History and evolution
The concept of health insurance was proposed in 1694 by Hugh the Elder Chamberlen from the Peter Chamberlen family. In the late 19th century, early health insurance was actually disability insurance, in the sense that it covered only the cost of emergency care for injuries that could lead to a disability[citation needed]. 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.[1] Patients were expected to pay all other health care costs out of their own pockets, under what is known as the fee-for-service business model. 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 also most prescription drugs, but this was not always the case
A Health insurance policy is an annually renewable contract between an insurance company and an individual. With health insurance claims, the individual policy-holder pays a deductible plus copayment (for instance, a hospital stay might require the first $1000 of fees to be paid by the policy-holder plus $100 per night stayed in hospital). Usually there is a maximum out-of-pocket payment for any single year, and there can be a lifetime maximum.
Prescription drug plans are a form of insurance offered through many employer benefit plans in the U.S., where the patient pays a copayment and the prescription drug insurance pays the rest.
Some health care providers 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, as the insurance company pays according to "reasonable" or "customary" charges, which may be less than the provider's usual fee. The "reasonable" and "customary" charges can vary.
Health insurance companies also often have a network of providers who agree to accept the reasonable and customary fee and waive the remainder. It will generally cost the patient less to use an in-network provider.
Inherent problems with private insurance
Any private insurance system will face two inherent challenges: adverse selection and ex-post moral hazard.
Adverse Selection
Insurance companies use the term "adverse selection" to describe the tendency for only those who will benefit from insurance to buy it. Specifically when talking about health insurance, unhealthy people are more likely to purchase health insurance because they anticipate large medical bills. On the other side, people who consider themselves to be reasonably healthy may decide that medical insurance is an unnecessary expense; if they see the doctor once a year and it costs $250, that's much better than making monthly insurance payments of $400 (example figures).
The fundamental concept of insurance is that it balances costs across a large, random sample of individuals. For instance, an insurance company has a pool of 1000 randomly selected subscribers, each paying $100/month. One of them gets really sick while the others stay healthy, which means that the insurance company can use the money paid by the healthy people to treat the sick person. Adverse selection upsets this balance between healthy and sick subscribers. It will leave an insurance company with primarily sick subscribers and no way to balance out the cost of their medical expenses with a large number of healthy subscribers.
Because of adverse selection, insurance companies use a patient's medical history to screen out persons with pre-existing medical conditions. Before buying health insurance, a person typically fills out a comprehensive medical history form that asks whether the person smokes, how much the person weighs, whether the person has been treated for any of a long list of diseases and so on. In general, those who look like they will be large financial burdens are denied coverage or charged high premiums to compensate. On the other side, applicants can actually get discounts if they do not smoke and are healthy.
Starting in 1976, some states started providing guaranteed-issuance risk pools, which allow individuals who are medically-uninsurable through private health insurance to be able to purchase a state-sponsored health insurance plan, usually at higher cost. Minnesota was the first to offer such a plan, there are now 34 states which do. Plans vary greatly from state to state, both in the costs and benefits to consumers and to their methods of funding and operating. They serve a very small portion of the uninsurable market -- about 183,000 people in the USA[citation needed]-- but in best cases do allow people with pre-existing conditions such as cancer, diabetes, heart disease or other chronic illnesses to be able to switch jobs or seek self-employment without fear of being without health care benefits. Efforts to pass a national pool have as yet been unsuccessful, but some federal tax dollars have been awarded to states to innovate and improve their plans.
Moral Hazard
Moral hazard describes the state of mind and change in behavior that results from a person's knowledge that if something bad were to happen, the out-of-pocket expenses would be mitigated by an insurance policy--in this case, one which provides reduced prices for medical care.
Other factors affecting insurance price
Because of advances in medicine and medical technology, medical treatment is more expensive, and people in developed countries are living longer. The population of those countries is aging, and a larger group of senior citizens requires more medical care than a young healthier population. (A similar rise in costs is evident in Social Security in the United States.) These factors cause an increase in the price of health insurance.
Some other factors that cause an increase in health insurance prices are health related: insufficient exercise; unhealthy food choices; a shortage of doctors in impoverished or rural areas; excessive alcohol use, smoking, street drugs, obesity, among some parts of the population; and the modern sedentary lifestyle of the middle classes.
In theory, people could lower health insurance prices by doing the opposite of the above; that is, by exercising, eating healthy food, avoiding addictive substances, etc. Healthier lifestyles protect the body from some, although not all, diseases, and with fewer diseases, the expenses borne by insurance companies would likely drop. A program for addressing increasing premiums, dubbed "consumer driven health care," encourages Americans to buy high-deductible, lower-premium insurance plans in exchange for tax benefits.
Common complaints of private insurance
Some common complaints about private health insurance include:
- Insurance companies do not announce their health insurance premiums more than a year in advance.[citation needed] This means that, if one becomes ill, he or she may find that their premiums have greatly increased (however, in many states these types of rate increases are prohibited).
- If insurance companies try to charge different people different amounts based on their own personal health, people may feel they are unfairly treated.[citation needed]
- When a claim is made, particularly for a sizable amount, insureds may feel as though the insurance company is using paperwork and bureaucracy to attempt to avoid payment of the claim or, at a minimum, greatly delay it.[citation needed]
- Health insurance is often only widely available at a reasonable cost through an employer-sponsored group plan.[citation needed]
- In the United States, there are tax advantages to Employer-provided health insurance, whereas individuals must pay tax on income used to fund their own health insurance, although there are a minority of pre-tax health plans currently extant.[citation needed]
- Experimental treatments are generally not covered.[citation needed] This practice is especially criticized by those who have already tried, and not benefited from, all "standard" medical treatments for their condition.[citation needed]
- The Health Maintenance Organization (HMO) type of health insurance plan has been criticized for excessive cost-cutting policies in its attempt to offer lower premiums to consumers.[citation needed]
- As the health care recipient is not directly involved in payment of health care services and products, they are less likely to scrutinize or negotiate the costs of the health care received.[citation needed] The health care company has popular and unpopular ways of controlling this market force.[citation needed]
- Some health care providers end up with different sets of rates for the same procedure. One for people with insurance and another for those without.[citation needed]
- Unlike most publicly funded health insurance, many private insurance plans do not provide coverage of dental health care, or only offer such coverage with additional premiums and very low dollar-amount coverages.
- Insurance Companies can influence the type or amount of treatment that the insured receives by setting limits on the number of visits, types of treatment, etc., it will cover.
