Actuarial Analysis and Collective Risk
A feature which is sometimes common in group insurance is that the premium cost on an individual basis may not be risk-based. Instead it is the same amount for all the insured persons in the group. So, for example, often all employees of an employer receiving health insurance coverage pay the same premium amount for the same coverage regardless of their age or other factors.
In contrast, under private individual health insurance coverage in the U.S., different insured persons will pay different premium amounts for the same coverage based on their age, location, preexisting conditions, etc.
Another distinction is that under group coverage, a member of the group is generally eligible to purchase or renew coverage all whilst he or she is a member of the group subject to certain conditions.
For example, under group insurance a person will normally remain covered as long as he or she continues to work for a certain employer and pays the required insurance premiums, whereas under individual coverage, the insurance company often has the right to non-renew a person’s individual health insurance policy when the policy is up for renewal, which it may do if the person’s risk profile changes (though some states limit the insurance company’s ability to non-renew after the person has been under individual coverage with a given company for a certain period.
What is Collective Risk?
Health insurance, like other forms of insurance, is a form of collectivism by means of which people collectively pool their risk, in this case the risk of incurring medical expenses. It is sometimes used more broadly to include insurance covering disability or long-term nursing or custodial care needs. It may be provided universally through government or as form of government aid such as the Medicaid program.
It may be purchased privately on a group basis (e.g., by a firm to cover its employees) or purchased by an individual for himself or his family. In each case, the covered groups or individuals pay a fee, premium, or tax, to help protect themselves from health care expenses.
By estimating the overall risk of health care expenses, a routine finance structure can be developed, ensuring that money is available to pay for the health care benefits specified in the insurance agreement.
The concept of health insurance was proposed in 1694 by Hugh Chamberlen. In the late 19th century, “accident insurance” began to be available, which operated much like modern disability insurance. This payment model continued until the start of the 20th century in some jurisdictions (like California), where all laws regulating health insurance actually referred to disability insurance.
Accident insurance was first offered in the United States by the Franklin Health Assurance Company of Massachusetts. This firm, founded in 1850, offered insurance against injuries arising from railroad and steamboat accidents. Sixty organizations were offering accident insurance in the U.S. by 1866, but the industry consolidated rapidly soon thereafter. While there were earlier experiments, the origins of sickness coverage in the U.S. effectively date from 1890. The first employer-sponsored group disability policy was issued in 1911.
During the middle to late 20th century, traditional disability insurance evolved into modern health insurance programs. Today, most comprehensive private health insurance programs cover the cost of routine, preventive, and emergency health care procedures, and most prescription drugs.
Hospital and medical expense policies were introduced during the first half of the 20th century. During the 1920s, individual hospitals began offering services to individuals on a prepaid basis, eventually leading to the development of Blue Cross organizations. The predecessors of today’s Health Maintenance Organizations (HMOs) originated beginning in 1929, through the 1930s and on during World War II.
How it Works?
A health insurance policy is a contract between an insurance company and an individual or his sponsor (e. g. an employer). The type and amount of health care costs that will be covered by the health insurance company are specified in advance, in a member contract or “Evidence of Coverage” booklet. The individual insured person’s obligations may take several forms:
Premiums (the amount the policy-holder or his sponsor (e.g. an employer) pays to the health plan to purchase health coverage).
Deductibles (the amount that the insured must pay out-of-pocket before the health insurer pays its share. For example, policy-holders might have to pay a $500 deductible per year, before any of their health care is covered by the health insurer. It may take several doctor’s visits or prescription refills before the insured person reaches the deductible and the insurance company starts to pay for care).
Co-payments (the amount that the insured person must pay out of pocket before the health insurer pays for a particular visit or service. For example, an insured person might pay a $45 co-payment for a doctor’s visit, or to obtain a prescription. A co-payment must be paid each time a particular service is obtained).
Coinsurance (instead of, or in addition to, paying a fixed amount up front (a co-payment), the co- insurance is a percentage of the total cost that insured person may also pay. For example, the member might have to pay 20% of the cost of a surgery over and above a co-payment, while the insurance company pays the other 80%. If there is an upper limit on coinsurance, the policy-holder could end up owing very little, or a great deal, depending on the actual costs of the services they obtain).
Exclusions (Not all services are covered. The insured are generally expected to pay the full cost of non-covered services out of their own pockets).
Coverage limits (Some health insurance policies only pay for health care up to a certain dollar amount. The insured person may be expected to pay any charges in excess of the health plan’s maximum payment for a specific service. In addition, some insurance company schemes have annual or lifetime coverage maximums. In these cases, the health plan will stop payment when they reach the benefit maximum, and the policy-holder must pay all remaining costs).
Out-of-pocket maximums (Similar to coverage limits, except that in this case, the insured person’s payment obligation ends when they reach the out-of-pocket maximum, and health insurance pays all further covered costs. Out-of-pocket maximums can be limited to a specific benefit category (such as prescription drugs) or can apply to all coverage provided during a specific benefit year).
Capitation (An amount paid by an insurer to a health care provider, for which the provider agrees to treat all members of the insurer).
In-Network Provider (A health care provider on a list of providers preselected by the insurer. The insurer will offer discounted coinsurance or co-payments, or additional benefits, to a plan member to see an in-network provider).
Referrals and Prior Authorization (A certification or authorization that an insurer provides as per a patients primary physician prior to medical service occurring. Obtaining an authorization means that the insurer is obligated to pay for the service, assuming it matches what was authorized).
Explanation of Benefits (A document that may be sent by an insurer to a patient explaining what was covered for a medical service, and how payment amount and patient responsibility amount were determined).
Prescription drug plans are a form of insurance offered through some employer benefit plans, where the patient pays a co-payment and the prescription drug insurance part or all of the balance for drugs covered in the plan.
Some, if not most, health care providers in the United States will agree to bill the insurance company if patients are willing to sign an agreement that they will be responsible for the amount that the insurance company doesn’t pay.
The insurance company pays out of network providers according to “reasonable and customary” charges, which may be less than the provider’s usual fee. The provider may also have a separate contract with the insurer to accept what amounts to a discounted rate or capitation to the provider’s standard charges. It generally costs the patient less to use an in-network provider.
Health Plans Vs. Health Insurance
Historically, HMOs tended to use the term “health plan”, while commercial insurance companies used the term “health insurance”. A health plan can also refer to a subscription-based medical care arrangement offered through HMOs, preferred provider organizations, or point of service plans.
Comprehensive vs. Scheduled
Comprehensive health insurance pays a percentage of the cost of hospital and physician charges after a deductible or a co-pay is met by the insured.
Scheduled health insurance plans are not meant to replace traditional comprehensive health insurance plans and are more of a basic policy providing access to day-to-day health care such as going to the doctor or getting a prescription drug.
In recent years these plans have taken the name mini-med plans or association plans.
The term “association” is often used to describe them because they require membership in an association that must exist for some other purpose than to sell insurance. These benefits will be limited.
Scheduled plans are not meant to be effective for catastrophic events. These plans cost much less than comprehensive health insurance. They generally pay limited benefits amounts directly to the service provider, and payments are based upon the plan’s “schedule of benefits”.