What Is Health Insurance – Definition of Health Insurance
Health insurance is a contract that requires an insurer to pay some or all of a person’s healthcare costs in exchange for a premium. More specifically, health insurance typically pays for the medical, surgical, prescription drugs, and sometimes dental expenses incurred by the insured. Health insurance can reimburse the insured for expenses incurred from illness or injury, or pay the care provider directly. It is often included in employer benefit packages as a means of enticing quality employees, with premiums partially covered by the employer but often also deducted from employee paychecks. The cost of health insurance premiums is deductible to the payer, and the benefits received are tax-free, with certain exceptions for S corporation employees.
A health insurance policy extends coverage against medical expenses incurred owing to accidents, illness, or injury. An individual can avail of such a policy against monthly or annual premium payments, for a specified tenure. During this period, if an insured meets with an accident or is diagnosed with a severe ailment, the expenses incurred for treatment purposes are borne by the insurance provider. You can also enjoy several add-on benefits, extended with health insurance policies, which are discussed in detail in the following sections.
Important Insurance Terms and Concepts
- Out-of-pocket expenses: The terms “out-of-pocket cost” and/or “cost sharing” refer to the portion of your medical expenses you are responsible for paying when you actually receive health care. The monthly premium you pay for care is separate from these costs.
- Annual deductible: The annual deductible is amount you pay each plan year before the insurance company starts paying its share of the costs. If the deductible is $2,000, then you would responsible for paying the first $2,000 in health care you receive each year, after which the insurance company would start paying its share.
- Copayment (or ‘Copay’): The copay is a fixed, upfront amount you pay each time you receive care when that care is subject to a copay. For example, a copay of $30 might be applicable for a doctor visit, after which the insurance company picks up the rest. Plans with higher premiums generally have lower copays and vice versa. Plans that do not have copays typically use other methods of cost sharing.
- Coinsurance: Coinsurance is a percentage of the cost of your medical care. For an MRI that costs $1,000, you might pay 20 percent ($200). Your insurance company will pay the other 80 percent ($800). Plans with higher premiums typically have less coinsurance.
- Annual out-of-pocket maximum: The annual out-of-pocket maximum is the most cost-sharing you will be responsible for in a year. It is the total of your deductible, copays, and coinsurance (but does not include your premiums). Once you hit this limit, the insurance company will pick up 100 percent of your covered costs for the remainder of the plan year. Most enrollees never reach the out-of-pocket limit but it can happen if a lot of costly treatment for a serious accident or illness is needed. Plans with higher premiums generally have lower out-of-pocket limits.
- What is means to be a ‘Covered Benefit’: The terms ‘covered benefit’ and ‘covered’ are used regularly in the insurance industry, but can be confusing. A ‘covered benefit’ generally refers to a health service that is included (i.e., ‘covered’) under the premium for a given health insurance policy that is paid by, or on behalf of, the enrolled patient. ‘Covered’ means that some portion of the allowable cost of a health service will be considered for payment by the insurance company. It does not mean that the service will be paid at 100%.
- For example, in a plan under which ‘urgent care’ is ‘covered’, a copay might apply. The copay os an out-of-pocket expense for the patient. If the copay is $100, the patient has to pay this amount (usually at the time of service) and then the insurance plan ‘covers’ the rest of the allowed cost for the urgent care service.
- In some instances, an insurance company might not pay anything toward a ‘covered benefit’. For example, if a patient has not yet met an annual deductible of $1,000, and the cost of the covered health service provided is $400, the patient will need to pay the $400 (often at the time of service). What makes this service ‘covered’ is that the cost counts toward the annual deductible, so only $600 would remain to be paid by the patient for future services before the insurance company starts to pay its share.
Types of Health Insurance
- Selecting the right type of health insurance plan for your organization is extremely important. To make matters trickier, there are different types of health policies designed for different purposes.
- Knowing the various policy types and health plan names will prepare you for evaluating your options when you’re ready to enroll in a new plan.
