How does health insurance work?
Health insurance works on the hunch that if people pool their resources, they will be better able to withstand unexpected challenges. With health insurance, hundreds or even thousands of people pay into a pool to cover the costs of the few who need costly medical services. Healthier people paying into the pool tend to support services for members who need more—and more expensive—health care.
Today, most Americans would suffer serious financial harm if they faced a health crisis without insurance. But, when we each pay some money into a pool every month, there’s enough to help cover those big expenses when it’s our turn. These monthly payments are usually called “premiums.”
Limiting expenses
Health insurance limits the amount of money people spend on health care in several ways. Most plans have an “out-of-pocket maximum.” Combined with your premiums, this is the upper limit on what you'll have to spend on covered benefits in a given year.
Because they represent a large number of people, health insurance companies have bargaining power. They can negotiate to get lower rates for their members. Yes, you may have to pay a $20 copay for a doctor’s visit or $10 for certain drugs—but without the insurance company negotiating that price, you would almost certainly pay much more. Just having insurance makes health care less expensive.
This is also why insurance companies have different pricing for "in-network" and "out-of-network" providers. The company has negotiated a discount for in-network providers and pharmaceuticals. So, it’s fine if you want to see doctors who are not in-network, but you're usually going to pay more.
Today, employers tend to offer health insurance plans to their employees. This coverage is purchased by the employee but also partially funded by the employer. Employers work with insurance brokers or administrators to fund the plan that works best for them and their employees.
Obstacles along the way
Traditional insurance companies usually set a “deductible.” If your health plan has a $2,000 deductible, for example, the insurance company won’t start paying for most health care expenses until you’ve spent $2,000 of your own money. (That’s in addition to however much you’ve paid in premiums.)
How much they help once you meet that deductible depends on “coinsurance.” Coinsurance is a promise by the insurance company to pay part of the bill for your health care. Maybe they agree to pay 50% or 80%. Maybe they’ll pay 50% up to a certain amount, and then 80% after that. The percentages differ among plans. But there’s usually some complicated math involved to figure out how much of a bill your insurance company will pay.
And then there are “copays.” A copay is a fee you pay for certain services. A $20 copay for office visits with your doctor means you pay $20 to visit your doctor’s office. A $10 copay for a drug means that’s what you pay for the drug.
Traditional insurance companies sometimes say that deductibles, coinsurance and copays are ways of making sure their members have “skin in the game.” If members have to pay for a certain level of care, they’ll consume health care more wisely, that thinking goes.
A different view, a different plan
But some insurance administrators don’t believe that.
These administrators see coinsurance and deductibles as barriers to health care. They think people should seek the health care they need when they need it. In some plans, there are no deductibles and no coinsurance. The plan begins paying for health care services from day one. This encourages people to seek the health care they need when they need it, rather than delaying care until matters worsen.
Some plans use quality data to set different prices for different providers and locations. When people can see prices in advance, they can “shop” and choose the health care that works best for them. The thinking is that, when people choose quality care that keeps them healthy, they’ll save money—both for themselves and their employer—over time.
Health insurance costs have been rising for a long time. New approaches may help people get the care they need while giving them a chance to save.