The purchase of a health insurance policy for the first time is, in many ways, a rite of passage – a signal that you have passed from child to adult. The purchase of a health insurance policy is also one of the more expensive acquisitions you will make during your life, rivaling the expense of buying a home. At the same time, most people do not understand health insurance or the components of the contract between insurance companies and themselves, often learning to their dismay that coverage they thought they had is actually nonexistent.
The way to avoid lacking vital health coverage when you need it most starts with understanding policy basics.
Definition of a Health Insurance Policy
A health insurance policy is a legal contract between an insurance company and the owner of the policy. Generally, the contract is limited in term, requires a payment by the policyholder to the insurance company (premiums), and details various conditions under which the insurance company will be responsible for the costs of medical care of the policyholder and possibly his or her family.
Insurance companies calculate the likelihood and costs of various and multiple medical treatments for which they will be liable, and set an annual rate of premium to be paid by the policyholder. In the United States, the majority of medical provider payments are made under a “fee for service” basis, whereby the provider is compensated based upon the type and number of services rendered to a patient, rather than the outcome of the services.
There are presently efforts within the healthcare community to use patient outcomes as the basis for payment, a method which many believe will lower costs while improving care. However, replacing the existing reimbursement system is likely to take years. In other words, we can continue to expect the fee-for-service model to dominate healthcare for some time.
Components of a Health Insurance Policy
1. Insurance Premium
The health insurance premium is the fee that you pay in order to have coverage of the medical conditions and/or treatments described in the policy. Premiums are established through an underwriting process whereby potential purchasers of health insurance are categorized into specific risk categories based upon such factors as age, gender, and medical history. The level of premium is intended to reflect the likelihood that members of the insured group will incur medical costs equal to the projected loss ratio or less.
Underwriting is necessary to avoid “adverse selection” – in other words, ideally, premiums are set high enough so as to deter participation by those most likely to use the insurance, and low enough to encourage participation by those least likely to use it. Underwriting ensures that the people who purchase health insurance are a true cross-selection of risks, and don’t only represent those who purchase health insurance because they are ill or expect to need it.
Health insurance usually requires that the covered policyholder bear a portion of the risk by paying initial medical costs up to an agreed-upon level before the health insurance is liable for payment. As the deductible amount increases, the premium decreases. For example, an annual deductible of $3,000 would require the policyholder to pay the first $3,000 in medical bills out-of-pocket before the insurance company will pay or reimburse any claim.
Deductibles can be applied to individuals or to family groups. For example, the policy might have a $3,000 individual deductible and a $5,000 family deductible. In this case, the insurance company would pay the individual’s medical claims when the accumulated expenses for that individual exceed $3,000 or when the total family expense exceeds $5,000, even though the total of no individual’s claims equal $3,000.
In addition to the deductible, policyholders are usually required to pay a portion of the cost of each medical treatment covered to reduce frivolous use of medical services. While higher co-pays reduce the insurance company’s total exposure, the amount of the co-pay per incident is rarely high enough to result in substantial premium reduction for the policy.
In order to share the risk and limit excessive utilization, policyholders remain liable for an agreed-upon level of expense, usually 80%. This limit is after the deduction of the co-payment.
For example, suppose an insured person named Joe has a cyst removed for a total cost of $2,500. After he pays the $50 co-pay, the insurance company would pay 80% of the remaining $2,450, or $1,960. Joe’s share of the cost would be the co-payment ($50) plus the remaining 20% of the amount after the co-pay ($490). His total out-of-pocket cost would be $540.
Health insurance policies do not normally cover all medical expenses. The non-covered expense may be defined by medical condition, type of treatment, or medical provider. For example, most health insurers do not cover elective cosmetic surgery, such as face lifts, tummy tucks, or bariatric (obesity) surgery, except in certain rare occasions. Policyholders remain 100% liable for any excluded treatment or expense, and these expenses do not apply to the deductible amount defined in the policy.
6. Coverage Limits
Health insurance is not open-ended. Insurance companies usually limit the amount of liability to which they are exposed by delineating the maximum amount for which they will pay medical costs. These limits usually run from $500,000 to $1 million, and may be either lifetime, annual, or both.
You could, for example, run an annual limit of $100,000 and a lifetime limit of $500,000. This means that the insurer would pay up to $100,000 in any 12-month period, but would cover total costs up to an accumulated $500,000. So if you spent the maximum $100,000 allowed per year, you’d have $400,000 left over that the insurer would pay out. Once the limit is reached, the health insurer will cease payments. The policyholder will be responsible for the payment of all costs after the maximum limit is reached.
While a $1 million coverage limit may seem large, purchasers should realize that that’s not necessarily the case. For example, a premature baby can require weeks of hospital stays and numerous operations, requiring hundreds of thousands of dollars in care. Organ transplants are very expensive, and can also reach limits if there are complications. While higher coverage limits are sometimes available, the agreement to raise maximum coverage usually requires negotiation, additional underwriting, and a higher premium.
