Medical Insurance 101

Health care is expensive, and most people can’t afford to pay for it out of pocket. That’s why medical insurance was created: it pools the risk of paying for expensive health care over a large group of people, in exchange for monthly payments (or premiums) that are typically much lower than the cost of receiving health services without insurance.

Having access to affordable, quality health care should be a cornerstone of every country’s national policy. But, unfortunately, in the United States, too many people don’t have access to health care they can afford. A health care system that is unaffordable can lead to delayed, disrupted or denied medically necessary care — harming enrollees’ physical and financial health.

In most countries, health insurance is a mandatory purchase for those who are employed or earn income through some means other than employment. Individuals who do not have health insurance are required to pay a penalty when they file their taxes. While in the United States, the federal government regulates the health insurance industry and provides some form of universal health coverage through Medicare, Medicaid and private insurers at the state and local levels.

Health Insurance 101

The simplest way to think about how health insurance works is that it’s like car insurance. You pay a fixed amount up front, known as a premium, to a health insurance company each month. In return, the health insurance company promises to cover your costs in case you need medical treatment. The health insurance company’s goal is to collect enough premium to offset the cost of the small number of people who get sick or injured.

Various types of health insurance plans exist, with each having its own rules and arrangements regarding what is covered and how much you have to pay out-of-pocket for certain services. For example, a Preferred Provider Organization (PPO) plan may only fund treatment referred by your primary care physician and has negotiated fees with in-network providers that are typically less than what non-in-network providers charge.

Another type of health insurance is a Health Maintenance Organization (HMO). With an HMO, you are assigned a primary care physician who will refer you to specialists if needed. An HMO is generally the cheapest type of health insurance.

Health insurance also includes prescription drug coverage. Some insurance companies have a list of approved drugs, known as a formulary, that they will pay for regardless of their cost. Other insurers may have additional requirements, such as prior authorization, before they will cover a specific medication.

Health insurance should be a bridge to medical care, not a barrier. However, many commercial health insurance policies delay, disrupt or deny care because of cost. This is unacceptable and needs to be addressed. Fortunately, many people have access to affordable health care through public programs such as Medicare and the Children’s Health Insurance Program (CHIP). Health reform is working to make sure that these programs are sustainable in the long term.