Health insurance

Health insurance is a type of insurance whereby the insurer pays the medical costs of the insured if the insured becomes sick due to covered causes, or due to accidents. The insurer may be a private organization or a government agency. Market-based health care systems such as that in the United States rely primarily on private health insurance.

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, early health insurance was actually disability insurance, in the sense that it covered only the cost of emergency care for injuries that could lead to a disability. 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. 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

A Health insurance policy is an annually renewable contract between an insurance company and an individual. With health insurance claims, the individual policy-holder pays a deductible plus copayment (for instance, a hospital stay might require the first $1000 of fees to be paid by the policy-holder plus $100 per night stayed in hospital). Usually there is a maximum out-of-pocket payment for any single year, and there can be a lifetime maximum.

Prescription drug plans are a form of insurance offered through many employer benefit plans in the U.S., where the patient pays a copayment and the prescription drug insurance pays the rest.

Some health care providers 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, as the insurance company pays according to "reasonable" or "customary" charges, which may be less than the provider's usual fee. The "reasonable" and "customary" charges can vary.

Health insurance companies also often have a network of providers who agree to accept the reasonable and customary fee and waive the remainder. It will generally cost the patient less to use an in-network provider.

Inherent problems with private insurance

Any private insurance system will face two inherent challenges: adverse selection and ex-post moral hazard.

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 $400 (example figures).

The fundamental concept of insurance is that it balances costs across a large, random sample of individuals. For instance, an insurance company has a pool of 1000 randomly selected subscribers, each paying $100/month. One of them gets really sick while the others stay healthy, which means that the insurance company can use the money paid by the healthy people to treat the sick person. Adverse selection upsets this balance between healthy and sick subscribers. It will 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 use a patient's medical history to screen out persons with pre-existing medical conditions. 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 look like they will be large financial burdens are denied coverage or charged high premiums to compensate. On the other side, applicants can actually get discounts if they do not smoke and are healthy.

Starting in 1976, some states started providing "health insurance" "risk pools", which allow individuals who are medically-uninsurable through private health insurance to be able to purchase a state-sponsored health insurance plan, usually at higher cost. Minnesota was the first to offer such a plan, there are now 34 states which do. Plans vary greatly from state-to-state, both in the costs and benefits to consumers and to their methods of funding and operating. They serve a very small portion of the uninsurable market -- about 183,000 people in the USA -- but in best cases do allow people with pre-existing conditions such as cancer, diabetes, heart disease or other chronic illnesses to be able to switch jobs or seek self-employment without fear of being without health care benefits. Efforts to pass a national pool have as yet been unsuccessful, but some federal tax dollars have been awarded to states to innovate and improve their plans.

Moral Hazard

Moral hazard describes the state of mind and change in behavior that results from a person's knowledge that if something bad were to happen, the out-of-pocket expenses would be mitigated by an insurance policy--in this case, one which provides reduced prices for medical care.

Other factors affecting insurance price

Because of advances in medicine and medical technology, medical treatment is more expensive, and people in developed countries are living longer. The population of those countries is aging, and a larger group of senior citizens requires more medical care than a young healthier population. (A similar rise in costs is evident in Social Security in the United States.) These factors cause an increase in the price of health insurance.

Some other factors that cause an increase in health insurance prices are health related: insufficient exercise; unhealthy food choices; a shortage of doctors in impoverished or rural areas; excessive alcohol use, smoking, street drugs, obesity, among some parts of the population; and the modern sedentary lifestyle of the middle classes.

In theory, people could lower health insurance prices by doing the opposite of the above; that is, by exercising, eating healthy food, avoiding addictive substances, etc. Healthier lifestyles protect the body from some, although not all, diseases, and with fewer diseases, the expenses borne by insurance companies would likely drop. A program for addressing increasing premiums, dubbed "consumer driven health care," encourages Americans to buy high-deductible, lower-premium insurance plans in exchange for tax benefits.

