How health insurance works

How does health insurance work?

The reason you have health insurance is because you don’t know when you are going to need health care. Heath insurance, at its core, provides you with protection against the financial risk that occurs when you need care. In this way it’s very much like insurance you may have for your home or car. You pay a regular premium, and when you need it, your insurance will help cover large expenses you couldn’t otherwise afford.

The system works because the financial risk is spread across a large group of people who are all paying premiums, but don’t all file large claims each year.

How is health insurance different?

Your health plan provides more than just protection against big, unexpected expenses. You might say it’s like having an auto insurance policy that covers oil changes.

Health coverage has evolved a bit differently from other kinds of insurance. There are two basic options:

  • A “traditional” PPO
  • A high-deductible health plan paired with a health savings account

If you have a PPO plan, you probably have a lower deductible. And you likely pay a copay when you see the doctor, rather than the full cost of the visit. Many people like PPO plans because they’re predictable and easy to understand.

High-deductible health plans are growing in popularity and offer lower premiums because you pay more of the cost for regular health care services up-front. And when you pair these plans with a health savings account, you can use pre-tax dollars for those expenses.

Both PPO and high-deductible plans cover many preventive services at no cost to you.

So your health plan provides more than just protection against big, unexpected expenses. You might say it’s like having an auto insurance policy that covers oil changes.

These differences are good. Having preventive care covered by insurance is good, not only for you, but for the entire system. You stay healthier when you take advantage of preventive care services, and it’s more cost-effective for everyone if you see a primary care doctor rather than going to the emergency room when you get sick.

Still, it’s important to note that adding benefits impacts premiums, i.e., it makes them more expensive.

How do we decide insurance premiums?

We have a responsibility to be advocates for affordable health care on behalf of our members. We do that by negotiating with health care providers to get better pricing for our members, and by limiting our administrative spending. In 2011, for example, we spent 81 cents of every premium dollar on direct medical costs. So, as those medical costs rise, so do premiums. In other words, the cost of care drives the cost of coverage.

Premiums are set through mathematical calculations that take into account a variety of factors, including:

  • The type and amount of coverage purchased
  • The cost of providing medical care
  • The size and makeup of the risk pool

The biggest factor is the benefit cost. We have to ask:

  • Who is buying the coverage?
  • How many medical services will they need?
  • What will those services cost?
  • How much of those costs will we pay?
  • How much will they pay through deductibles and copays?

We take all these factors into account when setting premium rates.

An Aon-Hewitt survey outlined several factors beyond medical cost trends that impact premiums:

  • Changes in the covered population
  • Cost-sharing effects (copays and deductibles)
  • Legislative and regulatory impacts
  • Plan design changes