If you want a higher coverage limit, you should work with the insurer to agree upon the limits before you purchase the policy. Insurers are unlikely to raise limits on a policy already in force since the need for the increased coverage is usually present before the request is made.
Before you purchase a policy, pay particular attention to the policy language. This way, you can ensure that the desired coverage is adequate to meet your potential need.
7. Out-of-Pocket Maximums
The reverse of coverage limits, this component applies to the insured’s maximum exposure for payment while the health insurance contract is in force. Once the out-of-pocket limit is reached, the insurance company pays all future covered costs (though co-pays and exclusions remain in effect) up to the coverage limit.
For example, if the out-of-pocket maximum is $3,000 annually, once the policyholder pays that amount, the insurance company will pay 100% of the covered expenses minus the individual co-pays for each service.
8. Provider Panels
One of the biggest ancillary benefits to health insurance policyholders is the schedule of discounted fee payments negotiated between the insurer and medical suppliers and providers. In some cases, the amount actually paid for the treatment will be 30% to 40% of the provider’s “usual and customary” fees. For example, a service that would cost $1,000 to an uninsured patient could be provided to policyholders at $300 to $400, or even less. Each insurer negotiates a discount with providers based upon the number of the insurer’s policyholders and the projected utilization of the provider’s services.
Based upon the rates to be charged, physicians, hospitals and other medical providers will be included into a defined network:
- In-Network. The practitioners providing the greatest discounts are considered to be in-network. Insurance companies encourage policyholders to utilize in-network providers by covering all or a majority of the provider’s fees in accordance with the negotiated rates between provider and insurer, and may also reduce co-pays or co-insurance when the in-network provider is used.
- Out-of-Network. Practitioners and medical providers who have not negotiated a preferred rate or minimal discounts are considered to be out-of-network. Policyholders who elect to use out-of-network providers will usually pay higher fees for similar services provided by an in-network provider, and may additionally incur a higher co-pay and higher percentage of co-insurance.
This is the process by which a health insurance policyholder gets prior approval of a medical procedure, or approval to see a specialist to ensure that the service or visit is covered. Most insurers require prior authorization before agreeing to cover a visit to a specialist practitioner.
Policyholders should note that preauthorization is not a guarantee that the service will be covered, but rather that it is the intent of the insurer to cover the service pending review of the claim and the determination that the service was necessary. Many non-critical treatments require preauthorizations, and it is usually the policyholder’s responsibility to know if preauthorization is required. Failure to get preauthorization can result in the payment of a claim being denied.
Insureds should pay special attention to the preauthorization requirement when seeing a specialist at the recommendation of their primary physician. Many primary caregivers are in-network, but may unknowingly refer their patient to a specialist who is out-of-network. In such cases, the patient will be penalized by the payment of a higher expense, and may have the claim denied entirely.
10. Explanation of Benefits (EOB)
Insurers generally send an explanation of a medical claim’s payment after it is adjudicated or approved by the insurer. The EOB generally describes what was covered and what may have been excluded, as well as the final contracted fees for the service, the proportion of the fees paid by the insurance company (and the amount which remains the patient’s responsibility), and an explanation of how the various amounts were calculated.
Policyholders should always review the EOB to determine whether payment was in accordance with their understanding of the health insurance policy.
Appealing a Claim Decision
Most health insurers rely upon older legacy information systems to review and make claim payments; these systems have been amended repeatedly over the years, so errors often occur. For example, some experts claim that errors occur in 8% to 10% of the claims adjudicated. As a consequence, it is likely that you will have claims either denied or inadequately paid.
If and when an error occurs, keep in mind that the personnel at the insurance company may be just as befuddled and confused as you. Being angry or belligerent will not help you achieve the results you want.
When disputing a claim decision by the insurance company, use the following procedure:
- Contact the Insurer. Contact the insurance company at the phone number printed on the EOB. If you call, follow up your conversation in writing confirming what you understood and the action that will follow.
- Get the Name of Who You Talk To. Be sure you get the name, address, and phone number of the persons with whom you talk. Personalize your conversation by using the person’s name so that you become more than just another complaint.
- Keep Good Records. Accurate documentation is essential when disputing the payment of a claim – never rely upon your memory alone. Insurers are generally large bureaucratic organizations with multiple levels of management. It is possible that a good outcome will require weeks, even months, before the matter is completely settled, so be prepared.
- Don’t Give Up. Kick the problems upstairs if you run into a roadblock, a hostile representative, or a decision with which you disagree. A letter to the president of the insurance company and your state’s insurance commissioner will generate activity on your claim, but it should be used only as a last resort.
Good health is your most precious asset and should be protected at all costs. While our American healthcare and healthcare insurance systems are in the midst of a massive overhaul, the value of health insurance cannot be overstated.
Being without health insurance can result in delayed treatment and hundreds of thousands of dollars of expense, even bankruptcy, in the event of an accident, a deadly illness, or at the development of a chronic condition. Protect yourself and your family by being an informed purchaser of health insurance that fits your particular needs.
What are your thoughts on health insurance?
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