Health Insurance

History and evolution

The idea of health insurance was created in 1694 by Hugh Chamberlen. In the late 1800s, "accident insurance" became popular and it operated much like modern disability insurance.  This model continued until the start of the early 1900s in some states to the degree that all laws regulating health insurance actually labeled it disability insurance.

This insurance was first offered in America by the Franklin Health Assurance Company of Massachusetts. This company, created in 1850, provided insurance against injuries arising from railroad and steamboat accidents. Fifty different organizations were offering accident insurance in the United States by 1866, but the business consolidated rapidly soon thereafter. While there were earlier providers, the origins of health coverage in the US began in 1890. The first employer-sponsored disability policy was issued in 1911.

Before the creation of medical insurance, patients were expected to pay all health care costs out of their own pockets. During the 1950s and 1960s, conventional disability insurance evolved into contemporary health insurance. Today most health insurance programs cover the cost of routine, emergency, and preventative procedures, and also most prescribed drugs.

Medical and hospital expense policies were created during the first half of the 20th century. During the 20s, some hospitals started offering services to people on a pre-paid basis.  This program lead to the development of the Blue Cross organization, which became one of the largest health insurance providers in the country.  The predecessors of our current Health Maintenance Organizations (HMOs) began in 1929, and expanded their responsibilities through the Second World War.

How it works

A health insurance policy is an agreement between an individual and a company that guarantees the company will pay for specified health care expenses and the individual will make regular payments to the company whether or not the benefits of coverage are realized. These contracts vary in length, but typically are about one year long. The coverage (cost and type of care) that will be provided by a health plan are agreed to when the contract is signed. The insured's payment obligations can take several forms:

• Premium: This is the amount the insured pays to the provider each month to continue health coverage.
• Deductible: The amount that the insured must pay out of pocket before the provider pays its share. For example, a patient might have to pay a $500 deductible each year, before any of their health care is paid for by the health plan. It may take multiple doctor's visits or prescription refills before a patient exceeds the deductible and the health plan starts to pay for care.
• Copayment: The amount that the insured must pay before the insurance company pays for care. For example, a patient might pay a $45 for a $160 prescription and the insurance company will cover the rest. A copayment must be made each time a specified service like a visit to a specialist or a prescription is used.
• Coinsurance: Instead making a copayment the insured covers a percentage of the total bill. For example, the insurance company might cover 90% of a bill, but the insured must cover the other 10%. Because there is no total limit on what an insurance company must spend on coinsurance, patients can afford extremely expensive medical care.
• Exclusions: Some services are not covered. The insured is required to pay the full cost of items that are excluded from a health insurance contract.
• Coverage limits: Some policies only cover health care up to a certain dollar amount. The insured may be obliged to pay any charges in excess of the health plan's maximum payment for a certain service. Also, some plans have annual or lifetime coverage limits. In such cases, the insurance company will end coverage when they reach the benefit maximum, and the insured must pay all remaining costs.
• Out-of-pocket maximum: Very similar to a coverage limit, but the member's payment obligation ends when they reach the out-of-pocket maximum. At that point the insurance company pays all further covered costs. Out-of-pocket maximums can be limited to a specific benefit category like prescription drugs or can apply to all coverage during a year.
• Capitated Reimbursement: A new plan where insurance companies pay a care provider a set amount based on the number of patients they will care for.  It is a new tool used by companies to encourage care providers to keep cost down by practicing preventative care.
• In-Network Provider: A health care provider that an insurer will provide coverage for when patients use that provider’s services. Usually, providers in network are providers who have a contract with the insurer to accept reduced fees in return for the ability to see more patients.

Prescription drug plans are almost always covered by health insurance and normally patients make a copayment and the drug and the insurance company covers the rest of the cost of the drub.

Some health care providers will agree to bill an insurance company for the cost of drugs if a patient will sign an agreement that makes them responsible for the amount that the insurance company doesn't pay. Insurers usually pay out of network providers according to "reasonable and customary" expenses, which may be less than the provider's usual fee. It generally costs the patient less to use an in-network provider.

Health plan vs. health insurance

Historically, HMOs often use the phrase "health plan", while commercial insurance companies used the phrase "health insurance". A health plan can also refer to a subscription-based care plan offered through HMOs, preferred provider organizations, or point of service plans. These plans are similar to pre-paid legal or dental plans. Pre-paid health plans often cover a static number of services (for instance, $300 in preventive care, a fixed number of vaccinations, or a certain number of days of hospital care etc.) The services rendered are usually at the discretion of a nurse who is contracted through insurance company. This determination can be made either before or after hospital admission

Comprehensive vs. scheduled

Comprehensive health insurance pays a percentage of the price hospitals and physicians charge after a deductible or a co-pay is met by the insured. These plans are usually expensive because of the high potential benefit payout and because of the vast array of covered benefits.