- The more familiar you are with the different insurance plan types, the better equipped you’ll be to pick one to fit your company’s budget and needs.
- In this article, we’ll go over the seven most popular types of medical insurance plans to help you better understand your options and find the health benefit that works for you.
Preferred provider organizations (PPOs)
- With a PPO plan, employees are encouraged to use a network of preferred doctors and hospitals to receive their medical needs at a negotiated or discounted rate.
- Employees generally aren’t required to select a primary care physician (PCP) and have the choice to see any doctors within their network.
- Employees have an annual deductible they’ll be required to meet before the insurance company begins covering their medical bills.
- They may also have a copayment for certain services or a co-insurance where they’re responsible for a percentage of the total charges.
- Services outside of the network typically result in a higher out-of-pocket cost.
A PPO may be a good option for your organization if your employees
- Need flexibility when choosing physicians and other providers
- Don’t want the burden of obtaining a referral to see a specialist
- Prefer the balance of greater provider choice versus lower premiums
Health maintenance organizations (HMOs)
- Employees with an HMO generally have lower out-of-pocket expenses but less flexibility in their choice of physicians or hospitals than other plans.
- An HMO usually requires employees to choose a PCP as part of their plan and employees need to obtain a referral from their PCP to see a specialist.
- As an advantage, HMOs generally provide broader coverage for preventative services than other policies.
- Employees may or may not be required to pay a deductible before their coverage starts and usually have a copayment.
- Keep in mind, most HMO plans won’t cover employees that go outside of their network without proper authorizations from their PCP or in cases of certain emergency situations.
An HMO may be a good option for your organization if your employees:
- Want lower premiums
- Like the trade-off of in-network services
- Need good preventive services
Point of service (POS) plans
- A POS group health plan combines features of an HMO and a PPO plan. Just like an HMO, POS plans may require employees to choose a PCP from the plan’s network providers.
- Generally, services rendered by the PCP aren’t subject to the policy’s deductible.
- If an employee uses services that are rendered or referred by their PCP, they may receive a higher level of coverage.
- f they utilize services by a non-network provider, they may be subject to a deductible, lower level of coverage, and have to pay up-front and submit a claim for reimbursement.
A POS may be a good option for your small business if your employees:
- Need flexibility when choosing physicians and other providers
- Desire primary care physicians to coordinate care
- Prefer the balance of greater provider choice versus lower premiums
Exclusive provider organization (EPO) plans
EPO plans are similar to HMOs because they have a network of physicians their members are required to use except in emergencies. Members have a PCP who provides referrals to in-network specialists and members are also responsible for small co-payments and potentially a deductible.
An EPO may be a good option for your organization if you:
- Like the balance of less provider choice in exchange for lower rates
- Have employees who can find value with a smaller panel of providers
- Have employees who are comfortable shouldering higher costs for unplanned events
- Indemnity health plans are known as fee-for-service plans. With indemnity plans, the insurance company pays a predetermined percentage of the reasonable and customary charges, or the average fee within a geographic area, for a given service, and the insured pays the rest.
- With an indemnity plan, there’s no provider network, so patients can choose their own doctors and hospitals. The fees for services are defined by the providers and vary from physician to physician, leaving the insured on the hook for potentially large and possibly unexpected medical bills, depending on how much the provider charges for the service.
An indemnity plan may be a good option for your organization if you:
- Can accept the burden of potentially increased administration for referral and claims paperwork
- Are willing to pay higher rates in exchange for more service control
- Have employees who need high levels of flexibility for doctors and hospitals
Health savings accounts (HSAs)
- An HSA is a tax-advantaged savings account used in conjunction with an HSA-compatible high deductible health plan (HDHP) to pay for qualifying medical expenses.
- Though HSAs can be attached to group health insurance, employers can contribute to the account whether they offer a group policy or not, and the account goes with the employee when they leave the company.
- However, you can only contribute to an HSA if you have a HDHP.
