Health Insurance is usually the most complicated and expensive insurance you need. Unfortunately, it is also usually the most important, making it very difficult to avoid the cost.
With very few exceptions, health insurance is mandatory for all citizens in the United States, but the way you become insured will change drastically based on your age, income, and the company you work for.
Types of Health Insurance
Health insurance falls into three broad categories:
The government provides public insurance directly to some people. This includes the Medicare (healthcare for the elderly), and Medicaid (healthcare for very low-income families and children). It also includes some health insurance coverage for veterans. Payroll taxes pay for Medicare and Medicaid. Public health coverage is not free – the covered persons usually must pay some amount out-of-pocket before the public insurance takes effect.
About 50% of all healthcare spending in the United States is through Public Insurance programs (especially Medicare).
Employers offer group insurance to their employees. With Group Health Insurance, a business will split the cost of health insurance coverage with its employees. Eligible employees are usually required to participate in the program, unless they already have better coverage from somewhere else. Group insurance is usually the cheapest for everyone. This is because it groups many people of different age groups and risk levels together, and splits the cost with the employer. Big group policies also have bargaining power to negotiate better deals with the insurance provider. About 60% of Americans have health insurance coverage through their employer.
You may need to purchase health insurance directly from a health insurance provider yourself if you cannot get it through work. The average cost is usually higher by purchasing yourself because you are not splitting the cost with your employer. There are some subsidies and state-run insurance exchanges that can make this cheaper. About 9% of Americans are covered through individual health care plans.
Health Insurance Terminologies
Health insurance is built upon the same core concepts of premiums and deductibles, like all other forms of insurance. The “Premium” is the monthly charge you pay to have health insurance coverage. Your deductible is the total amount you will need to pay out-of-pocket in medical expenses before your insurance starts to pay for some of it. As with all insurance policies, there is a balance between the premiums you pay, the deductibles you will need to pay in case of a problem, and the level of coverage you will receive.
Health insurance also has many other concepts that do not usually come up with other types of insurance.
Co-payments and Coinsurance
Co-payments and coinsurance means that even after you have paid out the full deductible, you will still be responsible to pay for some of your medical expenses.
Co-payments work similar to a deductible, but apply per use instead of a total per year. For example, you may have a $50 co-payment for a doctor’s visit. This means you will need to pay the first $50 out of pocket for each visit, with your insurance covering the rest.
Coinsurance switches the dollar amount with a percentage amount. With a 10% coinsurance, you would be required to pay 10% of any medical expense you receive. Your insurance provider covering the remaining 90%.
Coverage Limits and Maxima
Heath insurance policies may also put a ceiling on how much total they will pay out for medical expenses in a year, or a maximum amount they force you to pay out of pocket.
Coverage Limits is the ceiling – this is the total amount an insurance company will pay out for a single policy over the course of the year, or in some cases over a lifetime. Any additional expenses above this amount will be entirely passed on to the insured.
Out-of-Pocket Maxima is the opposite – this would be the maximum that you would be required to pay yourself before the insurance covers 100% of the remaining cost. A common example of this in use is balancing deductibles, premiums, and coinsurance – to keep premiums and deductibles low, you may have a very high coinsurance percentage, but also an out-of-pocket maxima to make sure you will not be bankrupted by very expensive medical emergencies.
Networks, Authorization, and Emergencies
You may have noticed that health insurance can be quite complex. Unfortunately, it gets a bit more messy from here!
Health insurance companies work to keep their costs down, which also means your coinsurance payments are lower. To do this, they often make specific agreements with hospitals, doctors, and other healthcare providers to set standard costs for routine procedures. They also negotiate prices for more complex procedures. As the insured, you do not necessarily need to worry about these negotiations and specific contracts, but you do need to be aware of which doctors and hospitals your insurance provider has agreements with, and which they do not.
In-Network and Out-of-Network
In-Network healthcare providers are the providers that your insurance company has these contracts and agreements with. If you visit an in-network doctor or hospital, your costs will be much lower. If you visit an out-of-network provider, you costs will usually be much higher, and your health insurance company may refuse to pay at all unless you can prove there was no viable in-network alternative. There is also a similar system for prescription medication – your health insurance may not cover all medicine. You can call your health insurance provider before visiting a health center to find out if they are in-network.
For some more expensive tests and procedures, your insurance company may require that you get their authorization before getting it done. This is usually done by getting an in-network doctor to confirm that the procedure or test is necessary. If your insurance provider refuses to authorize your care, you can appeal it to an independent third party to review your case.
Emergency Care is the exception to both your network and insurance authorization. If you are injured or very sick, you are entitled to use emergency services of almost any healthcare provider, and your insurance will cover it.
Supplemental Health Insurance
Normal health insurance coverage does not cover many non-life-threatening health issues. Supplemental insurance policies exist to fill this gap.