Common complaints of private insurance

Some common complaints about private health insurance include:

1. Insurance companies do not announce their health insurance premiums more than a year in advance. This means that, if one becomes ill, he or she may find that their premiums have greatly increased (however, in many states these types of rate increases are prohibited).
2. If insurance companies try to charge different people different amounts based on their own personal health, people may feel they are unfairly treated.
3. When a claim is made, particularly for a sizable amount, insureds may feel as though the insurance company is using paperwork and bureaucracy to attempt to avoid payment of the claim or, at a minimum, greatly delay it.
4. Health insurance is often only widely available at a reasonable cost through an employer-sponsored group plan.
5. In the United States, there are tax advantages to Employer-provided health insurance, whereas individuals must pay tax on income used to fund their own health insurance, although there are a minority of pre-tax health plans currently extant.
6. Experimental treatments are generally not covered. This practice is especially criticized by those who have already tried, and not benefited from, all "standard" medical treatments for their condition.
7. The Health Maintenance Organization (HMO) type of health insurance plan has been criticized for excessive cost-cutting policies in its attempt to offer lower premiums to consumers.
8. As the health care recipient is not directly involved in payment of health care services and products, they are less likely to scrutinize or negotiate the costs of the health care received. The health care company has popular and unpopular ways of controlling this market force.
9. Some health care providers end up with different sets of rates for the same procedure. One for people with insurance and another for those without.
10. Unlike most publicly funded health insurance, many private insurance plans do not provide coverage of dental health care, or only offer such coverage with additional premiums and very low dollar-amount coverages.
11. Insurance Companies can influence the type or amount of treatment that the insured receives by setting limits on the number of visits, types of treatment, etc., it will cover.

Publicly funded health insurance

Main article: Publicly funded health care

With publicly funded health insurance the good and the bad risks all receive coverage without regard to their health status.

National Health Service

The National Health Service (NHS) is the "public face" of the four publicly funded health care systems of the United Kingdom. The organisations provide the majority of healthcare in the UK, from general practitioners to Accident and Emergency Departments, long-term healthcare and dentistry. They were founded in 1948 and have become an integral part of British society, culture and everyday life: the NHS was once described by Nigel Lawson, former Chancellor of the Exchequer, as 'the national religion'. Private health care has continued parallel to the NHS, paid for largely by private insurance, but it is used only by a small percentage of the population, and generally as a top-up to NHS services.

Health insurance in the United States

Main article: Health care in the United States

According to the latest United States Census Bureau figures, approximately 85% of Americans have health insurance. Approximately 60% obtain health insurance through their place of employment or as individuals, and various government agencies provide health insurance to over 29% of Americans. In 2005, there were 41.2 million people in the U.S. (14.2 percent of the population) who were without healthcare insurance for at least part of that year.(ibid) For many people, however, this does not boil down to a simple question of affordability. Part of this population might include young and healthy individuals with low risk of serious illness who don't believe that health insurance would be cost-effective. In fact, approximately one-third of these 41.2 million live in households with an income over $50,000, with half of these having an income of over $75,000. Additionally, one third of these 41.2 million are eligible for public health insurance programs but have not signed up for them. People living in the western and southern United States are more likely to be uninsured.

Medicare

In the United States, government-funded Medicare programs help to insure the elderly and end stage renal disease patients. Some health care economists (Uwe Reinhardt of Princeton and Stuart Butler among others) assert that (the third party payment feature) these programs have had the unintended consequence of distorting the price of medical procedures. As a result, the Health Care Financing Administration has set up a list of procedures and corresponding prices under the Resource-Based Relative Value Scale.

Starting in 2006, Medicare Part D provides a program for the elderly to buy insurance for the purchase of prescription drugs.

Medicare Advantage

Medicare Advantage plans expand the health care options for Medicare beneficiaries. The option for Medicare Advantage plans is a result of the Balanced Budget Act of 1997, with the intent to better control the rapid growth in Medicare spending, as well as to provide Medicare beneficiaries more choices.

Medicaid

While Medicaid was instituted for the very poor, beginning in 1972, the number of individuals in the United States who lacked any form of health insurance for any period during the year increased each year, every year with the exceptions of the years 1999 and 2000. It has been reported that the number of physicians accepting Medicaid has decreased in recent years due to relatively high administrative costs and low reimbursements.

The shift to managed care in the U.S.

Through the 1990s, managed care grew from about 25% of U.S. employees to the vast majority.

Rise of managed care in the U.S.

Year	Conventional plans	HMOs	PPOs	POS plans	HDHPs
1998	14%	27%	35%	24%	~
1999	10%	28%	39%	24%	~
2000	8%	29%	42%	21%	~
2001	7%	24%	46%	23%	~
2002	4%	27%	52%	18%	~
2003	5%	24%	54%	17%	~
2004	5%	25%	55%	15%	~
2005	3%	21%	61%	15%	~
2006	5%	20%	60%	13%	4%

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According the Centers for Medicare and Medicaid Services, nearly 100% of large firms offer health insurance to their employees. Although much more likely to offer retiree health benefits than small firms, the percentage of large firms offering these benefits fell from 66% in 1988 to 34% in 2002.