- HSA contributions may be made pre-tax, up to certain limits set annually by the IRS. Any unused funds in an HSA account rollover each year and accrue interest, tax-free.
- Funds may be withdrawn for other expenses as well but will incur penalties and interest if you’re under 65 years old.
An HDPD used in conjunction with an HSA may be a good option for your organization if you:
- Can’t afford a low deductible health plan
- Want to have greater control over how much you contribute to health benefits
- Have a large number of employees who already have an HSA
Health reimbursement arrangements (HRAs)
- An HRA is an IRS-approved, employer-funded health benefit that allows employers to reimburse employees for qualifying insurance premiums and other out-of-pocket medical expenses.
- HRAs have a fixed cost—unlike group health plans which often have annual rate increases. HRAs are also flexible and work for any employer, regardless of size, group insurance status, or budget.
- With each HRA, employers are able to set a monthly allowance cap for employees to use. From there, employees shop for the healthcare items that suit their needs and submit a proof of purchase for reimbursement.
- Depending on which HRA you have, you’re able to either reimburse individual insurance premiums or supplement your employer-sponsored group health insurance plan.
How does Health Insurance Work
- Essentially, health insurance subscribers enter into an arrangement with a health insurance company in order to reduce the impact of the cost of medical expenses. There are many different types of insurance coverage plans, and even more ways of paying for them.
- Most plans share a few basic similarities. Most insurance plans require subscribers to pay premiums, which are essentially subscription fees. These may be assigned monthly or annually.
- Many plans also have deductibles, which are monetary limits after which the health insurance company assumes the cost of the medical procedure or service.
- Subscribers may also have a copay or coinsurance arrangement with their insurance company. A copay is a relatively small, fixed sum that must be paid before any medical service is rendered. The co-pay does not count against the deductible.
- A co-insurance is a type of arrangement with the insurance company that divides the responsibility for payment by percentage.
- Co-insurances are listed with the payer (insurance company)’s portion listed first, and then the subscriber’s.
- For instance, if a subscriber receives a $300 medical procedure, and has an 80-20 co-insurance agreement with his or her insurance company, the subscriber would owe 20% of the bill ($60). The insurance company would pay the rest.
- Now that we’ve got an idea of how some of the basic aspects of health insurance work, let’s take a look at the different types of health insurance.
- Indemnity is the most basic and straightforward kind of insurance, in that you pay a premium to an insurance company to insulate you from medical expenses.
- You’ll likely have a deductible and, depending on your insurance plan, a co-pay or co-insurance.
- Subscribers to indemnity plans have no restrictions on which providers they can see, but indemnity plans are typically much more expensive than managed care options, which we’ll review now.
- Let’s revisit these now. Managed care organizations (MCOs) are groups, organizations, or other bodies that seek to reduce the cost of healthcare and increase the efficacy or health services through a number of means.
- Managed care organizations, for instance, may confine the providers the subscriber may see to a specific network of doctors and facilities. In general, MCOs have fixed costs that are lower than most indemnity plans, but restrict the options a patient has for where to get treatment.
- There are three main types of MCO, which we’ll discuss below. Bear in mind that these are simplified descriptions of these managed care organizations.
HEALTH MANAGEMENT ORGANIZATION (HMO)
- At one time, HMOs were the most popular MCO option. HMOs operate by providing subscribers with a low premium and a strict network of providers a subscriber can see.
- If a subscriber sees a provider outside fo this network, they may have to cover all of the expenses from that service out of pockets.
- HMOs are often among the cheapest MCOs, but are also the least flexible. HMOs also often make use of primary care physicians (PCPs), who may act as “gatekeepers.” Subscribers often need to be referred to specialists by PCPs.
PREFERRED PROVIDER ORGANIZATION (PPO)
PPOs recently over took HMOs as the most common MCO. Unlike an HMO, subscribers to a PPO may see any doctor, physician or other provider, but they pay less if they see a provider within the PPO’s network (hence “preferred”). PPOs generally have higher premiums, but allow for more flexibility for subscribers.
