By Andrew Crane
HEALTH INSURANCE: How Does It Work?
Of all the simple pleasures we take for granted here in America, health insurance does not fall in that category. The complexity of the networks between healthcare providers, insurance providers and patients is astounding.
Complexity of the health industry language
Also, the language used to discuss health insurance is confusing as well. The licensing exams for health insurance providers are essentially all about learning vocabulary you would never use in a normal conversation. Jargon! It comes as no surprise that many patients do not understand exactly the extent of their benefits and how the healthcare providers are compensated by their insurance companies.
Insurance is the transfer of loss
First, let’s start with the basics. Insurance is the transfer of loss from one party to another. Essentially, health insurance is the transfer of the loss of health to another party. When an individual pays an insurance provider for health insurance, that person is transfering the financial loss s/he would experience (caused by their health) to the insurance provider. Payments for a health insurance policy are known as ‘premiums’. Insurance providers use the premiums paid as their source of revenue from customers. In exchange for premiums, insurance company must provide coverages as explicitly stated in the customers’ policies. Premiums are typically paid monthly.
However, all insurance providers include deductibles in health plans. A deductible is the amount a policy owner must pay towards their medical bills before the health plan takes effect. If Jane has a $1,800 deductible, this means that patient must pay for the first $1,800 of her medical expenses during the year before she receives coverage.
The deductibles and premiums in a policy are dependent on the risk rating the insurance provider assigns. In health insurance, risk is mainly determined by an individual’s age, medical history, occupation and income. From highest risk to lowest, the three general categories of risk are substandard, standard and preferred.
Individuals who have preferred risk pay the lowest deductibles and premiums because the insurance provider believes they live the healthiest lifestyle and are engaged in the least risky actions. Individuals who have standard or substandard risk will pay higher premiums and deductibles due to older age, a history of health issues and/or working in a hazardous occupation.
The impact of income level on health insurance has changed with the Affordable Care Act. Generally, people who make more money can of course afford more insurance and will more likely be offered additional coverages, while lower income citizens would purchase policies with more marginal coverages. Prior to the ACA, lower income individuals would often times not be able to afford health insurance because they didn’t have enough money to afford even the basic policies. The ACA created subsidized health plans for lower income individuals, with consumer protections to ensure that these citizens would get enough coverage. However, deductibles and premiums for higher-income citizens increased with the ACA, to allow insurance providers to subsidize the cheaper policies.
With the new health care bill presented to The Senate, the impact income will have on health plans could change again. After the deductible is paid, policy owners would then pay coinsurance or copayments for any additional medical expenses.
‘Coinsurance’ is a percentage of the healthcare cost that the patient must pay. For most insurance policies, the health plan will typically cover 70-80% of the cost of a medical claim, such as laboratory tests. If the plan covers 75% of the cost of the claim, then that patient’s coinsurance is 25% of the cost of the claim (which is the proportion that the patient will pay). Coinsurance is an ideal payment method for individuals who are in good health, because they’ll typically only seek out low-cost medical services such as a physical.
‘Copayment’ is a fixed payment a policy owner will pay for health services. The policy owner and an insurance provider may agree that the policy owner must pay a flat fee of $300 for an emergency room visit and $30 for a visit with their primary care physician. Copayments are ideal for individuals who frequently seek out medical services, because they pay flat rate regardless of how much treatment they need. Older patients unsurprisingly tend to use copayments to minimize the costs of regular hospital visits and treatments. In most policies, certain services will require coinsurance while other services require copayments.
Out of pocket Expenses
All of these terms are considered out of pocket expenses. When paying for the deductibles, premiums, copayments and coinsurance, these are all expenses an individual has to pay for with their own money. However, policies can include an out-of-pocket maximum (or limit) in order to keep costs for a policy owner manageable. Let’s say Jane has a back surgery that costs $30,000 in the beginning of the year. Her deductible is $1,800 and her coinsurance is 25%, but she has an out of pocket maximum of $7,600. Even though her total expenses would be $9,300 (paying the deductible in the beginning of the year), Jane would only have to pay $7,600 for the surgery because of the out of pocket limit. Jane saves $1,700, because the insurance provider puts a cap on how much money Jane would have to pay out of her own pocket.
Health plans with lower deductibles will have lower out of pocket limits, because these plans require higher premiums, while health plans with higher deductibles would have higher out of pocket limits. Choosing a health insurance policy is about what risk is tolerable. If you are willing to take a chance to have to pay more in out of pocket expenses, in case of a medical emergency, choose a policy with a higher deductible (so that you will save money each month). However, realize that you can be fine the one minute and then have something like a stroke the next minute. Risk!
How Do Deductibles, Coinsurance and Copays Work? Blue Cross Blue Shield, n.d. Web. 31 May 2017.
Hagland, Mark. “How Does Your Doctor Get Paid.” PBS. Public Broadcasting Service, n.d. Web. 27 May 2017.
“Medicare Out-of-Pocket Costs.” Medicare Information, Help, and Plan Enrollment – Medicare.com. Ehealthcare, 16 Nov. 2016. Web. 31 May 2017.
Abelson, Reed. “Is High-Deductible Health Insurance Worth the Risk?” The New York Times. The New York Times, 31 Oct. 2016. Web. 31 May 2017.
“How Does My Deductible Impact My Premium?” How Do Deductibles Impact Premiums? | FAQs. Blue Cross Blue Shield, n.d. Web. 31 May 2017.