Types of Medical plans in the United States

On December 8, 2003, President Bush signed The Medicare Prescription Drug, Improvement and Modernization Act of 2003 into law, creating tax-deductible Health Savings Accounts. This gives consumers a new alternative to pay for health care expenses. the HSA is a private bank account which is un-taxed and only penalized if spent on non-medical items or services. Because it must be part of a high deductable insurance plan, the HSA insurance generally has a very low monthly premium and allows mostly healthy people to bank money for their own healthcare expenses rather than give it to the insurance company.

Common Medical Insurance Terms

• Deductible - The fixed amount you have to pay before your insurance starts to pay.
• Co-insurance - A Percentage of the claim your health insurance pays. You insure payment to the provider and the health insurance pays a portion.
• Co-insurance limit - The dollar amount you have to pay with Co-insurance before the insurance company begins paying your bills at 100% for the remainder of the plan year.
• Out Of Pocket Maximum - The total dollar amount paid out by a subscriber (deductible plus coinsurance).
• Co-pay - A fixed fee you pay for services rendered. Most plans cover 100% after the co-pay for services rendered, however this can be adjusted to any amount depending on how the plan is set up.
• Life time maximum - The total your policy will pay out. Many plans have a yearly restoration amount which will replenish the total so that after the policy money is exhausted there will still be some money in the following plan year for new claims.
• Co-ordination of benefits or COB - How your plan pays when it is second to another plan. There are three principle methods in US health plans.
  
  

1. Maintenance of benefits - If the other plan pays the same amount or greater than your plan, then your plan pays nothing. If the other plan pays less, your plan pays only the difference between what it would have paid and what the other did pay.
   
   
2. 100% allowable - The secondary plan pays the patient responsibility up to the full allowed amount by the plan.
   
   
3. Government Exclusion - In general these plans take the patient responsibility remaining from the primary plan and treat it as a brand new claim and pay it under the normal plan benefits.

• Self-Insured - Many major U.S. and world corporations hire insurance companies as administrators to manage a pool of money held by the company. Many state and federal laws do not apply to these plans.
• Fully Insured - The insurance company collects the premiums and pays claims from its own money.
• Reciprocity - Most insurance plans deal with networks of doctors. If for example you have an HMO plan that allows you to see any HMO provider anywhere in the country, it is called Full Reciprocity, but if it only allows you access to local area networks of providers it is called Limited Reciprocity and if you can only go to select networks that your company has purchased access to, it is called No Reciprocity.
• Experimental/Investigational - Most insurance companies will deny coverage for any procedures or tests which have not been medically verified by clinical trials conducted by recognized bodies of physicians or scientists. Many medical providers use tests which they believe in but have not been clinically validated.
• No-fault - This is generally for automobile insurances, however if your auto policy is no-fault and you are injured, the medical insurance will become a secondary payor and will not be able to process claims until explanation of benefits are received from the auto insurance carrier.
• The Birthday rule - many insurance companies have adopted this rule to determine which parent is primary payor when both parents cover the same dependants. Who ever has the earlier date of birth, excluding the year, is designated primary insurance carrier. Exceptions to this rule usually arise when there is a court order for one of the parents to be the primary carrier.
• Subscriber - The primary member on the insurance policy.

Health insurance in Canada

Until recently, private health insurance was illegal in all of Canada. All insurance was supplied by the government. Recently, the Supreme Court of Quebec ruled, in Chaoulli v. Quebec that private business must be allowed to offer health insurance and compete with the public program.

Health insurance in Australia

The public health system is funded by a system similar to the US Medicaid called Medicare. The private health system is funded by a number of health insurance organisations the largest being Medibank which is government owned. The remainder of the private health insurers are 'for profit' enterprises with the notable exception of HCF Health Insurance which is a not for profit organization.

See also

• COBRA
• Economic capital
• Government ownership
• Health economics
• Health maintenance organization
• Healthcare reform
• Health Insurance Portability and Accountability Act
• Self-funded health care
• List of insurance topics
• Public health
• RAND Health Insurance Experiment
• Social security
• Social welfare
• AHIP