Health Insurance 101

Overview

In the United States, national health care spending has increased at a rapid trajectory. This is due in part to the argument that people are living longer but are experiencing declining health. In fact, the consumption of more medical services has contributed to the rising costs.

According to 2010 Census Bureau statistics, there are many more uninsured people delaying medical services than the insured. In 2010, the uninsured visited a medical provider significantly less than in 2001. See Note 1. The uninsured essentially costs the health care system more money than the insured and are far less likely to forgo choosing adequate medical coverage even when government-based options are available.

What is Health Insurance?

In general, insurance falls under the category of risk management, which is defined as a process of identifying, assessing, and prioritizing risks. Insurance is the transfer of risk of loss between two or more parties in exchange for consideration, or payment. Insurance risk managers use the process of risk management to coordinate the application of resources that help to minimize and control the probability of future events.

To be sure, health insurance is a type of insurance used to hedge against the risk of incurring (and/or incurred) medical expenses. Insurers develop a finance structure to allot funding for health care benefits referenced within the insurance agreement, or contract that provides details regarding financial compensation for covered benefits. The contract may be renewable annually or monthly and/or lifelong depending upon the policy.

The insurance carrier is the company selling insurance and the insurer of one entity in exchange for the monthly premium. The insured may be a person or organization purchasing an insurance policy; the insured is also defined in contract terms as the policyholder. Within this context, the insurer indemnifies the insured in case of a medical personal loss.

The type of health care costs the insurance carrier covers is typically outlined in writing. Individuals and companies communicate officially with insurance companies through their respective policies and agree to adhere to the provisions of the member contract, or “Evidence of Coverage” handbook.

The provision of insurance coverage is sponsored by an employer’s self-funded ERISA plan. The acronym ERISA stands for Employee Retirement Income Security Act, which is a federal law enacted in 1974. According to the Department of Labor, ERISA establishes minimum standards for private company pension plans in the United States. Visit DOL.gov for more information on ERISA plans. See also the reference section of this article for the exact link to the ERISA section on the agency’s website.

To be sure, ERISA does not require a company to create a pension plan; however, it does set guidelines for companies that establish plans. In addition, as a statute, ERISA does not require companies to specify the amount of money to be paid as a benefit, but requires companies to provide information to employees about the plan in terms of features, funding, participation requirements, vesting, and the accrual of benefits. Within this context, plan participants may sue for benefits and on the grounds of breach of fiduciary duty.

The provision of health care has been subject to debate within the last decade, with the 2008 financial crisis serving as the major catalyst for 2010 reforms. With this in mind, the Affordable Care Act, signed by President Obama on March 23, 2010, establishes “comprehensive health insurance reforms” that are set to roll out over the next four years (HealthCare.gov). Consumers can expect a new patient bill of rights (2010); free preventative services for Medicare (2011); the reduction of paperwork and administrative costs (2012); the improvement of preventative health coverage (2013); and the elimination of annual limits on insurance coverage (2014). The law aims to help make (health) care more affordable(HealthCare.gov).

This is an overview of health insurance as a concept. There are different types of health insurance programming offered by companies and through government-based benefits. Let’s review them.

Categories of Health Insurance

HMO
An HMO, or health maintenance organization, is a type of private-entity, employer-based plan that functions as a liaison between health care providers (i.e., hospitals, doctors, etc.) and health care plan participants, or policyholders. The HMO provides managed care on a prepaid basis and typically covers emergency care. A company’s HMO plan programming is subject to the guidelines of the Health Maintenance Organization Act of 1973, which requires employers to offer HMO options in addition to traditional health care options. Doctors and professionals agree by contract to provide health care under specific guidelines.

An HMO member must select a primary care physician (PCP). Through the PCP the HMO plan member receives access to medical services. A PCP may be an internist, pediatrician, general practitioner (GP), or a family doctor. Patients typically need a referral from a PCP to see a specialist or other type of doctor who is not a primary care physician. The only exception to this rule is when a patient visits the emergency room or when the HMO guidelines restrict this option.

An HMO typically covers preventative care, immunizations, well-baby checkups, mammograms, and physicals. Outpatient services are limited by the type; and experimental treatments are typically not covered if they are not medically necessary. Experimental treatments include plastic surgery and other elective services.

PPO
A PPO is also a private-entity, managed care organization. A PPO, or preferred provider organization, consists of medical doctors, health care providers, and hospitals. A PPO provider serves as a liaison between the insurer or third-party administrator and a plan participant. A PPO participant receives health care at a reduced rate.

With this in mind, the PPO arranges for subscription-based medical services for members, allowing for a discount below standard charged rates by designated professionals. A preferred provider earns revenue by charging the insurance company an access fee—negotiating with multiple providers regarding fee schedules, disputes, and the formation of new relationships.

