be paid for a defined set of health benefits during a defined period of time (usually a year). Premiums are typically paid in monthly installments by policyholders (individual coverage) and enrollees (group coverage). Premiums may vary for different individuals with the same health benefits package from the same insurance company. Each variation is referred to as a premium rate. Rating methodologies generally vary between health insurance market segments and may have additional state-specific variation due to differences in state rate regulations. Typically, the following methods are used by market segment: Individual health insurance market. Rates may vary by age and sex and may also be underwritten, meaning that the insurance carrier assesses the health status of the insurance applicant and uses it to set the rate according to the health risk of that individual. Small group market. What is called a "manual rate" is first calculated estimating the costs by the age and sex of the employees, geographic location, number of employees, and the type of health insurance product. Most states also permit the manual rate to be adjusted by a health status factor. Large group market . Premium rates are determined either from an individual group's medical claims history (referred to as "experience") or from a blended average of manual rates calculated from the members of the group and from the group's experience. Health insurance premium rates are actuarial estimates of the cost of covering a risk pool of individuals under a particular health benefits package for a particular period of time. Generally, the more generous the benefits package (i.e., large, open networks of providers and low cost- sharing requirements including deductibles) the higher the premiums will be. Just as premiums must be adequate to pay for expected health care use, they also must be sufficient to compensate insurance carriers for taking on the financial risk associated with providing coverage. The final premium rate calculation often is adjusted to reflect several other factors, such as making up for a previous financial loss and providing excess capital to manage various risks generally regulated under state solvency standards. State regulators have adopted solvency standards to protect consumers by requiring insurance companies to keep certain reserves of capital to protect against asset risks, underwriting or insurance risk, and business risks. Without this required safety net of reserved cash, a health insurance company could go bankrupt if it experiences unforeseen losses, thus resulting in its consumers being placed at full financial risk for their medical claims. Data from the Bureau of Labor Statistics' (BLS's) Producer Price Index (PPI) for health insurance companies indicates that the year-over-year percentage increase by month in private health insurance premiums has averaged around 4.4% between 2004 and 2010, but has accelerated some since 2009, ranging from 4.8%-5.5% ( Figure 1 ). The year-to-year increases in the PPI may not appear significant, but there are four relevant contextual factors to take into consideration. First, premium increases can be much higher in the individual and small group markets, where the smaller risk pools can result in distortions in the average health care costs covered by premiums, due to outlier policyholders or members. In other words, if there are only a few healthy persons to help pay for a sick person, the premiums (all else being equal) will be higher than if that sick person was in a larger risk pool with many healthy persons. Second, in the employer group market, the worker share of premiums has been increasing even more because employer subsidies have been trending down incrementally. The employer and workers shares vary according to coverage tier: self-only, employee-plus-one, and family. However, in the past few years employers have shifted incrementally more of that cost to workers. For example, the average worker share of the total premium for group coverage (for self-only coverage) was 15.3% in 2008 and grew to 17.0% by 2011 ( Table 1 ). Third, as premiums have gone up, the value of the coverage has gone down in terms of higher cost sharing requirements, including deductibles (see the Appendix ). Fourth, real income (i.e., income adjusted for inflation), both per capita and family, has decreased in the past several years. Real income for adults (age 16 and older) declined 4.6%, from an average of $40,389 in 2007 to $38,543 in 2010. Similarly, average family income declined 6.6%, from $73,426 to 68,599 for the same period. As a result, incomes are not keeping up with premium increases, and a greater proportion of incomes are being consumed by health insurance premiums. The growth of health insurance premiums (and out-of-pocket costs) for individuals and families has been the focus of considerable congressional attention. Using available public data, this report explores the potential drivers of the growth trend in health insurance premiums. In general, the premiums charged by health insurance companies represent the estimated amount that would be required to cover initially three major components: (1) the expected cost of the health benefits covered, (2) the administrative costs of operating the coverage, and (3) a profit margin consistent with the strategic business goals of the