Health insurance covers part of the cost of medical treatment, including doctor visits, prescription drugs and hospital stays. It works by spreading out the cost across a large group of people, or risk pool. Everyone in the risk pool pays into the pool through premiums. Those premiums cover the cost of care for everyone in the risk pool.
In any given year, most people in the risk pool will be healthy and need little healthcare. About 20% of the risk pool will consume most of the resources for the year. However, everyone is likely to be sick or injured at some point, so everyone eventually benefits from sharing the financial risk.
Health Insurance Programs
There are two main types of health insurance programs, public and private. Public programs include government plans such as Medicare, Medicaid, CHIP (Children’s Health Insurance Program), and TRICARE, which is insurance for military personnel and their families.
Private programs include group plans and individual plans. Group plans are typically available through employers. This accounts for the majority of private insurance. However, some states allow non-employer groups to purchase group plans.
Individual plans are available independently to people who are self-employed or do not have access to group plans. Although individual plans are highly customizable, they tend to be expensive because they are not part of a large risk pool. Today they account for a small portion of private insurance programs.
The Affordable Care Act allows people who do not have access to group insurance to purchase an individual plan through an online health insurance marketplace (exchange). In the future, it is expected that more people will get individual health policies through the online marketplaces.
Health Insurance Products
There are also two main types of health insurance products, indemnity and managed care coverage.
Indemnity coverage is traditional, fee-for-service insurance. It offers the most freedom, but tends to be very expensive. You can make appointments with any medical provider. The provider may submit a claim to your insurance company or have you pay for your services and submit the claim yourself. If you’ve met your deductible, the plan will pay a portion of your bill and you will pay the rest. The part you pay is called co-insurance. If you paid and submitted the claim, the plan will reimburse a portion of your bill. Today, indemnity coverage is a very small portion of the health insurance market.
Managed care coverage lowers healthcare costs by setting rules for coverage. These rules can include seeing certain providers who participate in a network and getting approval and referrals for care. Managed care coverage is very popular because it makes healthcare more affordable.
Managed care coverage plans include:
Health Maintenance Organizations (HMO)
- Point of Service (POS)
Cost Sharing and the Price of Health Insurance
No health insurance plan will cover 100% of your medical costs. Instead, each plan has cost sharing arrangements between the insurer and the consumer. Cost sharing in traditional indemnity plans tends to be very high. Managed care plans have lower cost sharing requirements due to the rules that consumers must follow to get medical care. Those rules, such as seeing an in-network provider, help the insurer keep their costs low and share the savings with the consumer.
The main forms of cost sharing are premiums, deductibles, co-pays and co-insurance. The cost sharing options work together to meet the needs of a variety of healthcare consumers. When deductibles and other costs are high, monthly premiums tend to be low. But plans with low deductibles and other costs will have much higher monthly premiums. Caps on cost sharing, such as limiting your total out-of-pocket cost per year or lifetime, also tend to increase premiums.
Consumers need to judge the value of a plan based on how much they tend to use healthcare services. For someone who rarely uses services, a plan with a high deductible and a low premium makes sense. A more frequent consumer of healthcare may be better off choosing a lower deductible plan and paying the higher premium.