Universal health care has been the goal of the Democratic Party for decades, primarily through the usage of health insurance to ensure affordability of health care itself. But why have health insurance? What is it and what does it do? How does it work? And what are some of the specifics?
The Principles of Health Insurance
The main principle behind insurance is to protect the holder against unexpected financial expenses or losses. This works by spreading out the costs of these potential events across time, and across a range of insurance holders. Each person has their own personal risk of an adverse event occurring, and their own associated costs. By pooling everyone’s risks and resources together, people gain access to a payout that ensures they are no worse off, or are not too far worse off than before an adverse event occurred. It is both a transfer from a person to themselves when an event occurs, and it is a transfer from someone who didn’t have an adverse event occur to someone that did. People like the certainty of financial security. Insurance satisfies that need.
Because people who expect some adverse event are more likely to need insurance, they are also more likely to purchase it. This creates something called a “adverse selection,” where riskier people have a higher demand for insurance leading to a more expensive product. This further makes the insurance risk pool “riskier” and raises the total pay outs from the insurance fund. That money has to come from somewhere, so insurance managers can either try to raise the costs to purchase plans, insurance can be mandated, or they can engage in “underwriting.”
If the costs of insurance become more expensive for everyone, and it is voluntary, then a situation called a “death spiral” may occur. As plans become more expensive, people with less risk stop purchasing it, forcing insurance to become more expensive to remain solvent. This could further cause people with low risk to stop purchasing insurance, and eventually the insurance program collapses.
To avoid a death spiral, people can be compelled to purchase insurance; this happens with car insurance or unemployment insurance. Since everyone has to purchase car insurance to have a car, and everyone must pay unemployment insurance when they earn money, markets can be solvent. In the case of unemployment insurance, it is run by the government as well, making the mandatory nature of it easier to enforce. But there’s also another method to avoid a death spiral, known as underwriting. This is when the insurance provider tries to assess a potential beneficiary’s risk prior to insuring them. With health insurance, that looks like assessing someone’s medical history, any conditions they may have, family history, if they engage in risky behavior like excessive drinking, smoking, drug usage, or dangerous activities prone to accidents. Car insurance does this by assessing the value of a car (more expensive cars are more expensive to insure), checking for recent accidents, or basing costs on enrollee age or the type of car. Underwriting can make insurance cheaper for enrollees that aren’t that risky, but more expensive for enrollees that have greater potential risk.
In the case of health insurance, someone with a chronic disability or recurrent cancer may be near impossible to insure, while the healthy get excellent insurance for cheap. Medicare solves this problem by compelling potential enrollees to have insurance, or face higher premiums (in some cases for life) the longer they delay coverage. Employer insurance solves this problem via mandating an offer at the same price for employees regardless of health and subsidizing coverage via a tax exclusion (making it more enticing for the healthy). The ACA marketplace mandates guaranteed issue, bans underwriting except for smoking and allowing older enrollees to be charged more than the young, and subsidizes insurance with tax credits like the tax exclusion for employer insurance. Before 2017, the government also used a tax penalty if people went without insurance, but that is currently set at $0. However, underwriting still exists for Medigap supplemental plans, or insurance off the ACA marketplace.
For the ACA marketplace and off-market insurance, the underwriting off-market could create a death spiral in theory if a strong insurance mandate doesn’t exist. However, off-market insurance both isn’t available for tax credits and is accounted for in the ACA market’s “risk-adjustment” process. So, if off-market insurance has too many healthy enrollees, they have to compensate other plans that have less healthy enrollees.
Furthermore, to work towards a healthier risk pool, insurance must make preventative care free. If this is effective, everyone could reap the rewards with cheaper insurance. And to avoid insurance companies denying coverage to stay afloat, a package of “essential health benefits” are mandated. However, off market insurance is not forced to follow these rules.
Premiums, deductibles, co-insurance, co-pays, and out of pocket maximums
That’s how insurance works in general, and how it functions in the health care market, but there is more to it. People don’t just purchase insurance and have all care covered, there are premiums, deductibles, copays, coinsurance, and even out of pocket maximums.