In an example above, we outlined how a policy may have an out-of-pocket maxima with a high co-insurance percentage in order to lower premiums and deductibles. Some companies might also add a supplementary policy, which covers the co-insurance payments and a policy coverage limit set at the same level as the primary policy’s out-of-pocket maxima.
This effectively means the out-of-pocket cost for the insured is simply the premiums and deductible. Splitting the policy between “primary” and “supplemental” can sometimes reduce the total cost, since the different policies have different risk levels.
Vision and Dental Insurance
Most health insurance policies do not cover glasses, contacts, routine eye exams, or anything with your teeth. You will need supplemental Vision and/or Dental Insurance Plans to cover these. Some are designed to cover the costs all care (minus premiums and deductibles), while others do not give any explicit coverage, but provide a “Provider Network” with reduced prices. This works the same as the provider network you would get with a health insurance policy. Your dental or vision network provider negotiates with eye doctors and dentists to lower prices for everyone they cover.
Specified Disease Coverage
It is also sometimes possible to get explicit coverage for one disease. For example, if your family has a history of breast cancer, it may be possible to get a specific Breast Cancer health insurance policy supplement.
These “specific disease” supplements generally emphasis preventative care and early testing. This helps catch these diseases early (which both improves survival rates and reduces total cost). Having specific disease coverage can reduce premiums on your primary insurance coverage. This is because it lowers the risk that your primary insurer will need to cover issues from that particular costly disease.
Why Health Insurance Is So Expensive?
The core balance of health insurance is between the premiums you pay and the coverage you receive. For insurance companies to operate, they need to take in more money in premiums and other fees from their total client base than they pay out in medical expenses.
Healthcare emergencies are often extremely expensive, and can sometimes even drag on for a very long time, accumulating hundreds of thousands of dollars in medical bills. This means even if your risk of having a medical emergency might be fairly low, the potential cost is extremely high. This is the main reason why policies are so expensive, but there are a few other factors raising costs as well.
The Self-Selection Problem
In the past, health insurance was not mandated for all citizens. Most people were insured through the companies they worked for, or were covered by public insurance. Those who were not covered by these options needed to decide if they would purchase medical insurance on their own.
Because medical insurance is so expensive, it meant that most of the people who enrolled on their own were the people who were at the most risk of having medical problems. This means premiums started increasing: the average cost insurance companies needed to pay out per insured person was also increasing. Preventing this “self selection” problem is the main reason why health insurance is now mandatory. Putting more low-risk people into the insurance pool should lower the average premium.
One problem from preventing this from becoming a reality is how the “mandatory insurance” is enforced. If you do not have health insurance (but legally would be required to), you currently need to pay a fine. In many cases, the fine will still be lower than the premiums you would pay with most health insurance companies. This continues to encourage the healthiest people to simply pay the fine, and keeps the cost of premiums up.
The Emergency Room Problem
Getting treatment at the Emergency Room is by far the most expensive way to get treated, and most likely to result in necessary further visits. On the other hand, emergency rooms are required to treat every patient who arrives. This means that an uninsured person with little savings and a chronic medical problem is often forced to wait until their condition becomes critical. Once their medical problem is considered an “emergency”, they use the emergency room to receive the treatment they need to survive. The emergency room provides the treatment, but the uninsured person is usually unable to pay the full medical bill.
That cost of providing care does not evaporate if the person is unable to pay the bill. Instead, the cost gets redistributed to all the other patients at a hospital who are able to pay. This means the cost of every other type of care at the hospital goes up. This is why you may have heard the infamous stories of the $15 hospital Tylenol, or other such extremely high costs for care.
This causes a loop – as the cost of all the other treatments go up, other uninsured (and people with low levels of insurance) find themselves unable to pay their own bills, pushing all other prices even higher. Most people with insurance do not need to worry much about these costs – insurance companies usually negotiate directly with the hospitals to force these costs back down. This means so the bulk of the bill falls on the uninsured first, who pay what they can, until they run out of savings. The rest is paid by the government (through patients with public insurance coverage) – the government does not usually negotiate prices as much as private insurance companies.
The Regulation Stability Problem
You may have heard about some of the major changes that have been moving through congress over the last couple of years regarding health care. Usually the government is trying to decide how much insurance will be subsidized, what levels of care are mandatory, and how many people might be covered by public insurance schemes. For health insurance companies, all of these changes mean very big problems. It makes it extremely difficult to engage in long-term planning when deciding how much to charge premiums to its current customers.
When insurance regulations are constantly being rewritten and put through successive major reforms, it makes the fee structure unstable. Health insurance companies often raise their premiums to protect against big changes in their insurance pool. For example, the government currently provides a subsidy to encourage insurance companies to cover more low-income families. If health insurance providers might that subsidy might disappear at some point in the middle of the next few years. This would mean many healthy families would drop out (raising their average cost). It would also mean they will lose some of their revenue from families that stay in with no subsidy. To protect against this, they raise premiums slightly in the short term to act as a buffer.