What is Health Insurance?

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History and evolution

The concept of health insurance was proposed in 1694 by Hugh the Elder Chamberlen from the Peter Chamberlen family. In the late 19th century, "accident insurance" began to be available, which operated much like modern disability insurance. This payment model continued until the start of the 20th century in some jurisdictions (like California), where all laws regulating health insurance actually referred to disability insurance.

Accident insurance was first offered in the United States by the Franklin Health Assurance Company of Massachusetts. This firm, founded in 1850, offered insurance against injuries arising from railroad and steamboat accidents. Sixty organizations were offering accident insurance in the US by 1866, but the industry consolidated rapidly soon thereafter. While there were earlier experiments, the origins of sickness coverage in the US effectively date from 1890. The first employer-sponsored group disability policy was issued in 1911.

Before the development of medical expense insurance, patients were expected to pay all other health care costs out of their own pockets, under what is known as the fee-for-service business model. During the middle to late 20th century, traditional disability insurance evolved into modern health insurance programs. Today, most comprehensive private health insurance programs cover the cost of routine, preventive, and emergency health care procedures, and also most prescription drugs, but this was not always the case.

Hospital and medical expense policies were introduced during the first half of the 20th century. During the 1920s, individual hospitals began offering services to individuals on a pre-paid basis, eventually leading to the development of Blue Cross organizations. The predecessors of today's Health Maintenance Organizations (HMOs) originated beginning in 1929, through the 1930s and on during World War II.

How it works

A health insurance policy is a contract between an insurance company and an individual or his sponsor (e.g. an employer). The contract can be renewable annually or monthly. The type and amount of health care costs that will be covered by the health insurance company are specified in advance, in the member contract or "Evidence of Coverage" booklet. The individual insurered person's obligations may take several forms:

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: (U.S. term) 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

Prescription drug plans are a form of insurance offered through some employer benefit plans in the US, where the patient pays a copayment and the prescription drug insurance part or all of the balance for drugs covered in the formulary of the plan.

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.

Health plan vs. health insurance

Historically, HMOs tended to use the term "health plan", while commercial insurance companies used the term "health insurance". A health plan can also refer to a subscription-based medical care arrangement offered through HMOs, preferred provider organizations, or point of service plans. These plans are similar to pre-paid dental, pre-paid legal, and pre-paid vision plans. Pre-paid health plans typically pay for a fixed number of services (for instance, $300 in preventive care, a certain number of days of hospice care or care in a skilled nursing facility, a fixed number of home health visits, a fixed number of spinal manipulation charges, etc.) The services offered are usually at the discretion of a utilization review nurse who is often contracted through the managed care entity providing the subscription health plan. This determination may be made either prior to or after hospital admission (concurrent utilization review).

Comprehensive vs. scheduled

Comprehensive health insurance pays a percentage of the cost of hospital and physician charges after a deductible (usually applies to hospital charges) or a co-pay (usually applies to physician charges, but may apply to some hospital services) is met by the insured. These plans are generally expensive because of the high potential benefit payout — $1,000,000 to 5,000,000 is common — and because of the vast array of covered benefits.

Scheduled health insurance plans are not meant to replace a traditional comprehensive health insurance plans and are more of a basic policy providing access to day-to-day health care such as going to the doctor or getting a prescription drug. In recent years, these plans have taken the name mini-med plans or association plans. These plans may provide benefits for hospitalization and surgical, but these benefits will be limited. Scheduled plans are not meant to be effective for catastrophic events. These plans cost much less than comprehensive health insurance. They generally pay limited benefits amounts directly to the service provider, and payments are based upon the plan's "schedule of benefits". Annual benefits maximums for a typical scheduled health insurance plan may range from $1,000 to $25,000.

Inherent problems with multiple insurance funds and optional insurance

The basic concept of insurance is population solidarity. There are inherent risks in a population but the population absorbs the cost of risks to an individual by spreading the impact of incurred costs amongst the insured population. However, if the population is split into insured and uninsured groups, or into selectively groups (as with private insurance with pre-insurance selection either by the insurance company or the insured) the concept of population solidarity breaks down. Insurance systems must then typically deal with two inherent challenges: adverse selection and ex-post moral hazard.

