Foundations of Health Insurance
Domain 1 tests whether you can explain why health insurance exists and how its cost-sharing pieces interact - not product details, which come later. Expect questions on risk classification, insurable interest, adverse selection, and arithmetic that combines deductibles, coinsurance, copayments, and out-of-pocket maximums.
Risk and pooling
Insurance transfers pure risk (loss or no loss) from an individual to a pool. The law of large numbers lets an insurer predict aggregate losses when the pool is large and reasonably homogeneous. Adverse selection - sicker-than-average buyers concentrating in a plan - is controlled by underwriting, waiting periods, preexisting-condition limits where still permitted, and enrollment incentives. Moral hazard is changed behavior after coverage exists; deductibles and coinsurance make the insured share each loss and reduce it. Insurable interest must exist at the time of application.
Cost-sharing mechanics
- Deductible: first-dollar amount the insured pays before benefits begin; family deductibles may include an embedded per-person limit.
- Coinsurance: percentage split after the deductible, commonly 80/20.
- Copayment: flat dollar amount, common for office visits and prescriptions.
- Out-of-pocket maximum: ceiling on deductible + coinsurance + copays (premiums never count); once met, covered services pay at 100%.
- Coordination of benefits: the primary plan pays first, the secondary pays the balance, never exceeding 100% of allowed charges.
Worked example
A plan has a $1,000 deductible, 80/20 coinsurance, and a $3,000 out-of-pocket maximum. A covered claim of $20,000 arrives.
- Insured pays the $1,000 deductible; $19,000 remains.
- Coinsurance would be 20% × $19,000 = $3,800.
- Total cost sharing would be $4,800, but the out-of-pocket maximum caps it at $3,000. The insured pays $2,000 of the coinsurance and the insurer pays the remaining $17,000 of the claim.
Traps
- Applying coinsurance before the deductible.
- Letting copays escape the out-of-pocket maximum in a calculation.
- Confusing coinsurance (a percentage) with a copay (a dollar amount).
- Treating the "usual, customary, and reasonable" allowance as equal to the billed charge.
- Mixing up adverse selection (buyer behavior before purchase) with moral hazard (behavior after).