Health insurance

Source: Wikipedia

Under health insurance, the insurer pays the medical costs of the insured if the insured becomes sick due to covered causes, or due to accidents.

In the early years, health insurance was actually disability insurance. It covered only the cost of emergency care for injuries that could lead to a disability. Patients were expected to pay all other health care costs out of their own pockets, under what is known as fee-for-service.

Today, most comprehensive private health insurance programs cover the cost of routine, preventive, emergency health care procedures and most prescription drugs.

A health insurance policy is an annually renewable contract. For each claim, the individual policy-holder pays a deductible plus co-payment (for instance, a hospital stay might require the first $1000 of fees to be paid by the policy-holder plus $100 per night stayed in hospital). Usually there is a maximum out-of-pocket payment for any single year, and there can be a lifetime maximum.

Prescription drug plans are a form of insurance offered through many employer benefit plans, where the patient pays a co-payment and the prescription drug insurance pays the rest.

Some health care providers will agree to bill the insurance company if patients are willing to sign an agreement that they will be responsible for the amount that the insurance company doesn't pay, as the insurance company pays according to "reasonable" or "customary" charges, which may be less than the provider's usual fee.

Health insurance companies also often have a network of providers who agree to accept the reasonable and customary fee and waive the remainder. It will generally cost the patient less to use an in-network provider.

Any private insurance system will face two inherent challenges: adverse selection and ex-post moral hazard.

Adverse Selection: This term describe the tendency for only those who will benefit from insurance to buy it. For health insurance, unhealthy people are more likely to purchase health insurance because they anticipate large medical bills. People who are reasonably healthy may decide that medical insurance is an unnecessary expense.

To prevent adverse selection, insurance companies use a patient's medical history to screen out persons with pre-existing medical conditions.

Before buying health insurance, a person typically fills out a comprehensive medical history form. In general, those who look like they will be large financial burdens are denied coverage or charged high premiums to compensate. Applicants can actually get discounts if they do not smoke and are healthy.

Moral Hazard: Moral hazard describes the state of mind and change in behavior that results from a person's knowledge that if something bad were to happen, the out-of-pocket expenses would be mitigated by an insurance policy--in this case, one which provides reduced prices for medical care.