Some national systems with compulsory insurance utilize systems such as risk equalization and community rating to overcome these inherent problems. Proponents of single-payer health care in the United States aim to provide the population of the country with health care from a single fund and thus avoid problems and costs associated with adverse selection, moral hazard, and private profiteering from insurance.

Adverse selection

Insurance companies use the term "adverse selection" to describe the tendency for only those who will benefit from insurance to buy it. Specifically when talking about health insurance, unhealthy people are more likely to purchase health insurance because they anticipate large medical bills. On the other side, people who consider themselves to be reasonably healthy may decide that medical insurance is an unnecessary expense; if they see the doctor once a year and it costs $250, that's much better than making monthly insurance payments of $40. (example figures).

The fundamental concept of insurance is that it balances costs across a large, random sample of individuals (see risk pool). For instance, an insurance company has a pool of 1000 randomly selected subscribers, each paying $100 per month. One person becomes very ill while the others stay healthy, allowing the insurance company to use the money paid by the healthy people to pay for the treatment costs of the sick person. However, when the pool is self-selecting rather than random, as is the case with individuals seeking to purchase health insurance directly, adverse selection is a greater concern. A disproportionate share of health care spending is attributable to individuals with high health care costs. In the US the 1% of the population with the highest spending accounted for 27% of aggregate health care spending in 1996. The highest-spending 5% of the population accounted for more than half of all spending. These patterns were stable through the 1970s and 1980s, and some data suggest that they may have been typical of the mid-to-early 20th century as well. A few individuals have extremely high medical expenses, in extreme cases totaling a half million dollars or more. Adverse selection could leave an insurance company with primarily sick subscribers and no way to balance out the cost of their medical expenses with a large number of healthy subscribers.

Because of adverse selection, insurance companies employ medical underwriting, using a patient's medical history to screen out those whose pre-existing medical conditions pose too great a risk for the risk pool. Before buying health insurance, a person typically fills out a comprehensive medical history form that asks whether the person smokes, how much the person weighs, whether the person has been treated for any of a long list of diseases and so on. In general, those who present large financial burdens are denied coverage or charged high premiums to compensate. One large US industry survey found that roughly 13 percent of applicants for comprehensive, individually purchased health insurance who went through the medical underwriting in 2004 were denied coverage. Declination rates increased significantly with age, rising from 5 percent for individuals 18 and under to just under a third for individuals aged 60 to 64. Among those who were offered coverage, the study found that 76% received offers at standard premium rates, and 22% were offered higher rates. On the other side, applicants can get discounts if they do not smoke and are healthy.

Moral hazard

Moral hazard occurs when an insurer and a consumer enter into a contract under symmetric information, but one party takes action, not taken into account in the contract, which changes the value of the insurance. A common example of moral hazard is third-party payment—when the parties involved in making a decision are not responsible for bearing costs arising from the decision. An example is where doctors and insured patients agree to extra tests which may or may not be necessary. Doctors benefit by avoiding possible malpractice suits, and patients benefit by gaining increased certainty of their medical condition. The cost of these extra tests is borne by the insurance company, which may have had little say in the decision. Co-payments, deductibles, and less generous insurance for services with more elastic demand attempt to combat moral hazard, as they hold the consumer responsible.

Other factors affecting insurance prices

A recent study by PriceWaterhouseCoopers examining the drivers of rising health care costs in the US pointed to increased utilization created by increased consumer demand, new treatments, and more intensive diagnostic testing, as the most significant driver. People in developed countries are living longer. The population of those countries is aging, and a larger group of senior citizens requires more intensive medical care than a young healthier population. Advances in medicine and medical technology can also increase the cost of medical treatment. Lifestyle-related factors can increase utilization and therefore insurance prices, such as: increases in obesity caused by insufficient exercise and unhealthy food choices; excessive alcohol use, smoking, and use of street drugs. Other factors noted by the PWC study included the movement to broader-access plans, higher-priced technologies, and cost-shifting from Medicaid and the uninsured to private payers.

Strategies for Saving on Prescription Drugs

By LESLEY ALDERMAN
Published: February 6, 2009
New York Times on Line

Drugs have never been so expensive — or so cheap.

