How Health Insurance Works

Basics

Individuals and businesses pay an insurance company to cover their health care needs, and in return, the insurance company pays doctors, hospitals and other health care providers for services, equipment and medicines. The premiums, deductibles and co-pays are derived from complicated tables that include historical numbers on ages and demographics, diseases and accidents, and levels of coverage required over a period by certain groups with those needs. Insurers make predictions about how much they will pay for medical services, and build in a profit margin to cover the expenses and pay for the administration of the claims. Health insurance rates often are arbitrary and difficult to understand.

Policies

Read a health insurance policy carefully to understand the nuances. Most insurance policies exclude coverage for certain services, such as those that are voluntary or deemed unnecessary by the insurance adjusters. Consumers are ultimately liable to their health care providers to pay any bills not paid by the insurer, so it behooves consumers to know their benefits before agreeing to certain procedures. Many health care administrators will call an insurance company when in doubt. Customers also should call their insurance company to have exclusions spelled out.

Groups

Group insurance policies are based on the overall health and statistical information available about the individuals within the group. Most group plans include young and healthy members who offset the needs of the more senior members of the group, keeping the premiums lower. Unexpectedly high claims from people requiring expensive treatments within a group can affect the premiums of the entire group, and usually do.

Coverage

Some health insurance plans are written to cover only those providers who have agreed to accept the payments that the insurance company has decreed. If you purchase a Preferred Provider Organization (PPO) plan, then you may only see those providers who have entered the agreement, or pay large penalties. Health Management Organization (HMO) policies have a built-in review system for each procedure and give consent to a treatment before its delivery. Other plans have different pay levels for generic prescriptions, outpatient services and home health care.

Payments

Premiums are the monthly or yearly payments made to the insurance company for the protection. A deductible is the amount of money the insured must pay before the insurance policy begins to pay any claims. Once the deductible is satisfied, the policy states how much of each claim it will pay. For example, an 80/20 plan means that the insurance company will pay 80 percent of the bills submitted, and the client must pay the other 20 percent.