Health Insurance Basics
Risk and cost sharing
Health insurance transfers the financial risk of medical care. Morbidity, not mortality, is the underlying risk. Insurers use underwriting and plan design to control adverse selection and utilization. Cost-sharing terms include deductible, copayment, coinsurance, and out-of-pocket maximum. A deductible is paid before benefits; coinsurance is a percentage of covered costs; a copay is a fixed amount; the out-of-pocket maximum caps covered in-network spending.
Plan types
Indemnity plans reimburse providers. Managed care includes HMOs, which typically require a primary care physician and referrals; PPOs, which use networks with higher out-of-network costs; and POS plans, which blend features. Group coverage is usually medically underwritten at the group level, not individually. Under the ACA, individual and small-group plans must cover essential health benefits, cannot exclude preexisting conditions, and must meet guaranteed-issue and rating rules.
Traps
Do not confuse coinsurance with a copay. HMO emergency care is generally covered even outside the network. Coordination of benefits prevents duplicate payment when two plans cover the same person. Subrogation lets a plan recover from a liable third party.
Worked example
A plan has a $1,000 deductible, 20% coinsurance, and a $5,000 out-of-pocket maximum. After the deductible, the insured pays 20% of covered charges until total cost sharing reaches $5,000; the plan pays the rest of covered expenses.