How Health Insurance Works
Insurance companies establish their fees by estimating overall health care costs for a specific sector of the population. This includes the cost of primary care, secondary care, tertiary care, and quaternary care. Primary care represents the bulk of the cost and includes the initial health care services provided by family physicians or general practitioners. Secondary care includes the services provided by medical specialists as well as acute care provided in emergency rooms. Tertiary care is specialized health care such as cancer treatment, neurosurgery and plastic surgery.
Quaternary care is an extension of tertiary care and includes such things as experimental surgery and uncommon diagnostic surgical procedures. Similar to other types of insurance, health insurance is a shared expense. Insured persons pay monthly premiums for the protection and insurance companies pay the claims on health care expenses. The health insurance policies outline what health care services and cost limitations are included in the contract.
Why is Health Insurance Expensive?
The successful operation of a health insurance system depends on several factors, at the root of which is estimating health care costs and how many people will use health insurance. Call it risk analysis. It is somewhat similar to the way banking systems work; customer deposits are invested so the banks can make money. If all depositors demanded all of their money at once, there would not be enough money to pay them. Primary care covers a very large range of health care services and often includes the treatment of chronic illnesses such as heart disease, diabetes, depression, anxiety, COPD and arthritis. Because the population is aging and people are living longer, there are increasing number of older adults pushing the need for primary care health services. In addition, advances in medicine and medical technology is driving up the cost of medical treatment.
Today's health care providers such as physicians and hospitals operate on a fee for service (FFS) type basis. There is a fee for an office call, tests and other procedures. Patients pay their insurance premiums and deductibles but depend on the insurance companies to pay the health care bills. Most physicians are also reimbursed from the insurance companies. When patients visit their physician, for example, in most cases the billing department requires no money at the time but sends the invoice into the insurance company. If the patient owes anything, the insurance company will notify them.
The result of this type of third party payment system is that physicians and patients are insulated from the actual cost of health care services. It encourages excessive costs and volume when it comes to health care treatments. It could be compared to people paying cash for everything they purchase versus using credit cards. Credit cards can easily mask the actual amount of spending. Paying cash gives people an immediate visual and, therefore, more accountability for their spending habits.
Types of Health Insurance Plans
Most health insurance plans are employer sponsored. There are also other plans through the military and U.S. Government. People who are self-employed purchase their own private insurance policies. Traditional health insurance plans include varying levels of deductibles. Generally speaking, the higher the deductible, the lower the premium. The downside of opting for lower premiums is more out-of-pocket health care expenses for the insured when the health insurance is used.
Most people are able to choose a balance that works best for them. The other type of plan that is becoming more popular in the private sector is account-based plans. Although the deductible is higher than traditional health insurance plans, it includes a Health Savings Account (HSA) . Employees deposit tax-free money into an HSA which is used to cover out-of-pocket health care expenses. In most instances, the money is allowed to accumulate and remain in the account. Some companies who have switched more than half their employees to account-based plans are decreasing per employee costs by more than $1,000 compared to companies offering only traditional plans.
In addition, a recent study by Cigna stated that employers can save an average of $9,700 per employee over five years by changing to an account-based health insurance plan. Account-based health insurance plans seem to be successful for several reasons. Companies are saving money. People insured are benefiting with lower premium costs.
Although they are spending money on HSA's, it is tax-free money. In addition, it makes them more accountable by allowing them to manage their own health care spending. People enrolled in account-based health plans tend to compare health care costs and ask more questions about proposed treatments than those who are insured with traditional health insurance plans.
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