Understanding How Health Insurance Works

Health Insurance

The role of health insurance coverage in the lives of people cannot be overlooked as it makes the difference between life and death.   A health insurance policy is a contract between an insurance company and an individual or his sponsor (e.g. an employer) whereby the insurance company undertakes to indemnify the individual or his sponsor against any health risks or damages.    The contract can renewable monthly or annually and it can be lifelong depending on the agreement between the insurer and the insured.   Most employers offer some form of health insurance plans for their employees.    The employees are asked to choose from several different alternative plans which vary in terms of coverage and premiums.

There are basically two broad categories of insurance coverage.

Fee-For-Service: This type of coverage allows you to select doctors and hospitals based on your needs and preferences.   It offers you greater amount of choices but it is usually more expensive.  Under this plan, your doctor will submit a bill to your insurance provider or you may pay the bill directly if your doctor does not have a relationship with your insurer.  You may be required to pay the bill directly and be reimbursed by your provider.  On the other hand, you are likely going to be responsible for any other expenses incurred.  For instance, if your doctor charges more than reasonable, you will have to pay the difference. Fee-For-Service plans have an annual deductible which vary based on the level of coverage and the higher the deductible, the lower you the premiums that you will pay.  Remember you have to pay the deductible before receiving the reimbursement.

Managed Care: Under the managed care plans, you are allowed to select one primary physician who will be responsible for coordinating your care.   You will need to be approved by this primary physician to seek medical care or hospitalization.  Also, you pay lower premiums to allow managed care provider to make your health care decisions for you.   Three major types of Managed Care plans are Health Maintenance Organization (HMOs), Preferred Provider Organizations (PPOs) and Point of Sales (POSs).

HMOs are a group of health services who pool their service together in a fixed price option.  The main difference between PPOs and POSs and HMOs is that they have a network of providers.  But they allow the consumer to decide to use a doctor, hospital or other health care service outside the recognized network.

The following are some of the health insurance terms that you need to be familiar with:

Premium: This is the amount the insured pays to the health plan to purchase health coverage.

Deductible: This is the amount that the insured must pay out-of-pocket before the health insurer pays its share.

Co-payment: This is amount that the insured person must pay out of pocket before the health insurer pays for a particular visit or service. For example, an insured person might pay a $45 co-payment for a doctor’s visit, or to obtain a prescription. A co-payment must be paid each time a particular service is obtained.