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How health insurance works

What you don’t know can hurt you

How many people really understand how health insurance works? When it comes down to it, we pay our premiums, co-pays and deductibles without putting much thought into where the money goes. We hear that insurance companies make astronomical profits and avoid covering those with chronic conditions. Is it true? This primer on how health insurance works offers an overview from who needs insurance to how the claims process works to the ways insurance companies help and protect consumers.

What is health insurance?
Private health insurance coverage helps protect people from financial devastation should they become severely ill. Insurance companies pool risk across a number of people who pay premiums based on the average cost of health care for the group.

Who needs it?
Everyone benefits from health insurance. Even if you are young and healthy, you cannot see the future. Unforeseen illnesses and accidents cause medical bills to quickly accrue, and health insurance eases the financial burden.

Copays, deductibles and coinsurance – are the all the same thing?
As similar as they seem, these terms mean different things. A copay is a flat fee paid for health care services in addition to what the insurer covers. For instance you may pay $25 for physician office visits or $150 at the ER upfront before any services are rendered.

A deductible is the amount an individual or family pays for health care before health insurance begins to pay for covered expenses. This is usually an annual amount such as $2,000 depending on your plan

Coinsurance is the portion or percentage an individual pays for a health care services. For example, the individual may pay 20 percent for mental health services or inpatient hospitalization and the insurance company picks up the other 80 percent.

How does the application process work?
Once you select a plan and apply for individual insurance, your application goes through the underwriting process. If you are applying for individual coverage or coverage as part of a small group, you will probably be required to provide information regarding your health; this may include medical records and even blood, urine or saliva samples. In the underwriting process, your information is verified, your risk is assessed and your premium is calculated.

Applying for group coverage through a mid- to large-size company tends to be less involved. You will probably fill out a form. If you apply through your employer, federal law prohibits insurance companies from denying you coverage or charging you more than other employees.

On what basis are health insurance applicants accepted or rejected?
This may vary from insurer to insurer, but the basic principle of health insurance is that the healthy balance out the cost of the sick. If you are assessed as a high-risk, then you may be offered insurance with a higher premium or your plan may exclude preexisting conditions for a certain period of time.

Consulting a broker or agent can help you strengthen your application and find the best plan for your situation. Some states have high-risk pools, which insure those who are considered medically uninsurable by private insurers and are ineligible for Medicaid.

Where does my premium go?
For every dollar of your premium, 87 cents go directly toward paying for medical services such as physician services, inpatient costs, outpatient costs and drugs. Of the remaining 13 cents, 10 cents go toward administrative costs and 3 cents go toward profits. This information was found in the PricewaterhouseCoopers study “The factors fueling rising health care costs 2008.”

How much profit does a health insurance company make compared to other health care industries?
According to the 2009 FORTUNE 500, which lists America’s largest corporations, the health insurance and managed care industry ranks 35 on the list of most profitable industries. In 2008, the industry’s profits accounted for 2.2 percent of its revenue.

Here are the profits for other health care industries on the list:

• Pharmaceuticals — 19.3 percent
• Medical products and equipment — 16.3 percent
• Insurance: life, health (stock) — 4.6 percent
• Health care: pharmacy and other services — 3 percent
• Health care: medical facilities — 2.4 percent
• Wholesalers: health care — 1.3 percent
• Insurance: life, health (mutual) — -3 percent

How does the claims process work?
First, before you schedule an appointment, receive a service or fill a prescription, you should know what benefits are covered under your policy. You will pay your copay, and then the bill is sent to your insurance claims processing center. The charges will be compared with what your policy covers, and the carrier will pay the bill and charge you for the balance, if applicable.

How do health insurance companies help and protect consumers?
Insurance companies ensure consumers have access to health care services, and they help keep costs manageable. Health care costs vary from year to year, and no one can predict when an accident or illness may strike and create thousands of dollars worth of medical bills. Purchasing health insurance gives you the peace of mind that you will not be encumbered with paying them alone.

Also, studies show that those with health insurance are more likely to receive preventive care, thereby catching illnesses earlier when they are more treatable and consulting with physicians about healthy lifestyle choices that help them avoid preventable illnesses.