How Health Insurance Works
Just how does health insurance work? Health insurance and health insurance plans have changed immensely since the 1970s. At that time, Most people in the United States who had health insurance had what is called indemnity insurance.
Indemnity insurance is often called fee-for-service or traditional health insurance. This type of coverage generally assumes that the medical provider (usually a doctor or hospital) will be paid a fee for each service provided to the patient, meaning you or a family member covered under the policy.
With fee-for-service insurance, you go to the doctor of your choice, and you submit a claim to the insurance company for reimbursement. Often, your doctor or hospital will submit the claim for you. You will only be reimbursed for covered medical expenses; that is, the covered services listed in your plan's benefits summary.
When a service is covered under your policy, you can expect to be reimbursed for some,but generally not all, of the cost. How much you will receive depends on your policy's coinsurance and deductibles. You will be responsible for the portion of the bill not reimbursed by the insurance company.
Today, many Americans who have health insurance are enrolled in a managed care plan, such as a health maintenance organization (HMO) or a preferred provider organization (PPO). For more information on HMOs and PPOs, see "cheap Health Insurance Quotes" and "Health Insurance Plans."
When we talk about health insurance, we usually mean the kind of insurance that pays medical bills, hospital bills, and typically, prescription drug costs. This type of coverage includes Medicare and Medicaid, two government programs that provide health insurance coverage for certain populations, such as seniors, people with disabilities, and individuals and families with low income. But there are other types of coverage as well, including disability insurance, long-term care insurance, and other coverage that can offer additional financial protection for you and your family.
As medical care advances and treatments increase, health care costs also increase. The purpose of health insurance is to help you pay for care. It protects you and your family financially in the event of an unexpected serious illness or injury that could be very expensive. In addition, you are more likely to get routine and preventive care ifyou have health insurance.
The rationale behind the "need" for health insurance is that you cannot predict what your medical bills will be. In some years, your costs may be low. In other years, you may have very high medical expenses. The point of health insurance is to provide you with security in knowing that you are protected from most of these costs. You may decide not to purchase health insurance; however, never put it off with the idea that you will purchase when you or another family member is seriously ill. By that time it will be too late, and insurance companies may not sell you a policy or may price it so hight that you would not be able to afford it.
Most people get health insurance through their employers or organizations to which they belong. This is called group insurance. As we know, many people do not have access to group insurance. If they can affor it, they may choose to purchase their own individual health insurance directly from an insurance company. Many Americans also get health insurance through government programs that operate at the national, State, and local levels. Examples include Medicare, Medicaid, and programs run by the Department of Veterans Affairs and Department of Defense.
Group health insurance is typically offered by employers. Or, if you are a member of a union, professional association, or other group, you may be able to get group coverage through that organization. Some employers allow employees to choose between several plans, including both indemnity insurance and managed care. Other employers offer only one plan. Some group plans offer dental and/or vision benefits as well as medical benefits. So it is important to compare plans to find the one that offers the benefits you need most. Once you enroll in a health insurance plan, you usually cannot change to another plan until the next open season, usually set once a year.
When group health insurance is an employee benefit, your employer usually pays a portion or all of the premiums. This means your costs for health insurance premiums will be lower than they would be if you paid the entire premium alone. When you get group insurance through membership in an organization, you usually will benefit from being a member of a large group. You may pay less for premiums than an individual would pay. However, the organization often does not pay a share of the premium, meaning you may be responsible for paying the entire premium yourself.
If you are self-employed or your employer does not offer health insurance, you may not have access to group insurance. You may, however, be able to purchase individual coverage directly from an insurance company. When you buy your own health insurance, you will be responsible for paying the entire premium rather than sharing the cost with an employer. You should shop around to find a plan that fits your needs at a price that you are willing to pay.
Most self-employed workers are able to deduct their health insurance premiums from their Federal taxable income, providing them with an important tax saving. Most States also offer similar tax preferences. If you are self-employed and buy individual health insurance, you should consult a tax advisor to find out if you are eligible for this deduction.
Insurance plans differ greatly from one company to another and, within an insurance company, from one plan or product to another. Some plans have multiple options from which you can choose; however, read carefully through the fine print to be sure you understand the various choices.
Whether you are eligible for group insurance or choosing an individual plan, you should carefully compare costs and coverage. Be sure to compare:
- Premiums
- Coverage/benefits
- Access to doctors, hospitals, and other providers
- Access to after hours and emergency care
- Out-of-pocket costs (coinsurance, copays, anddeductibles)
- Exclusions and limitations
Some, if not most, health care providers in the United States will agree to bill the insurance company if patients are willing to sign an agreement that they will be responsible for the amount that the insurance company doesn't pay. The insurance company pays out of network providers according to "reasonable and customary" charges, which may be less than the provider's usual fee. The provider may also have a separate contract with the insurer to accept what amounts to a discounted rate or capitation to the provider's standard charges. It generally costs the patient less to use an in-network provider.
To better help understand how health insurance works, please see our glossary of essential terms and resources. We have also provided a list of basic terms below:
Premium: The amount the policy-holder or his sponsor (e.g. an employer) pays to the health plan each month to purchase health coverage.
Deductible: The amount that the insured must pay out-of-pocket before the health insurer pays its share. For example, a policy-holder might have to pay a $500 deductible per year, before any of their health care is covered by the health insurer. It may take several doctor's visits or prescription refills before the insured person reaches the deductible and the insurance company starts to pay for care.
Copayment: The amount that the insured person must pay out of pocket before the health insurer pays for a particular visit or service. For example, an insured person might pay a $45 copayment for a doctor's visit, or to obtain a prescription. A copayment must be paid each time a particular service is obtained.
Coinsurance: Instead of, or in addition to, paying a fixed amount up front (a copayment), the co-insurance is a percentage of the total cost that insured person may also pay. For example, the member might have to pay 20% of the cost of a surgery over and above a co-payment, while the insurance company pays the other 80%. If there is an upper limit on coinsurance, the policy-holder could end up owing very little, or a great deal, depending on the actual costs of the services they obtain.
Exclusions: Not all services are covered. The insured person is generally expected to pay the full cost of non-covered services out of their own pocket.
Coverage limits: Some health insurance policies only pay for health care up to a certain dollar amount. The insured person may be expected to pay any charges in excess of the health plan's maximum payment for a specific service. In addition, some insurance company schemes have annual or lifetime coverage maximums. In these cases, the health plan will stop payment when they reach the benefit maximum, and the policy-holder must pay all remaining costs.
Out-of-pocket maximums: Similar to coverage limits, except that in this case, the insured person's payment obligation ends when they reach the out-of-pocket maximum, and the health company pays all further covered costs. Out-of-pocket maximums can be limited to a specific benefit category (such as prescription drugs) or can apply to all coverage provided during a specific benefit year.
Capitation: An amount paid by an insurer to a health care provider, for which the provider agrees to treat all members of the insurer.
In-Network Provider: A health care provider on a list of providers preselected by the insurer. The insurer will offer discounted coinsurance or copayments, or additional benefits, to a plan member to see an in-network provider. Generally, providers in network are providers who have a contract with the insurer to accept rates further discounted from the "usual and customary" charges the insurer pays to out-of-network providers.
Prior Authorization: A certification or authorization that an insurer provides prior to medical service occurring. Obtaining an authorization means that the insurer is obligated to pay for the service, assume it matches what was authorized. Many smaller, routine services do not require authorization.
Explanation of Benefits: A document sent by an insurer to a patient explaining what was covered for a medical service, and how they arrived at the payment amount and patient responsibility amount.
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