News reports and anecdotal evidence indicate that the recession is prompting many people to skimp on prescription drugs, putting their health at risk now and setting them up for higher medical expenses in the long term. So now is a good time to take a hard look at what you spend on prescriptions and figure out how you can make that money go farther.

The average brand-name prescription cost an eye-popping $120 in 2007, according to the most recent data from the Kaiser Family Foundation. That was up from $111 the year before. The average generic in 2007 was a mere $34, according to Kaiser. These days you can buy many generic drugs for as little as $4 for a 30-day supply at WalMart or Target, and many other retailers are offering steep discounts.

Switching to generics is obviously one of the best options, if your doctor approves. But generics aren’t the answer in every case. So before you go to the pharmacy, or your drug Web site, consider these strategies for lowering your prescription bills.

Take advantage of your insurance. If you’re fortunate enough to have employer-sponsored health insurance, you probably have a prescription drug plan. These plans are generous, but they can be confusing.

Typically they offer coverage at three levels, or tiers. You might have a co-payment of just $10 or so for a generic drug, $25 for a preferred drug (meaning the insurer has negotiated a preferred rate with the drug company), and as much as $75 for a nonpreferred drug.

To learn how the drugs you take are reimbursed, go to your insurer’s Web site and print out the formulary, the list of drugs they cover. Or call the 800 number on the back of your insurance card. If you’re taking drugs in the top tier, talk with your doctor about less expensive options. (More about that below.)

If you take one or more drugs for a chronic condition, check out the drug insurer’s mail order system. That could save you hundreds of dollars a year. Many people fail to take advantage of this option, which involves relatively little paperwork.

“Nearly 40 percent of our customers are unaware that they even have a mail order benefit,” said Ken Malley, a vice president at Medco Health Solutions, one of the country’s largest pharmacy benefit managers, as drug insurers are known. Mr. Malley estimates that a person who takes four medications for a chronic condition could save up to $400 a year by simply switching to mail order. It’s also more convenient.

Talk with your doctor about less costly options. Whether you have insurance or not, make an appointment to speak with your doctor about your drugs. Bring a copy of your insurer’s formulary, as well as a list of the medications you currently take (or just bring the bottles).

Ask three questions:

Are all these medications necessary? “Medicines from every class are overprescribed,” said Dr. Edward Jardini, author of “How to Save on Prescription Drugs” (Ten Speed Press, 2008). “Make sure you’re not taking duplicate therapies. And make sure the drug treatment you’re on has proven to be effective.”
Am I on the correct dose? If you’ve lost a lot of weight or started a vigorous exercise routine, for instance, you may need a lower dose of a blood pressure or cholesterol lowering medicine.
Is there a generic alternative that I can try? Roughly 75 percent of all premium drugs have a generic equivalent or alternative. Although the osteoporosis drug Actonel does not have a generic equivalent, for example, another one — Fosamax — does. By switching from Actonel to the generic version of Fosamax you could save hundreds of dollars a year.

“Generic drugs are much better than they were 30 years ago,” said Dr. Edward Langston, a family doctor, pharmacist and immediate past chairman of the American Medical Association board of trustees. “For the most part, switching to generics is seamless.”

You should also ask those questions any time a doctor prescribes a medication — especially if it’s for a cold or the flu. Remember, colds and flus are caused by viruses, which don’t respond to antibiotics. The federal Centers for Disease Control and Prevention estimate that consumers spend millions of dollars each year on ineffective antibiotic prescriptions for viral conditions.

And if you do need an antibiotic, for a bacterial infection, be sure to ask you doctor to look for a generic solution first.

And while you’re speaking with your doctor, ask whether long-term prescriptions can be written for 90 days, rather than 30 — which may cost less per dose.

In addition, find out whether your medications are available in a larger dose and whether the pills can be split. Instead of taking a 50-milligram pill, for instance, you would take half of a 100-milligram pill. The cost of the two prescriptions is the same, but one will give you twice as many doses. Simple and inexpensive pill-splitting devices are available at most drugstores.

If you are on a Medicare “Part D” drug plan . . . Talking with your doctor now, early in the year, is especially important if you are covered by a Medicare prescription plan. Discuss how you can avoid running up a large bill that will bring you to the coverage gap in Medicare Part D — the dreaded “doughnut hole,” in which you must pay full price for your medications.