POINT OF SERVICE (POS)
- A slight variation on the HMO model, subscribers to a POS plan fulfill most of the medical needs in-network, but are allowed to go out-of-network if they pay a higher fee.
- Many POS plans are tiered, so that a subscriber pays more if they see a specialist out-of-network, but less if they are referred to that specialist by an in-network PCP.
CONSUMER-DRIVEN HEALTH PLAN (CDHP)
- A relatively recent development in the world of MCOs, CDHPs enable subscribers to receive PPO-like benefits only after they’ve paid a certain deductible.
- This deductible is usually quite high, but comes with low premiums and a “savings account” that works like a retirement fund. Subscribers may put money into the account to help pay for out-of-pocket expenses.
- Why do we need to know about all these different types of insurance coverage? Because each of these affects the way we create claims.
- Let’s say we’re billing for a procedure that costs $1500. The patient who received the procedure has a CDHP with a deductible of $1000.
- In order to create an accurate claim, we’d look at the patient’s coverage plan, and assign the $1000 deductible to the patient, and then pass the $500 on to the payer.
- Likewise, if we’re looking at a patient with coverage under an HMO, but that patient sees a provider out-of-network, we need to know that we can’t send a claim to that HMO, but must instead bill the patient directly. (Recall that HMO subscribers cannot receive insurance coverage if they see providers out of their network).
- Knowing the ins and outs of insurance plans—what type of coverage they provide, how much to deduct and send to the payer—is an integral part of the billing process.
What Does Health Insurance Not Cover?
- Navigating health insurance coverage is a monumental task. Consumers generally have no say in which services are rendered, which services are covered, and how much they will ultimately be responsible for paying.
- It is not uncommon that a doctor requests a service, the patient follows the doctor’s orders, insurance pays only a portion or none at all, and the patient is left holding the bag—and the bill.
- The No Surprises Act, part of the Consolidated Appropriations Act of 2021, forbids patients from receiving surprise medical bills when seeking emergency services or certain services from out-of-network providers at in-network facilities.
- Other common scenarios: A patient calls the doctor to ask for the price of a particular test or treatment, only to be told the price is unknown. Or a plan participant calls their health insurer to ask for the customary fee for a service—to determine how much of it will be covered—only to be told, “It depends.”
- No one would go into the local electronics store and buy a TV without being told the price, but in medical care, this is basically what patients are expected to do.
- To be fair, health insurance companies, traditionally known as the gatekeepers to healthcare, have recognized this and in recent years have tried to improve price transparency.
- Despite these efforts, there are many pitfalls associated with health insurance coverage. Learning how to navigate these should make for a more educated healthcare consumer.
- Here are the services that most insurers decline and a look at how you can get things covered that may initially be denied.
Medicare: The Roadmap
- Medicare provides the most insight into covered benefits for consumers. The Medicare system is a federally run health insurance system granted primarily to U.S. citizens ages 65 and older.
- In general, the basis for all health insurance benefit design is the Medicare system. Many commercial health insurance plans model basic benefits after those benefits granted to Medicare recipients.
- The focus is on health and wellness rather than sickness; annual physical exams are not fully covered by Medicare, and treatment for severe ailments also usually requires a copay or coinsurance payment.
- However, preventative assessments, such as wellness visits and various screenings, are included in Medicare Part B.
- After the basic plan design is set for commercial health insurance, other benefits are added depending on the requirements of the plan’s sponsor—for example, an employer.
- To understand the basics of what is covered under the Medicare plan, you can visit its website. Medicare is not an “early adopter” system; therefore, most new technologies are typically not covered at all—or not covered as robustly as other, more time-tested technologies.
- One example of this is drug-eluting stents versus bare-metal stents in cardiac procedures or ceramic hip replacements versus traditional metal ones.
- It is much easier to obtain coverage for proven procedures rather than those that could potentially be deemed as “test procedures.” Similarly, covered lab tests are often lagging behind the newest technology; one example of this is the ThinPrep pap test.