Premiums
Premiums are the regular payments you make each month to be insured. This is the traditional payment discussed above that creates the pooled funds for the insurance to function. Without this, there are no funds to be used. In the ACA marketplace, premiums are paid by some mix of the enrollee and the federal government. When you enter in your income information, you see the enrollee portion. For employer insurance, premiums are shared by some tax-free mix of the employer and employee.
Taxes can also function as premiums for some programs. This is seen in Medicare, Medicaid, the VA, and the ACA marketplace. However, that tax revenue may not come primarily from the enrollee and this functions as a transfer from tax payers to other tax payers that may need aid for something like Medicaid, Medicare, or ACA coverage.
Premiums and taxes don’t cover all our health care costs though, and enrollees are expected to have some “skin in the game” to try and hold down utilization of care. This can control health care spending by forcing people to think about the costs before usage. However, this can come at a cost of enrollees avoiding necessary care as well as unnecessary care. This can lead to problems later for some people if problems are allowed to fester.
Deductibles
Deductibles are the amount you pay out of pocket before your insurance kicks in. As you recall, the purpose of insurance is to avoid financial devastation. Deductibles are set to hold down the cost of premiums since lower levels of spending are more common and avoiding cost-sharing entirely would make premiums far more expensive. However, this also means some level of spending by the enrollee is expected. And not everyone can afford an unexpected expense in hundreds or thousands of dollars. This can lead to medical debt.
Additionally, not all plans require enrollees to pay the entire cost of care before a deductible is met. Some may instead have greater enrollee cost-sharing before the deductible is met.
Copays and coinsurance
Copays are flat fees you pay whether or not you have met your deductible. Think of them like the cost of purchase enrollee-side for care.
Coinsurance is the enrollee’s share of the bill after insurance has kicked in and after the deductible has been met. On the ACA, coinsurance can range from 10%-40% (see Obamacare metal levels) depending on the type of plan someone has. For traditional Medicare, coinsurance is typically 20 percent.
Out of pocket maximums
The out of pocket maximum is the maximum amount the enrollee will pay out of pocket for care. Once this is met, cost-sharing is no longer used and the enrollee is fully covered for care. The principle behind this is that the enrollee has reached a catastrophic level of health spending and the insurance plan must cover all costs. The enrollee should not be expected to pay the costs and that is the very reason for premiums.
However, out of pocket maximums may only apply to “in-network” care or there may be a separate maximum for combined “in-network” and “out-of-network” care.
Deductibles and out of pocket maximums reset every year. This may create a problem where care and accidents at the beginning of the year require more cost-sharing than at the end of the year. People may get more care later in the year after deductibles are hit. There could also be a problem where someone spends a lot at the end of the year, then gets in an accident in the early part of the following year. Someone in this situation could have greater cost-sharing than someone that had both expenses in a single year even if they events were farther apart.
Networks
Cost-sharing isn’t the only tool insurance has to keep down costs. It can also negotiate to create networks of providers that offer discounted rates for enrollees for their services. This is a double-edged sword creating “in-network” and “out-of-network” care.
As long as enrollees remain in-network, they can access cheaper insurance negotiated prices and have cost-sharing applied to their deductibles. Out-of-network care, by contrast, may not apply from cost-sharing protections or may not be covered by insurance save emergency care. The principle behind networks is to hold down cost via these negotiated rates. Providers outside these networks didn’t offer a price the insurance found acceptable and an agreement wasn’t reached. However, providers aren’t always connected and a hospital may be covered while a surgeon or an anesthesiologist was not. This means patients got care in-network got some care out-of-network without meaning to, and get stuck with higher cost-sharing than predicted. The No Surprises Act attempts to address this problem, but it is new and the effects are still being assessed.
Types of Health Insurance
Aside from cost-sharing and the enrollee share, there are also different types of health insurance.