company. The fourth and final component to the premium calculation involves adjustments upward or downward to reflect several miscellaneous factors, such as responding to prior gains or losses, strategically responding to competitors (i.e., pricing lower to gain market share), hedging against uncertainty risks created by a changing regulatory environment, and other factors often collectively described as the underwriting cycle. Health benefits expenses equal the aggregate products of unit prices for health services times utilization of health services (e.g., hospital visits) or health items, such as prescription drugs. Health benefits expenses represent the largest component of premiums. According to the aggregate health insurance industry statements of revenue and expenses submitted to the National Association of Insurance Commissioners (NAIC) in 2010, health benefits represented about 85% of premiums. Health benefits expenses on a per member per month (PMPM) basis have trended upwards between 2003 and 2010 in aggregate for the health insurance industry, as illustrated in Figure 2 . The annual percentage increase in total health benefits expenses, typically referred to as medical trend, has generally been over 7% per year during most of that time period, but the rate of growth was 5.0% between 2008 and 2009, and only 1.1% between 2009 and 2010. The medical trend of a particular plan or policy can vary substantively based on such factors as the relative health status of the enrollees and policyholders, differences in coverage policy, differences in the use of managed care techniques, geographic differences, use of restrictive versus open provider networks, and various organizational factors, such as being for-profit or non-profit. The unit price of health services and prescription drugs is determined through a contract negotiation process between health insurance companies, health providers, medical device companies, and drug manufacturers or distributors. There is evidence of considerable geographic variation in provider, but not prescription drug pricing. For example, the Center for Studying Health System Change (HSC) found significant differences in payment rates to hospitals and physicians among the eight markets it studied during site visits to nationally representative metropolitan areas during 2010. Average payments for inpatient hospital care, as a percentage of Medicare, ranged from 147% in Miami to 210% in San Francisco. For physician payments as a percentage of Medicare, it ranged from 82% in Miami to 176% in rural Wisconsin. HSC attributed the variation in prices paid by insurers to differences in provider bargaining power. Another study in six California markets between October and December 2008 found that physician group practice integration with hospital systems, hospital mergers, the desire for broad provider choice, growing physician shortages, and a regulatory environment that favors providers all contributed to a price negotiation advantage for some providers. The power of providers in negotiating higher unit prices has been recognized by some state insurance commissioners that perform premium rate reviews. For example, in the reformed Massachusetts market, the Division of Insurance approved (on appeal) a premium rate increase for Fallon Community Health Plan after finding that, among other things, "individuals and employer groups demand that Fallon provide options that include access to every doctor and hospital, including local providers, as well as access to larger tertiary systems." The Massachusetts Division of Insurance Appeals Board concluded that "[m]arketplace realities mean that Fallon sometimes has no choice but to contract with higher cost providers." Similarly, an investigation by the state Attorney General concluded that large providers with brand-name recognition have considerable leverage over health insurance companies when negotiating prices, and that price increases have accounted for the majority of the medical trend in Massachusetts. Health care services and items in the United States generally lack unit price transparency because they are considered proprietary contractual negotiations between payers and providers. Moreover, standard measures of producer price inflation, such as the PPI, are inappropriate to examine the unit price inflation among privately insured persons because they include prices paid by consumers that are uninsured or are in government programs (e.g., Medicare and Medicaid). However, one survey by Segal Consulting projected that the annual price inflation for hospitals will increase 7.2% for 2012 (2012 estimates from insurers are based on provider-contracted rates set before the coverage year begins). In addition, Segal projected that the annual price inflation for physicians and prescription drugs in 2012 would be 4.6% and 5.5%, respectively. Conventional wisdom states that the aging of the American population is the primary driver of increased demand for health services and prescriptions drugs experienced by health insurers. On its face, this seems logical given that the elderly have the highest utilization of health care. However, the overall age distribution of the population actually shifts very slowly over time. Indeed, the median age of the U.S. population is projected to increase just 1.8 years, from 36.9 in 2010 to 38.7 in 2030.