Services Usually Not Covered
Although each benefit plan is different, depending on the sponsor’s needs, and depending on state regulations (each state has its own insurance commissioner), there are services that are typically not covered by most health insurance plans.
- Many services that improve someone’s exterior appearance, such as plastic surgery and some dermatological procedures, are usually not covered by typical plans.
- Interestingly, because consumers elect to have these procedures, there is great price transparency for them.
- A consumer who wants laser hair removal can call any number of providers, and each one will be able to immediately quote a price.
- The costs of many procedures often aren’t covered by health insurance, although health insurers are required to pay for all the testing required to make an infertility diagnosis.
- However, this is one of the treatment areas that differs among states.
- Currently, 19 states mandate coverage for fertility treatments, but even in those states, there are loopholes that allow employers of certain sizes to decline coverage.
- If covered by a fully insured plan, the company must follow the state insurance laws. Self-insured plans are exempt from the state stipulations and can decline coverage.
- Prescription drugs are tested and approved for specific disorders, such as autoimmune diseases. At times, these drugs can be prescribed for disorders not listed on the “label.” In some cases, the insurance company may reject paying for these off-label uses.
- Occasionally, physicians can argue for the coverage of off-label prescriptions for specific uses by offering peer-reviewed research supporting the prescription, but insurance companies are not obligated to cover them.
New Technology in Products or Services
- Covering these costs often happens slowly, particularly if the technology does not demonstrate an added benefit for the increased costs.
- Medical companies are tasked with proving that a new drug, product, or test provides a measurable benefit to the consumer such that the cost will improve mortality or morbidity rates (basically, save lives or reduce ill health).
- Because Medicare is not an early adopter of new technology, other insurance plans generally follow suit and wait for more data before including it in the covered benefits.
Get Coverage for New Technology
- For cases in which a new technology provides additional benefits as opposed to the older technology, consumers can try several methods for getting the insurance company to pay.
- Many insurance companies require doctors to “prove” why the costlier procedure or product is more beneficial. Additionally, an insurance company may pay a specific amount for a procedure, and the patient can pay the difference to get the new technology—in other words, partial coverage is available.
- The first step in this process is to discuss the coverage with the insurance company, determine what will be covered, and have an agreement with the physician for the total cost and what you will be required to pay.
- Medical device companies can also lobby for inclusion. Within the Medicare system, they may apply for a new technology add-on payment.
- If accepted, Medicare will cover a portion of the device cost or the incremental costs associated with it.
Health Insurance Premium
How much does health insurance cost? The cost of health insurance in the USA is a major talking point for Americans and visitors alike – here, we explore the averages of health insurance costs and factors impacting policy fees. The USA’s healthcare system is unlike many others, so we look at why the cost of average American healthcare insurance seems to be rising and how other nations compare.
- Age, geography, employer size and plan type all influence the cost.
- Healthcare costs in the USA are partly due to administrative factors.
- Fees are going up, with plan trends contributing.
- Almost half of American adults were underinsured in 2020.
- Voluntary health payments are higher in Switzerland than the USA, though America’s costs are among the world’s highest.
- On the flipside, American expats abroad often find they pay less for insurance overseas.
How much does average health insurance cost in the USA?
Health insurance means different things to people across the world – the USA’s system is known for several distinguishing features, including a high relative cost to the individual and a lack of universal coverage.
- You may be wondering why the cost of healthcare insurance seems to be rising and how the picture compares to other nations. In a country that spends nearly $4 trillion on healthcare yet finds coverage varies widely, there’s a lot to weigh up.
- “How much does health insurance cost?” is one of the most important questions to Americans.
- Across the United States, Americans pay wildly different premiums monthly for health insurance. The average annual cost of health insurance in the USA is $7,470 for an individual and $21,342 for a family as of July 2020, according to the Kaiser Family Foundation – a bill employers typically fund roughly three quarters of.
- The cost to each person can vary a lot, however, based on factors such as age, geography, employer size and the type of plan they’re enrolled in.
