How Health Insurance Works
Health insurance works by protecting your assets from the high cost of medical care. Without it, your entire life savings could be wiped out by a $300,000 medical bill.It's very complicated, and many people are overwhelmed and annoyed with the process. Here's an explanation of health insurance, and how it got to be the dominant delivery vehicle for health care in America.Health care in the United States can be very expensive. A single doctor’s office visit may cost several hundred dollars and an average three-day hospital stay can run tens of thousands of dollars or even more depending on the type of care provided. Most of us could not afford to pay such large sums if we get sick, especially since we don’t know when we might become ill or injured or how much care we might need. Health insurance offers a way to reduce such costs to more reasonable amounts.
How U.S. Health Insurance Works
The way it typically works is that the consumer (you) pays an up front premium to a health insurance company and that payment allows you to share "risk" with lots of other people (enrollees) who are making similar payments. Since most people are healthy most of the time, the premium dollars paid to the insurance company can be used to cover the expenses of the (relatively) small number of enrollees who get sick or are injured. Insurance companies, as you can imagine, have studied risk extensively, and their goal is to collect enough premium to cover medical costs of the enrollees. There are many, many different types of health insurance plans in the U.S. and many different rules and arrangements regarding care.
Where can I receive care?
One way that health insurance plans control their costs is to influence access to providers. Providers include physicians, hospitals, laboratories, pharmacies, and other entities. Many insurance companies contract with a specified network of providers that has agreed to supply services to plan enrollees at more favorable pricing.If a provider is not in a plan’s network, the insurance company may not pay for the service(s) provided or may pay a smaller portion than it would for in-network care. This means the enrollee who goes outside of the network for care may be required to pay a much higher share of the cost. This is an important concept to understand, especially if you are not originally from the local Stanford area.
What does the plan cover?
One of the things health care reform has done in the U.S. under the Affordable Care Act is to introduce more standardization to insurance plan benefits. Before such standardization, the benefits offered varied drastically from plan to plan. For example, some plans covered prescriptions, others did not. Now, plans in the U.S. are required to offer a number of "essential health benefits" which include
Emergency services
Hospitalization
Laboratory tests
Maternity and newborn care
Mental health and substance-abuse treatment
Outpatient care (doctors and other services you receive outside of a hospital)
Pediatric services, including dental and vision care
Prescription drugs
Preventive services (e.g., some immunizations) and management of chronic diseases
Rehabilitation services
How much will it cost?
Understanding what insurance coverage costs is actually quite complicated. In our overview, we talked about paying a premium to enroll in a plan. This is an up front cost that is transparent to you i.e., you know how much you pay.
Unfortunately, for most plans, this is not the only cost associated with the care you receive. There is also typically cost when you access care. Such cost is captured as deductibles, coinsurance, and/or copays see definitions below and represents the share you pay out of your own pocket when you receive care. As a general rule of thumb, the more you pay in premium up front, the less you will pay when you access care. The less you pay in premium, the more you will pay when you access care.