A PPO charges a slightly higher premium to the plan participant than HMOs. This type of plan is typically more flexible and less restrictive than a standard HMO.

FSA
A flexible spending account (FSA) is a type of financial account that offers tax advantages. An FSA is considered under the guidelines of Section 125 of the Internal Revenue Code to be a “cafeteria plan,” which is defined as an employee benefit plan that allows employees to choose from different types of benefits. This process is similar to a consumer choosing from a menu of available food items in a standard cafeteria.

The FSA plan is established through an employer where one or more employees create a goal to save a portion of their earnings for the purpose of meeting qualified expenses. Qualified expenses relate to medical, dependent care, and other types that fall under the guidelines. These include “accident and health benefits, adoption assistance, dependent care assistance, and group term-life insurance coverage” (IRS.gov).

Money is deducted from an employee’s pay and is put into a flexible spending account; under these conditions, deductions are not subject to payroll taxes. There is a drawback to choosing an FSA. An employee must use the funds by the end of the plan year or run the risk of losing all of the money deposited into the account. This is known as the “use or lose it rule” under the flexible spending account plan.

Employees typically use an FSA for medical expenses or to meet related health care costs. This is why an FSA is often referred to as a “medical expense FSA” or a “health FSA” because it is similar to a health savings account (HSA) or a health reimbursement account (HRA). However, an HSA is unlike an FSA, because with the former, funds are not lost to the employee at the end of the plan year.

Medicaid
Medicaid is a United States government-based health care program designed for individuals and families with low incomes. The program is jointly-funded by federal and multiple state governments, but is significantly managed by each participating state. A program participant of Medicaid must be a U.S. citizen or a legal permanent resident; must demonstrate proof of income below certain guidelines; and must provide evidence of disability if using this as a factor to meet eligibility requirements.

As a Medicaid managed care program, the features of a state-based Medicaid plan include enrollment in a private health plan; the plan receives a monthly premium on the program participant’s behalf from the state. The health plan then provides health care to the recipient.

Since Medicaid is primarily managed as a state-based program, some states operate the program under HIPP, or the Health Insurance Premium Payment Program, where Medicaid recipients receive private health insurance.

The Medicaid plan is offered through the Social Security program and includes dental services benefits. Dental benefits are optional for adults over the age of 21; but individuals under this age are typically eligible, by default, to receive these services. Minimum dental services include pain relief and restoration of teeth. Early and mandatory screening is a required benefit under the Medicaid program.

Medicare
Medicare is a U.S. government-based national social insurance program created initially in 1965. The purpose of the Medicare program is to guarantee individual Americans over the age of 65 and younger people with disabilities access to health insurance.

The Medicare program allocates financial risk differently from private, for-profit insurers. The purpose of a private insurer in terms of risk allocation is to adjust pricing according to the insurer’s perception of risk. However, with a social insurance program, risk is allocated across a society for the purpose of protecting everyone that lives in that society. In essence, the social role objectives are different for each insurer.

Medicare defines its coverage in four parts. For example, Part A covers hospital care. Part B covers outpatient medical services. With Part C, the federal government assumes the risk for private health coverage, submitting payments to the health care provider. Lastly, Part D covers outpatient prescription drugs.

According to Kaiser Family Foundation statistics, “Medicare provided health insurance to 48 million Americans” where Medicare covered approximately 48% of the cost and individuals aged 65 and older were expected to cover the remaining costs (Kaiser Slides). These out-of-pocket costs vary and are based upon the type of health care the Medicare enrollee needs. Out-of-pocket expenses may fall under “services” or “premiums.”

For More Information

To view Fact Sheet: Health Insurance Coverage of Women Ages 18 to 64, by State, 2010-2011, click here.

To view Issue Brief: Medicaid’s Role for Women Across the Lifespan: Current Issues and the Impact of the Affordable Care Act, click here.

To view Men’s Health statistics by the Centers for Disease Control and Prevention, click here.

References

Census.gov: Health Status, Health Insurance, and Medical Services Utilization: 2010

United States Department of Labor: ERISA

HealthCare.gov Insurance Basics

HealthCare.gov: Key Features of the Affordable Care Act, By Year

IRS: FAQs for government entities regarding Cafeteria Plans

Medicaid.gov

Centers for Medicare and Medicaid Services: Medicare and Medicaid Statistical Supplement, 2012 Edition

Kaiser Family Foundation (KFF.org): Sources of Payment for Medicare Fee-for-Service Beneficiaries’ Health Care Spending, 2006

Notes

1 The U.S. Census Bureau’s statistics suggest that “[y]early medical provider visits among the uninsured aged 18 to 64 declined from 28.4 percent in 2001 to 24.1 percent in 2010” (http://www.census.gov/prod/2012pubs/p70-133.pdf).