Indemnity
Indemnity insurance is more typical of insurance that predate the managed care models of HMOs, PPOs, EPOs, and POSs. These plans do not have the problems of in-network vs out-of-network costs. You can see any provider you want and there aren’t geographic constraints. The insurance plan will cover a portion and you cover the rest. There may be deductibles like other plans. However, these plans are not ACA compliant. Essential health benefits are not required, underwriting is standard, and denials for pre-existing conditions exist. Additionally, the savings benefits of networks do not exist. Therefore, sicker enrollees may face the same problems as in the past and the lack of a network could make premiums more difficult to afford.
Health Maintenance Organizations (HMOs)
HMOs were created by the HMO Act of 1973. This created a health insurance plan that attempts to control costs with networks of providers. HMOs set up primary care providers (PCPs) as “gatekeepers” to specialists in an effort to establish relationships with patients and avoid unnecessary care. If a PCP must sign off on an appointment, the thought was that unnecessary care would be prevented. There are several types of HMOs.
Group Model HMOs contract with a physician group and the HMO and group share profits and losses.
Individual Practice Association (IPA) Model HMOs have negotiated discounted rates with HMO enrollees while providing care to patients outside the HMO as well.
Network Model HMOs contract with several physician groups rather than a single group like a Group Model HMO.
Staff Model HMOs are when the HMO directly hires providers to exclusively serve HMO enrollees.
Preferred Provider Organizations (PPOs)
PPOs are like HMOs in that they have networks as well. Enrollees are still covered outside the network, but they require more cost-sharing. These were created in the early 1980s after HMOs started to take off.
Exclusive Provider Organizations (EPOs)
EPOs are like HMOs in that they require enrollees to work within the network, but they tend to have larger networks than HMOs. They are like PPOs in that there is a discounted rate. They may or may not require a PCP gatekeeper.
Point of Service (POSs)
POSs require gatekeeper PCPs like an HMO, but they allow for out-of-network care at a reduced reimbursement like a PPO.
High Deductible Health Plans (HDHPs)
Within all these choices lies another, HDHPs. If an enrollee is willing to accept a higher deductible, then enrollees could gain access to a tax-free Health Savings Account (HSA) to be used for health care expenses. In 2021, HDHPs were available for individual plans with a deductible of at least $1,400 and family plans of at least $2,800. These amounts rise each year, but allowing someone to contribute $3,650 (in 2022) to a tax-free account and investing it could be a good deal for a healthy person with enough money to spare. Some people criticize HSAs as a regressive tool that helps upper middle class healthy enrollees, while sticking everyone else with costlier plans.
Indemnity plans can be the least restrictive for the healthy, but can be expensive and lack the regulatory protections of the ACA. HMOs can have the lowest premiums, but they can be quite restrictive in the choice of providers you can see and requiring a PCP gatekeeper can slow down care for a condition. PPOs have the protection of the ACA and the greater freedom of indemnity insurance, but they can be quite expensive. POSs and EPOs attempt to split the difference between HMOs and PPOs in different way. However, plan type isn’t a perfect determinant of how broad a network really will be. Some HMO networks are vast, and some PPO networks are narrow.
Conclusion
Confused? Many are. People distinguish between premiums and taxes, though with government shares the line can blur. Flat copays vs coinsurance is just fixed amounts vs a percent of care. People confuse deductibles and out of pocket maxes, and distinguishing between in-network and total out of pocket maxes makes things harder. That’s all before the alphabet soup of insurance type, and whether you know a plan is ACA compliant or something more like a legacy indemnity plan found before the ACA.
Insurance provides an important function: to give everyone access to a good that may be unaffordable without it, and to protect us from financial devastation when we are sick. But through a flood of choice and many fuzzy definitions, it is easy to be overwhelmed. Some models of insurance, like unemployment insurance, avoid this problem via government monopoly and mandated purchase. Others like car insurance, prefer a private market that is mandated but keeps underwriting. The health insurance market, by contrast, is a fractured mess of public vs private vs a mix, subsidized vs unsubsidized, regulated vs unregulated, and de facto mandated vs voluntary.