How Health Insurance Works
Health care is expensive. Health care costs are increasing every year. Without health insurance it would be difficult for most people to afford their health care bills.
Health insurance is a way for people to:
- Protect themselves from extreme financial medical care costs if they become severely ill
- Ensure that they have access to health care when they need it
There are two types of health insurance:
- Taxpayer-funded: funded by federal and state taxes; examples are Medicare, Medicaid and Children’s Health Insurance Program (CHIP)
- Private-funded: provided primarily through employer-sponsored plans; examples are Blue Cross and Blue Shield plans, non-Blue commercial plans, HMOs and self-funded employer plans
Taxpayer-funded health insurers are funded by state and federal taxes. Examples include:
- Federal/state employee health plans
- Veterans Health Administration (VHA)
Private health insurance is primarily funded through benefits plans provided by employers.
- 160 million individuals are insured through employer-sponsored health insurance
- About 15 million individuals buy health insurance on their own
- Blue Cross and Blue Shield health insurance companies
- Non-Blue commercial health insurance companies
- Health Maintenance Organizations (HMOs)
- Self-funded employer-sponsored benefit plans
To receive health insurance, employees choose to participate in their employer-sponsored plan. They pay a premium. In return, they receive an insurance card that gives them access to the doctors, hospitals and other health care providers that are part of the insurance plan.
Health Insurance Regulations
- States primarily regulate health insurance by setting standards for when and on what terms a state-licensed health insurer must accept an applicant.
- Federal laws also regulate health insurance, including ERISA and HIPAA.
- ERISA establishes national standards for employer- and union-sponsored health plans.
- ERISA prohibits states from regulating self-funded employer- and union-sponsored health plans.
- HIPAA requires private insurers to accept certain people leaving group coverage into the individual market regardless of health status and without exclusion for pre-existing conditions. However, in most states, if eligible people are guaranteed access to coverage in the state's high-risk pool, private insurers are not required to sell coverage to them.
Health insurance makes health care more affordable.
Health insurance helps people pay for health care by combining the risk of high health care costs across a large number of people, permitting them (or employers) to pay a premium based on the average cost of medical care for the group.
Thus, health insurance makes the cost of health care affordable for most people.
Health insurance provides security.
When an individual has an insurance card, it provides easier access to medical care by showing health care providers that most of the individual’s covered treatment costs will be paid.
Employer-sponsored Health Insurance
Most private health insurance is provided through employer-sponsored benefits plans.
- Whether to offer health benefits
- Level of benefits and the amount of coverage
- Whether to assume the risk and payment for its employees' health care or have the insurance company assume the risk and payment
Employees do this…
- To receive health insurance, employees choose to participate in their employer-sponsored plan.
- They pay a premium that varies based on factors impacting the health care needs of the employee group.
- In return, they receive an insurance card that gives them access to the doctors, hospitals and other health care providers who are part of the insurance plan.
How Health Insurance is Regulated
States generally regulate the business of health insurance. At the same time, a number of federal laws also govern health insurance. We will review two specific federal laws: ERISA and HIPAA.
States set standards covering when and on what terms a state-licensed health insurer must accept an applicant. For example, most states mandate that coverage must be given to small employers that want it. States mandate the extent to which insurers can vary premiums based on health status, claims experience and other factors.
However, states cannot require self-funded employer plans to offer benefits (these plans are governed under ERISA).
States have lists of mandated benefits. Some examples are:
- Fertilization treatments
- Substance abuse treatments
- Breast reconstruction surgery after a mastectomy
Employee Retirement Income Security Act of 1974 (ERISA)
- Protects workers from the loss of benefits provided through the workplace
- Establishes national standards for employee benefits maintained by an employer or an employee organization (union)
- Does not regulate insurance provided directly by a private health insurer
- Does not allow states to regulate the content or activities of self-funded employee benefit plans
- Does not allow states to regulate how third parties, including state-licensed health insuring organizations, provide administrative services to self-funded employee benefit plans
Health Insurance Portability and Accountability Act (HIPAA)
HIPAA addresses the concern that:
- People can face lapses in coverage when they change or lose their jobs
- Health coverage providers often exclude benefits for preexisting health conditions for new enrollees
HIPAA requires state-licensed private insurers to accept certain people leaving group health coverage into the individual market regardless of their health status and without any exclusion period for pre-existing medical conditions. However, in most states, if eligible people are guaranteed access to coverage in the state's high-risk pool, private insurers are not required to sell coverage to them.
HIPAA also prohibits state-licensed private insurers from considering the health status of a member when determining the member’s eligibility for group coverage.