Scheduled health insurance plans were not created to replace traditional comprehensive health plans.  They are a basic policy that provides access to day-to-day health care like visiting a doctor or getting a prescription filled, but they do not cover the care needed for catastrophic events. These plans might provide coverage for hospitalization and surgery, but these benefits are usually limited. Scheduled plans cost much less than comprehensive plans. Annual benefits maximums for a typical scheduled plan range from $2,000 to $25,000.

Problems with insurance

Insurance systems face two major inherent challenges: adverse selection, and moral hazard.

Adverse selection

Insurance companies use the phrase "adverse selection" to describe the tendency for only people who will benefit from insurance to buy it. With health insurance, unhealthy people are more likely to buy it than healthy people are because they expect big medical bills. Often healthy people that might see a doctor once per year for $300 would prefer to pay that cost out of pocket than to pay a $50 premium each month ($600 in one year).

Insurance balances costs across a large, random sample of individuals. For example, if an insurance company has a pool of 1000 subscribers and all of them pay $50 per month the company should be able to cover the costs of one person who becomes very ill while the others stay healthy.  However, when the pool is self-selecting rather than random, and people who anticipate high health care costs are more likely to join than healthy people higher premiums must be charged to all participants. In the US the 1% of the population with the greatest health care needs accounted for 27% of health care spending in 1996. The neediest 5% of the population accounted for more than half of all health care spending. A few individuals have extremely high medical expenses, in extreme cases totaling a half million dollars or more.  Theoretically, adverse selection could leave an insurance provider with a lot of unhealthy subscribers and no way to balance out the costs they generate with a large number of healthy subscribers.

Because of this phenomenon, insurance companies use medical underwriting, and look at an individual’s medical history to screen out people whose pre-existing conditions pose too great a risk for the pool of subscribers. Before a person can buy health care, they usually must fill out a medical history form that investigates drinking and smoking habits, weight, disease treatment and other variables. Usually people who present large financial burdens charged high premiums or just denied coverage. One industry survey found that out of all the American applicants for comprehensive, individually purchased health care who went through the medical underwriting in 2004 13% were denied coverage. Declination rates increased considerably with age, rising from 5 percent for individuals 18 and under to almost a third for individuals aged 60 to 64. Among those who were offered coverage, the study found that 76% received offers at standard premium rates, and 22% were offered higher rates. One of the benefits of medical underwriting is that it allows individuals with healthy habits and a lack of medical problems to get discounts in medical insurance.

Moral hazard

The Moral hazard problem occurs when a person will not have to bear the full consequences of their actions so they decided to make costly choices than they normally would. This often applies to health insurance through third-party payment.  When the parties involved in making a decision are not responsible for bearing all the costs of the decision. A common example is a physician and a patient that agree to extra tests which may not be necessary. The physician benefits by reducing the risk of a malpractice lawsuit, and patient benefits by gaining increased certainty of their condition. The cost of the extra tests is paid by the insurance company, which ultimately is paid for by other consumers through higher premiums. Co-payments and deductibles, attempt to combat moral hazard, as they hold the consumer somewhat responsible for the level of care they need.

Other factors affecting insurance prices

A recent study by PriceWaterhouseCoopers that investigated the factors of rising health care costs in the US highlighted increased patient demand for new treatments  and more intensive diagnostic testing, as the most significant driver. There are three main reasons for this increased demand.  First as people in developed countries live longer the population of those countries is aging, and a larger group of senior citizens requires more intensive medical care than a young healthier population. Second advances in medicine and medical technology have increased the cost of treatment.  Third lifestyle-related factors like increases in obesity caused by insufficient exercise and unhealthy food choices have contributed to the need for greater health care.

Student Health Insurance

College student health insurance plans have become popular among students and parents because almost all colleges and universities require students to show proof of health insurance coverage to enroll.

Securing health insurance has become essential for students who move to a college because they less likely to receive needed treatment that students who live at home. This is great disadvantage as students may have serious health problems because of the lack of proper health care facilities.

Health insurance in the United States

In the US market-based health care system private and not-for-profit health insurance is the primary source of coverage for most Americans. According to the United States Census Bureau, about 84% of Americans have health insurance. Some 60% obtain it through an employer, while about 9% purchase it directly. Various government agencies provide coverage to about 27% of Americans.  There is some overlap in these figures because some people have insurance with more than one of these three sources.

Medicare and Medicaid are the primary source of health care coverage for many seniors and low-income families that meet certain eligibility requirements. These programs are government sponsored with Medicare being a federal program for seniors and certain disabled individuals, and Medicaid, being a federal and state government program which covers certain very low income children and their families.  Other government sponsored programs that provide coverage include SCHIP, a federal-state partnership that serves certain children and families who do not qualify for Medicaid but who cannot afford private coverage TRICARE and the Veterans Health Administration which cover military service men and women and the Indian Health Service. Some states have additional programs for low-income individuals.

In 2006, there were 47 million people in the United States (16% of the population) who were without health insurance for at least part of that year. About 37% of the uninsured live in households with an income over $50,000.