Health Insurance Basics
Core concepts
Health insurance transfers the financial risk of medical costs from an individual to an insurer in exchange for a premium. Candidates must distinguish risk pooling (spreading losses across many insureds), adverse selection (sicker-than-average applicants seeking coverage), and moral hazard (insureds using more care because someone else pays). Know the vocabulary: premium (cost of coverage), deductible (amount paid before benefits begin), coinsurance (shared percentage after deductible), copayment (fixed dollar amount per service), and out-of-pocket maximum (cap on member cost-sharing).
Understand the parties and flow: the policyholder owns the contract, the insured is the person whose health is covered, and the beneficiary receives benefits (important for life and accidental death riders). Also know the difference between indemnity (reimbursement of actual charges) and benefits-based coverage, and between individual and group contracts.
Traps
Questions often swap coinsurance and copayment, or ask who receives benefits versus who owns the policy. Another common trap: assuming the deductible applies to every service (preventive care is frequently exempt) or that the out-of-pocket maximum includes premiums (it does not). Watch for the distinction between first-dollar coverage and coverage that begins only after cost-sharing.
Worked example
A plan has a $1,000 deductible, 20% coinsurance, and a $5,000 out-of-pocket maximum. For a $6,000 covered claim, the member pays the $1,000 deductible, then 20% of the remaining $5,000 = $1,000, for $2,000 total. The insurer pays $4,000. Because $2,000 is below the $5,000 maximum, the member bears the full $2,000.
Rule of thumb: Apply cost-sharing in order-deductible, then coinsurance, then check the out-of-pocket cap.