Health insurance can be confusing. This page is meant to provide general information about health insurance, including the different types of insurance, and define common terms.
General Health Insurance Facts
- Health insurance is a type of insurance coverage that pays for medical and surgical expenses incurred by the insured. In the U.S., most people under the age of 65 get their health insurance from an employer.
- Choosing a health insurance plan can be tricky because of plan rules regarding in- and out-of-network services, deductibles, co-pays, and more.
- Since 2010, the Affordable Care Act has prohibited insurance companies from denying coverage to patients with pre-existing conditions and has allowed children to remain on their parents' insurance plan until they reached the age of 26.
- Medicare and Medicaid are the two largest public health insurance coverage programs. Medicare is for people over age 65 and people with disabilities, including end stage renal disease (ESRD) and covers 44 million people. In fact, people with ESRD are eligible for Medicare three months after they are diagnosed with ESRD, regardless of age. Medicaid is health coverage for people with limited incomes.
- Reimbursement rates for health care services vary among insurance companies. Typically, private insurance has much higher reimbursement rates than Medicare or Medicaid.
Understanding Premiums, Deductibles, Copayment and Coinsurance
Insurance companies and Medicare use cost-sharing mechanisms – like premiums, deductibles, copays and coinsurance -- to keep expenditures down and prevent the overuse of healthcare services.
- Premium: What the patient pays every month for insurance.
- Deductible: The amount that the patient needs to pay before the insurance benefits activate.
- Copayment: The amount paid each time a patient utilizes a healthcare service. Insurance companies can set specific copays to specific services.
- Coinsurance: Similar to a copay, but instead of a set amount per service the patient pays for a set percentage of the cost of the service.
A report by the RAND corporation showed that when there are no cost-sharing mechanisms, people will over utilize healthcare services and will not have improved health outcomes. This is called “moral hazard.” A certain portion of cost-sharing is required, but there is no consensus on what the appropriate and fair amount is.
Healthcare and the U.S. Economy
- Healthcare spending represents approximately 1/6th of the U.S. GDP.
- Healthcare costs are higher and Americans utilize services more often than any other developed nation in the world.
- Of the U.S. population of 318 million people in 2018, approximately 180 million had private insurance, (158 through employers and 20 million individual or small group policies), 65 million had Medicaid, 44 million had Medicare and nearly 28 million people were uninsured. (SOURCE: https://www.kff.org/other/state-indicator/total-population/?dataView=1¤tTimeframe=0&sortModel=%7B%22colId%22:%22Location%22,%22sort%22:%22asc%22%7D
- Hospital care accounts for 32 percent of healthcare spending in the US while physician and clinical services account for nearly 20 percent. Prescription drugs account for about 10 percent of health care spending.
Commercial/Private Health Insurance
A private health insurance plan is any plan that is not run by a government program, and can include both group plans, which are typically offered by employers, and individual/non-group plans, many of which are purchased on through Health Insurance Marketplaces created by the Affordable Care Act (ACA), also known as Obamacare. Each state and the District of Columbia have their own Marketplace; 19 are administered by the state and 32 are administered by the federal government. These plans are provided by a private insurance company (for example, Blue Cross Blue Shield, UnitedHealth, Cigna, Aetna, or Kaiser Permanente).
Facts about Private Health Insurance Plans
- Private plans can be used to cover an individual or a group, for example, a family or a group of employees.
- A group plan is usually one of the major benefits offered by employers.
- Group plans allow employers and insurance companies to spread the potential risk of high-cost employees among the rest of the employees and the premiums of the healthier employees will cover the cost of sicker employees.
- According to the Kaiser Family Foundation, 49 percent of non-elderly adults had health insurance through their employer in 2018.
- Group health plans typically cost less than an equivalent benefit plan on the individual market.
- An individual health policy is often purchased with the guidance of an insurance agent to help navigate plan choices and premium costs. These typically are plans that are purchased on the ACA Marketplace or through the insurer. They cover individuals and their families, who are self-employed or have another reason for not having insurance through an employer and do not qualify for Medicaid.
Regulations Around Commercial Health Insurance
Regulations for commercial plans vary widely from state to state. Insurance plans must meet the requirements of the state insurance department in which they conduct business.
States can regulate which services must be provided beyond the Federal essential benefits, how insurers reimburse patients and providers, and if they must keep fiscal reserves on hand to meet their obligations to beneficiaries.
The Affordable Care Act mandated some of the strictest regulations on the commercial insurance industry:
- Enacted a community rating system: A community rating system in insurance is one which requires all insurers to offer policies within a given geographic area at the same price to all persons.
