Understanding Health Insurance
The world of health insurance can be confusing. This page is meant to provide general information about the insurance industry, break down the different types of insurance, and define common terms.
General Health Insurance Facts
- Health insurance pays doctors on a fee-for-service system. This means they are paid according to the quantity and type of service that they provide.
- Doctors will typically pay for the cost of the procedure, supplies they use, and the visits they have with the patient. Insurance companies will then reimburse a doctor based on what procedures were done and supplies were used.
- Insurance pays hospitals by something called Diagnosis-related Groups, or DRGs. When a person is admitted to a hospital, an insurance company will give that hospital a certain amount of money based on the patient’s diagnosis. The hospital then uses that money to cover the cost of all treatment the patient gets.
- Reimbursement rates for both vary among insurance companies. Typically, private insurance has much higher reimbursement rates than Medicaid which is why fewer doctors are able to accept Medicaid patients. Since they pay for the supplies and treatments first, they might not be able to afford to administer care if Medicaid reimbursements are too low.
Understanding Premiums, Deductibles, Copayment and Coinsurance
Insurance companies use cost-sharing mechanisms to keep their expenditures down and prevent overuse of healthcare services. These are premiums, deductibles, copay, and coinsurance.
- Premium: What the patient pays every month for insurance
- Deductible: The amount that the patient needs to pay before the insurance benefits activate
- Copayment: The amount paid each time a patient utilizes a healthcare service. Insurance companies can set specific copays to specific services.
- Coinsurance: Similar to a copay, but instead of a set amount per service the patient pays for a set percentage of the cost of the service.
A report by the RAND corporation showed that when there are no cost-sharing mechanisms, people will over utilize healthcare services and will not have improved health outcomes. This is called “moral hazard.” A certain portion of cost-sharing is required, but there is no consensus on what is the correct and fair amount.
Healthcare and the U.S. Economy
- Healthcare Spending represents 1/6th of the U.S. Economy.
- Costs are higher and Americans utilize services more often than any other developed nation in the world/
- Prescription drugs account for about 10% of healthcare spending (2014).
While this may seem large, it is important to realize hospital care accounts for 32% of healthcare spending in the US while physician and clinical services account for 19.9%. Prescription drugs are not the source of most of our healthcare spending.
Health Insurance and the Affordable Care Act
After 2014, as part of the Affordable Care Act, anyone who went more than a few months without health insurance would be subject to a fine when they paid their taxes. This is often referred to as a mandate, and this practice had the goal of ultimately lowering costs for everyone. Insurance companies pool all the money they get from their patients to make payments for health services. If more people have insurance, there is more money to cover these payments. With more resources to the company, patients themselves end up having lower out of pocket costs.
The penalty was put in place to encourage more people to sign up for insurance. We all need healthcare at some point, but previously healthy people didn’t like to buy insurance because they didn’t think they needed it. The penalty encouraged them to get health coverage they might need while lowering costs for all members of the plan as a whole.
This concept of how insurance companies pay for services also explains why many of them would rather have healthy patients than those with chronic disease. If you are healthy, you only pay money through premiums without using health services that insurance must reimburse for. If you are sick, you may receive expensive medical care often, and insurance will have to pay more than what you pay them. Different regulations are in place to prevent insurance companies from punishing people for being sick, but there is still work to do.
Commercial or Private Health Insurance
A commercial or private health insurance plan is any plan that is not run by a government program, and can plans include both group and individual plans. These plans purchased through a private insurance company (Cigna, Aetna, Oxford, Kaiser, etc).
Facts about Private Health Insurance Plans
- UnitedHealth is the largest private insurer in the United States.
- Private insurance plans are generally associated with shorter wait times and higher cost-sharing mechanisms.
- Private plans can be used to cover an individual or a group, for example, a Family or a group of employees.
- A group plan is usually one of the major benefits offered by employers.
- Group plans allow insurance companies to spread the potential risk of high-cost employees among the rest of the employees. This lowers the overall burden because the premiums of the healthier employees will cover the cost of sicker employees.
- According to the Kaiser Family Foundation, in 2014 over 54% of non-elderly adults had health insurance through their employer.
- Group health plans typically cost less than an equivalent benefit plan on the individual market.
- An individual health policy is often purchased with the guidance of an insurance agent to help navigate plan choices and premium costs. These are typically plans that are purchased on the individual market place. They cover individuals and their families, who are self-employed or have another reason for not having insurance through an employer and do not qualify for Medicaid. Individual health insurance plans can also be purchased through the State Health Exchange Marketplace or directly from the insurer.
