Understanding Health Insurance Concepts and Coverage Options

HEALTH INSURANCE Personal Finance

CONCEPTS Originally designed to insure only against major catastrophic losses Has evolved to the expectation of paying for every health-related issue Actuaries use the past history of large populations to forecast the percentage of people who will become ill or injured and what the cost will be Premiums are based on those numbers This data only works if the group being insured behaves like the large population

POTENTIAL PROBLEMS Adverse Selection only people who are more likely to need insurance will obtain it Moral Hazard once insured, people will be less careful With either of these problems, your group will not behave like the large population and the premiums being charged won t be adequate to meet the claims

ADDITIONAL PROBLEM If you wreck your car without car insurance the body shop is not expected to fix the car without getting paid. If your house burns down, without homeowner s insurance, the builders are not expected to rebuild your home without getting paid But if you go to the hospital without health insurance, the hospital is expected to admit you and the doctors are expected to treat you even if they know they will never get paid. Obviously, this creates pricing problems

GROUP INSURANCE Group insurance typically overcomes the adverse selection problem. If your group is big enough, it should behave like the general population Insurance works when the number of claims and the amount of the claims are predictable in advance

TYPES OF MEDICAL COVERAGE Hospital Expense Insurance Surgical Expense Insurance Physician Expense Insurance

MAJOR MEDICAL EXPENSE INSURANCE Picks up where any of the above leave off Deductible Per family member Per year Per family Coinsurance Policyholder typically pays 20% after the deductible has been met Out of Pocket Maximum Insurance company pays 100% once you have paid this amount during the year Typically something like $2,000/person and $6,000/family

OTHER TYPES OF HEALTH INSURANCE Hospital Indemnity Policy Pays you directly Supplement to basic or major medical coverage Can supplement lost income and other associated costs Dental Insurance Vision Insurance Cancer (and other specific disease) Insurance Accident Insurance Long-term Care Insurance Nursing home or private duty home care

OTHER TERMS Copay how much you must pay each time you see the doctor, have a prescription filled, or go to an emergency room An attempt to avoid the moral hazard problem Coordination of Benefits keeps you from collecting from two policies for the same accident or illness Exclusions and Limitations the policy does not cover you for these things. Sometimes pre-existing conditions are not covered Reasonable and Customary Charges average charges for hospital stay and certain procedures in your geographic area

BLUE CROSS AND BLUE SHIELD Private health insurance plans Separate for each state Blue Cross is hospital care benefits Blue Shield is surgical and medical expenses

MANAGED CARE HMO Health Maintenance Organization the HMO directly employs or contracts with the doctors to provide health care services in exchange for a fixed, prepaid monthly premium. So the doctors are on a salary and are not paid per procedure or visit. Emphasis is on preventative medicine and wellness checks so that there will be fewer illnesses You can t see anyone other that one of your HMO doctors unless it is an emergency

MANAGED CARE PPO Preferred Provider Organization a group of doctors and hospitals that agree to provide health care at rates approved by the insurer Premiums for PPOs are usually a bit higher than for HMOs You can see a non-PPO doctor, but at a higher deductible and coinsurance because those doctors have not agreed to the PPO s rates Medicare a federal health insurance program for people 65 and older Medicaid a federal health insurance program for certain low-income individuals and families Administered by each state but within federal guidelines