- While these premiums are not determined by gender or pre-existing health conditions, thanks to the Affordable Care Act, a number of other factors impact what you pay.
- Deductibles, also known as out-of-pocket fees, are a common feature in American health insurance policies, meaning upfront costs are common even for those who are insured. 83% of covered American workers have a general annual deductible that must be met before services are funded by their health plan and the average size of a deductible is $1,644 for individuals. These fees tend to be higher in smaller firms.
- Of course, not all companies offer health benefits to employees – 44% of firms did not offer insurance to staff in 2020.
- For those without cover, as well as entrepreneurs and the self-employed, taking out private health insurance is a common route. The average cost of purchasing your own health insurance in this way is $456 per month for unsubsidised individuals in the USA, according to a 2020 survey.
What influences the cost of health insurance in the USA?
Americans and visitors alike often wonder why health costs are so high in the USA, a nation where per capita health spending is almost twice the average seen in other wealthy countries. The answer to this question is complex.
The American treatment cost gap and health insurance cost
The raw cost of treatment is higher in the USA than in many countries, so this influences the cost of insurance. There are several reasons for this cost gap:
- Pharmaceutical drugs, for instance, cost nearly four times more in the USA than other similar countries.
- American doctors and nurses enjoy some of the world’s best pay – the average registered nurse in California earns $113,240 – so this also drives up cost.
- The American system also tends to favour more frequent interventions and complicated procedures, which comes with a price tag.
- Due to the sizeable treatment cost differences, many international insurers – including William Russell – do not cover treatments that take place on American soil as part of our standard policies.
- However, if you’re an American citizen working overseas, then it’s good to know some of our international health insurance policies provide short-term cover for visits of up to 45 or 90 days. Find out more about our USA-45 and USA-90 international health policies.
Administrative factors and health insurance cost
Estimates suggest 15 to 30% of healthcare spending in the USA is for administrative services, such as billing costs – a large part of the difference between healthcare costs in the USA in Canada can be explained by administration spending. These might be higher due to the complex structure of healthcare in the USA, where federal, state and local governments, employers, insurers and citizens all have a share to pay.
Why do US health insurance costs keep going up?
The cost of US health insurance has almost doubled in a decade, as the table shows:
|Average employer health insurance costs for family coverage||$9,773||$12,591||$15,754|
|Average employee health insurance costs for worker coverage||$3,997||$4,955||$5,588|
- What’s behind this trend is the subject of debate – some argue government programmes, such as Medicare and Medicaid (both introduced in 1965), have relieved providers of pressure to keep insurance affordable.
- However, it’s likely that some factors driving up the cost of healthcare in the USA may be similar to those in other countries, including population ageing and an increase in chronic illness. Check out eight main reasons healthcare costs are rising globally.
- At the same time, a shift towards high-deductible health plans (HDHPs) is increasing the out-of-pocket costs for Americans. Under such plans, families can be asked to pay for their first $14,000 of medical costs, so the impact may be greater even if their insurance package costs the same overall.
How much does health insurance cost? Average health insurance costs by US state
Health insurance costs vary a lot between states. According to a 2019 report by the Commonwealth Fund:
- Hawaii has the cheapest individual health insurance contributions of any US state, at $755 annually.
- Texas, Tennessee, South Carolina and Michigan all see personal health insurance costs close to the US national average – $1,427.
- Massachusetts was the most expensive state for health insurance. Here, individual contributions stood at $1,903
How do health insurance subsidies work in the USA?
- A health insurance subsidy provides government assistance to contribute to the cost of cover – in the USA, the Affordable Care Act (Obamacare) provides a sliding scale of support to US citizens and legal residents earning four times the federal poverty level or less.
- In 2021, the federal poverty level is $12,880 for an individual, so individuals earning less than $51,520 may be entitled to subsidised health insurance.
- Applications are made through the government-run health insurance marketplaces in each state. Changes to incomes may affect eligibility, so applicants sometimes need to pay subsidies back if circumstances change.