Health insurance extends coverage against medical expenses incurred owing to accidents, illness, or injury. An individual can avail of health insurance against monthly or annual premium payments, for a specified tenure.
During this period, if an insured meets with an accident or is diagnosed with a severe ailment, the expenses incurred for treatment purposes are borne by the insurance provider.
What is Health Insurance?
Health insurance is a type of insurance that covers the medical and surgical expenses of a person. People use the term “provider” to describe a clinic, hospital, doctor, laboratory, healthcare practitioner, or pharmacy that provides treatment for an individual’s condition.
The “insured” is the owner of the health insurance policy or the person with the health insurance coverage.
Depending on the type of health insurance coverage a person has, either person pays costs out of pocket and receives reimbursement, or the insurer makes payments directly to the provider.
In countries without universal healthcare coverage, such as the United States, health insurance is commonly included in employer benefit packages.
How Health Insurance Works
Health care in the United States can be very expensive. A single doctor’s office visit may cost several hundred dollars and an average three-day hospital stay can run tens of thousands of dollars depending on the type of care provided. Most of us could not afford to pay such a large amount of expenses if we get sick, especially since we don’t know when we might become ill or injured or how much care we might need. Health insurance offers a way to reduce such costs to more reasonable amounts.
The way it typically works is that the consumer pays an upfront premium to a health insurance company and that payment allows you to share risk with lots of other people who are making similar payments.
Since most people are healthy most of the time, the premium dollars paid to the insurance company can be used to cover the expenses of the small number of enrollees who get sick or are injured.
Insurance companies, as you can imagine, have studied risk extensively, and their goal is to collect enough premiums to cover the medical costs of the enrollees. There are many, many different types of health insurance plans in the U.S. and many different rules and arrangements regarding care.
Types of Health Insurance
There are two main types of health insurance: private and public, or government. There are also a few other, more specific types. The following sections will look at each of these in more detail.
Private Health Insurance
The Centers for Disease Control and Prevention say that the U.S. healthcare system relies heavily on private health insurance. In the National Health Interview Survey, researchers found that 63.7%Trusted Source of people under the age of 65 years in the U.S. has a type of private health insurance coverage.
Public OR Government Health Insurance
With this type of insurance, the state subsidizes healthcare in exchange for a premium. Medicare, Medicaid, the Veterans Health Administration, and the Indian Health Service are examples of public health insurance in the U.S.
Managed-Care Plans
With this type of plan, the insurer will have contracts with a network of providers to provide lower-cost medical care to its policyholders. There will be penalties and additional costs added to out-of-network hospitals and clinics, but they will provide some treatment.
The more expensive the policy, the more flexible it is likely to be with the network of hospitals.
Fee-for-Service, plans
A Fee-for-Service plan covers treatment equally among all providers, allowing the insured to choose their preferred place of treatment. The insurer will typically pay 80% of costs on an indemnity plan, while the individual pays the remaining costs as a coinsurance.
Health Maintenance Organization plans
These are organizations that provide medical care directly to the people that have health insurance. The policy will usually have a dedicated primary care physician who will coordinate all necessary care.
Health Maintenance Organization (HMO) plans will usually only fund treatment referred by a family doctor and will have negotiated fees for each medical service to minimize costs. This is usually the cheapest type of plan.
Preferred Provider Organization plans
A Preferred Provider Organization (PPO) plan is similar to an indemnity plan in that it allows the insured to visit any doctor they prefer. The PPO plan also has a network of approved providers with which it has negotiated costs.
The insurer will pay less for treatment with out-of-network providers. However, people with a PPO plan can self-refer to specialists without having to visit a primary care physician.
Point of Service plans
A Point-of-Service plan functions as a combination of an HMO plan and a PPO plan. The insured can choose between coordinating all treatment through a primary care physician, receiving treatment within the insurer’s provider network, and using non-network providers. The type of plan they have will dictate the progress of treatment.
Is The Type Of Insurance Plan Important?
The type of plan a person has dictated how they will approach getting the treatment they need and how much money they will need to pay on the day they receive it.
It is a combination of an HMO plan, a PPO plan, an indemnity plan, and a savings account with tax benefits. However, in the plan year 2020, a policyholder must pair this type with an existing health plan that has a deductible of over $1,400 for individuals or $2,800 for families.
HSAs can top up coverage, extending existing plans to cover a wider range of treatments. If an employer pays for an HSA on behalf of their employees, the payments are tax-free. An individual can build up funds in the HSA while they are healthy and save for instances of poor health later in life.