Regulations Around Commercial Health Insurance
There are lots of variety in regulations for commercial plans across state. Insurance plans need to meet the requirements of the state insurance agency in which they conduct business.
States can regulate which services must be provided beyond the Federal essential benefits, how insurers reimburse patients and providers, and if they must keep fiscal reserves on hand to meet their obligations to beneficiaries.
The Affordable Care Act enacted some of the stiffest regulations on the commercial insurance industry:
- Enacted a community rating system. A community rating system in insurance is one which requires all insurers to offer policies within a given territory at the same price to all persons.
- Mandated that insurers cannot charge the sickest individual more than 3 times what it charges the healthiest individual. Previously, insurers could charge 5 times as much, and in some cases, it was even higher.
- Eliminated the practice of rejecting people for coverage if they had a pre-existing condition. A pre-existing condition is a medical condition that started before a person’s health benefits went into effect. Previously, insurers could refuse to cover individuals whose medicals costs would be too expensive.
- Forced all plans to cover a list of “essential health benefits.” The ACA established 10 services that it declared were “essential” for every health benefit plan in the U.S. to include. Things like Ambulatory Care and Maternity Services, which previously required specific plans and increased premiums, became fully covered under every plan in the US. Previously, insurers had free reign in setting what they chose to cover as long as they satisfied the state requirements.
- Eliminated lifetime and yearly spending caps. Previously, insurers could cap how much they would be willing to spend for an individual. Once someone reached that cap, they would no longer be eligible for their benefits and would have to pay the full cost of their treatment.
Government Health Insurance
Government health insurance plans are those are that run directly through government funding. They are funded primarily by though taxes on the public and are available to anyone who meets certain criteria. In the United States, there are 6 types of government health insurance programs and they are each regulated by a specific industry:
You are eligible for Medicare if you are over 65, have been receiving Social Security Disability Insurance, have Lou Gehrig’s disease (ALS), or have End Stage Renal Disease.
Prior to turning 65, people pay 1.45% of their income into the Medicare “pool” while their employer pays an additional 1.45% (Medicare tax equals 2.9% of our earned income). Medicare, in and of itself, is designed to absorb risk by providing coverage to the most risky and costliest of individuals who would otherwise be subjected to very high premiums. Once they turn 65, people automatically become eligible for Medicare. They still have the option to supplement it with private insurance.
Medicare is paid for in different ways, and is regulated by the Center for Medicare and Medicaid Services (CMS).
- Part A (hospital care, skilled nursing homes, hospice, and home health services) is paid for entirely by the Federal Government through CMS revenue, like those from income taxes.
- Part B (preventative services, doctors offices, mental health, out-patient-services) is paid for by CMS and through premiums paid by beneficiaries.
- Part D (medications) is paid for by CMS, beneficiary premiums, and by some state payments for those who are also eligible for Medicaid.
- Part C, or Medicare Advantage, covers A, B, and D and is paid for by CMS and with a beneficiary premium. Medicare Advantage plans are a type of Public/Private partnership plan. Medicare Advantage plans are offered by private companies that contracts with CMS to provide beneficiaries with all Part A and Part B services. In addition to the Part B premium, people on Medicare Advantage plans also pay a beneficiary premium to the private company that offered the Advantage plan. Some Medicare Advantage plans do not offer Part D coverage. This is where a Medigap plan comes in handy. These are small private plans that cover prescription drug benefits and other small gaps that a Medicare Advantage plan may miss.
Medicaid is jointly funded by the States and the Federal government, which gives States more flexibility in determining eligibility for the state’s Medicaid programs as well as the things that mandated to be covered.
Medicaid is used to provide low cost health insurance to low income families, qualified pregnant women and children, and individuals on Social Security Income. States may then choose to cover additional groups, such as children in foster care who do not otherwise qualify or people receiving home care services, to expand their programs
The Children’s Health Insurance Program (CHIP) is a program administered by the Federal Government’s Department of Health and Human Services (HHS) and provides funds to states that create health plans for families with children but do not have a low enough income to qualify for Medicaid.
TRICARE is a program run by the Defense Health Agency (DHA) and provides health benefits to the US Armed Services and certain members of the Reserves, along with their families.
Veterans Health Administration
The Veterans Health Administration (VHA) is a component of the US Department of Veterans Affairs (VA) and provides medical care and long-term care to veterans of the US military who are not eligible for TRICARE. Typically, the VA covers more veterans who are disabled.
Indian Health Service
The Indian Health Service (IHS) is administered by the Federal government and the HHS to provide medical care and public health services to members of Federally recognized Native American Tribes and Alaska Native peoples.