- Mandated that insurers cannot charge the sickest individual more than 3 times what it charges the healthiest individual: Previously, insurers could charge 5 times as much, and in some cases, it was even higher.
- Eliminated the practice of rejecting people for coverage if they had a pre-existing condition: A pre-existing condition is a medical condition that started before a person’s health benefits went into effect. Previously, insurers could refuse to cover individuals who had a pre-existing condition like end state renal disease or cancer.
- Required all plans to cover a list of “essential health benefits”: The ACA established 10 services that it declared were “essential” for every health benefit plan in the U.S. to include. Things like outpatient services, prescription drugs and preventive and wellness care, became fully covered under every plan in the US. Previously, insurers had free reign in setting what they chose to cover so long as they satisfied the state requirements.
- Eliminated lifetime and yearly spending limits: Previously, insurers could cap how much they would be willing to spend for an individual. Once someone reached that cap, they would no longer be eligible for their benefits and would have to pay the full cost of their treatment.
Public Health Insurance
Public health insurance plans are those that are paid for and administered through the federal or state governments. They are funded primarily through payroll and general income taxes on the public and are available to anyone who meets certain criteria. In the United States, there are 6 types of government health insurance programs:
You are eligible for Medicare if you are over 65, have been receiving Social Security Disability Insurance, have Lou Gehrig’s disease (ALS), or have ESRD.
Prior to turning 65, people pay 1.45% of their income into the Medicare “pool” while their employer pays an additional 1.45% (the Medicare tax equals 2.9% of our earned income).
Medicare, in and of itself, is designed to absorb risk by providing coverage to the most risky and costliest of individuals who would otherwise be subjected to very high premiums. People automatically become eligible for Medicare once they turn 65 if they have worked 10 years and paid Medicare and Social Security taxes during that time.
Unlike most private plans, Medicare does not have an out-of-pocket limit. That is why many beneficiaries opt for supplemental insurance, commonly known as Medigap. There are 10 different types of Medigap plans and they are intended to pay for Medicare out-of-pocket costs; the amount of coverage depends on the type of plan. Any Medicare beneficiary over the age of 65 has guaranteed issue for Medigap. Unfortunately, if you are under 65 and have ESRD, there are 20 states where insurers are not required to offer you a Medigap plan.
Medicare is regulated by the Centers for Medicare and Medicaid Services (CMS) at the US Department of Health and Human Services (HHS).
- Part A (hospital care, skilled nursing homes, hospice, and home health services) is paid for entirely by the Federal Government through CMS revenue, like those from payroll taxes.
- Part B (preventive services, doctor visits, mental health and out-patient-services including kidney dialysis) is paid for by CMS and through monthly premiums paid by beneficiaries.
- Part D (outpatient prescription drugs) is paid for by CMS, beneficiary premiums, and by some state payments for those who are also eligible for Medicaid.
- Part C, or Medicare Advantage (MA), covers Parts A, B, and D and is paid for by CMS and beneficiary premiums. MA plans are a public-private partnership and are offered by private insurance companies that contract with CMS to provide beneficiaries with all Part A and Part B services. In addition to the Part B premium, people on Medicare Advantage plans may also pay a beneficiary premium to the private company that offers the MA plan. Some Medicare Advantage plans do not offer Part D coverage, but most do.
Medicaid is jointly funded by the states and CMS, which gives States more flexibility in determining eligibility for the state’s Medicaid programs as well as the what services must be covered. As a result, Medicaid eligibility and covered services vary widely from state to state. Medicaid covers certain low-income people, such as qualified pregnant women and children, the elderly, blind and disabled and individuals on Social Security Income. States may then choose to cover additional groups, such as adults without dependent children. The ACA also gives states the option to expand their Medicaid population to Under the expansion, Medicaid eligibility would be extended to adults up to age 64 with incomes up to 138 percent of the federal poverty level and 37 states and the District of Columbia have done so.
The Children’s Health Insurance Program (CHIP) is a program administered by the HHS and provides funds to states to create health plans for families with children but do not have a low enough income to qualify for Medicaid.
TRICARE is a program run by the Defense Health Agency in the US Department of Defense and provides health benefits to the US Armed Services and certain members of the Reserves, along with their families.
Veterans Health Administration
The Veterans Health Administration (VHA) is a component of the US Department of Veterans Affairs (VA) and provides medical care and long-term care to veterans of the US military who are not eligible for TRICARE. Typically, the VA covers more veterans who are disabled.
Indian Health Service
The Indian Health Service (IHS) is administered by HHS to provide medical care and public health services to members of Federally recognized Native American Tribes and Alaska Native peoples.