However, people with chronic conditions, such as diabetes, might not be able to save a large amount on their HSA, as they regularly have to pay high medical costs for the management of their health concerns. These plans often carry very high deductibles, meaning that although premiums can be lower, people often end up paying the full expenses of any required medical treatment.
There is more overlap as plan types evolve. The distinctions between policy types are becoming more and more blurred. The majority of indemnity plans use managed care techniques to control costs and ensure that there are enough resources to pay for appropriate care. Similarly, many managed care plans have adopted some characteristics of Fee-for-Service plans.
Legislation
In the U.S., having some degree of insurance is legally necessary as part of the Affordable Care Act. A person without health insurance has to pay a fine. However, policymakers removed the Individual Mandate in the Affordable Care Act from the legislation in 2019. Insurance is no longer an individual legal requirement in the U.S.
If the policy also covers the children in the family, a person is allowed to be on their parent’s insurance until the age of 26 years, even if they are:
- Married
- Living away from home
- Not financially dependent on their parents
- Eligible to be included in their employer’s coverage
Insurance is regulated at the state level, meaning that buying a policy in one state is different from doing so in another.
Although state legislation can affect the price of a policy, the important decisions about a person’s coverage and reimbursements rest with the insurer. People should be sure to have their broker or customer services representative discuss the impact of any changing legislation on their particular policy.
Important Insurance Terms and Conditions
Out of Pocket Expenses
The terms out-of-pocket cost refer to the portion of your medical expenses you are responsible for paying when you receive health care. The monthly premium you pay for care is separate from these costs.
Annual Deductible
The annual deductible is the amount you pay each plan year before the insurance company starts paying its share of the costs. If the deductible is $2,000, then you would responsible for paying the first $2,000 in health care you receive each year, after which the insurance company would start paying its share.
Copayment
The copay is a fixed, upfront amount you pay each time you receive care when that care is subject to a copay. For example, a copay of $30 might be applicable for a doctor visit, after which the insurance company picks up the rest. Plans with higher premiums generally have lower copays and vice versa. Plans that do not have copays typically use other methods of cost-sharing.
Coinsurance
Coinsurance is a percentage of the cost of your medical care. For an MRI that costs $1,000, you might pay 20%. Your insurance company will pay the other 80%. Plans with higher premiums typically have less coinsurance.
Annual Out-Of-Pocket Maximum
The annual out-of-pocket maximum is the most cost-sharing you will be responsible for in a year. It is the total of your deductible, copays, and coinsurance. Once you hit this limit, the insurance company will pick up 100% of your covered costs for the remainder of the plan year.
Most enrollees never reach the out-of-pocket limit but it can happen if a lot of costly treatment for a serious accident or illness is needed. Plans with higher premiums generally have lower out-of-pocket limits.
Covered Benefit
The term covered benefit is used regularly in the insurance industry but can be confusing. A covered benefit generally refers to a health service that is included under the premium for a given health insurance policy that is paid by, or on behalf of, the enrolled patient.
Covered means that some portion of the allowable cost of health service will be considered for payment by the insurance company. It does not mean that the service will be paid at 100%.
What Does The Plan Cover?
One of the things health care reform has done in the U.S.is to introduce more standardization to insurance plan benefits. Before such standardization, the benefits offered varied drastically from plan to plan.
- Emergency services
- Hospitalization
- Laboratory tests
- Maternity and newborn care
- Mental health and substance abuse treatment
- Outpatient care
- Pediatric services, including dental and vision care
- Prescription drugs
- Preventive services and management of chronic diseases
- Rehabilitation services
How Much Health Insurance Will Cost?
Understanding what insurance coverage costs is quite complicated. In our overview, we talked about paying a premium to enroll in a plan. This is an upfront cost that is transparent to you.
Unfortunately, for most plans, this is not the only cost associated with the care you receive. There is also typically cost when you access care. Such cost is captured as deductibles, coinsurance, and copays and represents the share you pay out of your pocket when you receive care.
As a general rule of thumb, the more you pay in premium upfront, the less you will pay when you access care. The less you pay in premium, the more you will pay when you access care.
The question for our students is, pay now or pay later? Either way, you will pay the cost of care you receive. We have taken the approach that it is better to pay a larger share in the upfront premium to minimize, as much as possible, costs that are incurred at the time of service.
The reason for our thinking is that we don’t want any barrier to care, such as a high copay at the time of service, to discourage students from getting care. We want students to access medical care whenever it is needed.
Conclusion
Health insurance helps cover the cost of an insured individual’s medical and surgical expenses. There are various plan types, and they vary in terms of what they cover and how a person can access treatment.
Currently, a person in the U.S. must have some form of health insurance coverage. Anyone without a form of coverage may need to pay a fine.