This year Part D will cover medications until your own out-of-pocket expenditures and your plan’s outlays reach $2,700. After that, you’re in the doughnut hole and must pay the full cost of prescription drugs until the running total reaches $4,350. Only at that point does Medicare coverage resume.

Some of the strategies outlined above can help reduce your costs and possibly avoid the Medicare doughnut hole.

Compare costs at different retail outlets. Prices vary from drugstore to drugstore — sometimes a lot, depending on the medicine. If you don’t have insurance and you take a pricey name-brand drug, shop around.

A good place to start is at the comparison-shopping site Destination RX. Plug in the name of your drug and your ZIP code, and the site will show you how prices compare at a few venues, including a local pharmacy, a large chain store and a discounter like Costco. You should also check out the prices at other online retailers, like Drugstore.com or FamilyMeds.com. In addition, call your local pharmacy and ask for prices on the drugs you take. You might be surprised. I found, for instance, that a small pharmacy near my Brooklyn home had lower prices than Costco on several medications, while the nearby chain drugstore turned out to be the most expensive option. (See table for examples of my spot-check survey.)

Even if you take low-cost generics, bargain-hunting is worth it. Several national pharmacy chains, as lures for your broader business, are practically giving drugs away. (See table.)

If your drugs bills are high and your funds are low. Contact the Partnership for Prescription Assistance, (888-477-2669), a nonprofit organization run by the Pharmaceutical Research and Manufacturers of America. The partnership helps uninsured or low-income consumers get access to 475 public and private prescription assistance programs.

Needymeds.org also has information on medicine and healthcare assistance programs. Older people should contact BenefitsCheckUp, a service of the National Council on Aging, which locates benefits programs for seniors with limited income and resources.

Health Insurance: What You Need to Know

By LESLEY ALDERMAN
Published: February 2, 2009
New York Times on line

With Americans spending an ever increasing amount on medical costs, it’s more important than ever to have insurance that fits your health care needs. So when you start shopping for a plan, don’t just look for one with the lowest premiums. Consider the services that are most important to you.

The best place to get health insurance, of course, is from your employer. Group plans are typically cheaper, and your employer will probably cover much of the cost.

There are three main types of coverage you can choose from: H.M.O.s (health maintenance organizations), P.P.O.s (preferred provider organizations) and the newer option called an H.D.H.P. (high deductible health plan) paired with a savings account. A small number of companies still offer old-fashioned, fee-for-service plans, but their ranks are dwindling. Here’s what you need to know about the most common plans:

H.M.O.S provide comprehensive coverage at a low cost to the consumer. In general, you don’t pay any deductibles or co-payments for basic care (and if you do, they will be relatively low). But your choices will be limited. You can generally use only the doctors and hospitals within the H.M.O.’s network, though more plans are easing up on this restriction, and your designated primary-care physician will determine the level of care you require and when you need to see a specialist.

Pros: Low cost. Coordinated care.

Cons: A limited choice of providers. If you go out of network, for example to a specialist, you will probably not be reimbursed.

PREFERRED PROVIDER ORGANIZATION AND POINT OF SERVICE plans were created in response to consumer frustrations with the limitations ofH.M.O.S. You can choose to go to network providers and pay a small co-payment, or go out of network and have only a portion — typically around 60 to 70 percent — of your costs reimbursed. The main difference between the two is that a point of service plan requires a referral from your primary care physician to see a specialist, while the preferred provider plan does not.

Pros: More flexibility than an H.M.O.; lower overall out-of-pocket costs than a fee for service plan.

Cons: It’s tricky to predict your costs unless you’re willing to stay within the network. Getting reimbursed for out-of-network claims can be a hassle.

HIGH-DEDUCTIBLE HEALTH PLAN Over the past few years, more employers have begun to offer the option to sign up for a high deductible health plan that is linked to a health savings account or health reimbursement account. Some employers may offer the high-deductible health plan on its own and allow the employees to set up a savings account with the bank of their choice.

The plans work like the preferred provider option, but the deductible is much higher — at least $1,150 for coverage of a single person and $2,300 for families. To compensate for the larger deductible, employers typically offer different two savings options:

A health savings account allows you to put away pretax dollars and then withdraw the money to pay your out-of-pocket costs. (Your employer may kick in some money, too.) In 2009, you and your employer can put up to a combined limit of $5,950 in a health savings account if you opt for family coverage ($3,000 for singles). The money rolls over from year to year, so you can basically store up a medical emergency fund. When you’re 65, you can take the remaining money out without paying a penalty, though you’ll pay taxes on the withdrawal if you’re not using it to pay for medical costs.

A health reimbursement account is financed solely by your employer. Typically, an employer will contribute an amount equal to about half the employee’s deductible The money rolls over from year to year, but you cannot take the money with you when you leave the company.

Pros: Low premiums. Tax-free savings (in the case of the health savings account).

Cons: Potentially high costs, especially if you or a family member becomes chronically ill. Don’t choose this option unless you have the money to pay the deductible.

INDEMNITY, OR FEE-FOR-SERVICE, PLANS are offered by fewer and fewer employers because of their expense. They allow you to go to any doctor, hospital or medical provider you choose. The plan typically reimburses 80 percent of your out-of-pocket costs after you fulfill an annual deductible.

Pros: Flexibility. You can go to any medical provider, anywhere, without seeking plan approval first.

Cons: Your total out-of-pocket costs will probably be higher than in a preferred provider plan or H.M.O. Most fee-for-service plans don’t cover preventive care like flu shots or mental health services.

To help narrow your choice, here are the steps you should take:

Ask your favorite doctors which insurance plans they accept. If you find that one or more of your doctors do not accept any insurance plans, then you’ll want to select a plan that reimburses you for your costs when you go out of the network.
Make a list of all the services you and your family use. Include on the list things like vision care, dental, physical therapy, acupuncture and mental health care. Find out how the plans you like best will cover these services and at what cost.
Compare costs. Write down the costs associated with each plan, including premiums, out-of-network costs, and extras like vision or mental health care.

The Joint Commission on the Accreditation of Healthcare Organizations has put together a comprehensive list of helpful questions.

In addition to offering low-cost health insurance, your employer may also offer a health care flexible spending account, which lets you set aside pretax dollars to pay for your out-of-pocket medical costs. (If you have already signed up for a health savings account, you can only use the flexible spending account for dental, vision or post-deductible medical expenses.) You can deposit up to $5,000 a year in a flexible spending account, depending on the limit set by your employer. The money will be deducted from your paycheck and you can’t change the amount midyear. If you have high medical costs, using a flexible spending account can save you hundreds of dollars a year in taxes. But calculate your costs carefully. The money does not roll over to the next year. Any money you don’t use will be lost.

If you need to buy insurance on your own — there are a number of options to consider, including these:

First, if you are about to lose your job and work for a company with more than 20 employees, you can remain on your employer’s plan for up to 18 months, under a federal law called Cobra, the Consolidated Omnibus Budget Reconciliation Act. But you will have to pay the full premium plus 2 percent for administrative costs, and the expense is often quite high. This may be a good temporary measure, though, until you can find a more affordable option.

If you’re out on your own, try to find a group plan to join since group plans typically cost less and offer more benefits than individual plans. Can you join your spouse’s plan? Do you belong to (or can you join) a union, professional organization or alumni group that offers insurance? You may also be able to find a group plan for freelance workers. If you are over age 50, look at the plans offered by the AARP.

If a group plan is not an option for you, you’ll have to buy an independent policy. Fortunately, there are numerous plans to consider. The simplest way to compare policies and prices is by going to an online insurance broker like eHealthInsurance.com. At EHealthInsurance, for instance, you simply fill in your gender, ZIP code and date of birth -- and, if you want, the names of your doctors — and the site comes up with a list of policies for you to consider. You can apply online.

If the prospect of sorting and sifting through dozens of policies seems daunting, consider using an independent insurance agent, who sells many different kinds of health insurance. You can find agents in your area at the Web site for the Independent Insurance Agents & Brokers of America.

Individuals with modest incomes may be eligible for Medicaid. You may be able to get coverage for your children through the State Children’s Health Insurance Program, a federal-state partnership.

Insurance 101

What is Health Insurance?