Health Insurance - Why Buy It And How It Works

Without health insurance, a single illness can cause serious, and often irrevocable, financial hardship.Unfortunately, many people discover this fact after incurring a large medical claim. A few days in the hospital can cost $10,000 dollars. Follow up care adds to this cost. Without an ability to pay, the quality of care delivered, if delivered at all, will be substantially less than care provided when services are paid for. No one wants to work for free.

Insurance of any kind is intended to transfer financial risk to an insurance company in exchange for a reasonable insurance premium. Keep this universal insurance concept in mind when deciding upon what type of health insurance is right for you. The bottom line is this. When you transfer first dollar risks to an insurance company, they in turn,require substantially more premium payments for insuring that risk. If we cover all of your colds and sore throats and you only pay $5 for a prescription and $20 for an office visit with the doctor, you will have a gold standard plan and pay gold standard premiums whether you use these first dollar benefits or not.

Think of it this way. You probably drive a car or truck. I would hope that you have it insured. Most likely, you are concerned with repairing or replacing your vehicle if severely damaged, and protecting yourself from liability exposure if you damage property of or cause injury to another party. Think for a moment about how much more premium would have to be charged to cover oil changes, tire replacement, other wear and tear, mechanical failure and every little scratch and paint chip for a $10 copay. Most people would take no responsibility for routine maintenance and would not take any kind of care of their vehicle, after all, someone else is going to pay for anything that happens. Those premiums would be outrageous and this is essentially what happens with gold standard health plans.

Health insurance is probably your most important coverage since it can be the difference between life and death.

Fortunately, most employers offer some form of health insurance. Often you will have to select from several different alternative plans with differing coverages and premiums.Often, coverage for the employee is subsidized and the employee's cost to insure himself or herself is reasonable. Providing family coverage, on the other hand, can be quite expensive.

Health Savings Accounts (HSAs) and Medical Savings Accounts (MSAs).

HSAs were introduced in 2004. HSAs are similar to and have replaced Medical Savings Accounts (MSAs). MSA eligibility was restricted to employees of small businesses and the self-employed while HSAs are open to everyone with a qualified high deductible health insurance plan.

First, you should understand that there are two separate parts. The first part is the qualified High Deductible Health Plan (HDHP). The second part is the Health Savings Account (HSA). You must be covered by a HDHP in order to open and make contributions to an HSA.

The interest and investment earnings, or growth, generated by the account are tax deferred meaning that they are not taxable while in the HSA. Amounts distributed are not taxable as long as they are used to pay for qualified medical expenses. Amounts distributed which are not used to pay for qualified medical expenses are treated like early distributions from a qualified plan and will be taxable. In addition, a 10% tax penalty will be applied in order to discourage the use of the HSA for non-medical purposes.

Balances remaining in the Health Savings Account can be used for retirement income at or after age 65. The distributions will be taxable at that time but will not be subject to the 10% penalty.

Definitions and Terms

Actual Charge: The amount a physician, hospital or other provider of medical care actually charges for a service or supply.

Ambulatory Care: Medical services provided on an outpatient (non-hospitalized) basis. Services may include diagnosis, treatment, surgery and rehabilitation.

Annual Benefit Cap or Annual Benefit Maximum: A dollar amount limit or cap that specifies how much benefit a health insurance plan will pay in a calendar year. These are used to limit an insurance companies exposure to very large claims. This will result in a lower premium but at the expense of the insured assuming greater risk. Beware of these because even if a policy states a lifetime benefit cap of $5,000,000 but limits the annual cap to $100,000 you can be left exposed to tremendous out-of-pocket expenses.

Authorizations: Consent or endorsement by a Primary Care Physician for patient referral to ancillary services or specialists. These apply primarily to Health Maintenance Organizations (HMOs)and Point of Service plans (POS).

Benefit: The amount an insurance company pays to a claimant, assignee or beneficiary when an insured suffers a loss covered by the policy.

Centers of Excellence: Providers, usually hospitals, who are selected to perform certain specialized procedures because of their expertise and willingness to provide discounts. Examples include cancer, specialized heart procedures or heart and other organ transplants.

COBRA or Consolidated Omnibus Budget Reconciliation Act of 1985: A federal law that requires most employers with 20 or more employees to allow eligible employees and their beneficiaries to continue to self-pay for their group coverage after it would have normally terminated. Length of continuation depends upon circumstances and will be 18, 24, 29 or 36 months.

Co-Insurance: This is a percentage split after the deductible has been met. The insurance company agrees to pay a certain percentage of claims and you are responsible for the balance. For example, a plan with 80/20 coinsurance pays 80% after the deductible has been met and the insured pays 20%. There is usually a stop loss feature that states that the insurance company will pay 100% after a specified dollar amount of claims has been met. The most common designs are 80/20 co-insurance up to either $5,000 or $10,000.

Co-Insurance Limit:

Co-Pay or Co-Payment:


Explanation of Benefits or EOB:

HMO- See Health Maintenance Organization

Health Maintnance Organization or HMO:

Health Savings Account or HSA:

High Deductible Health Plan or HDHP:

Negotiated Rate:

Out-of Pocket Expenses:

Out-of-Pocket Maximum:

POS: See Point-of-Service

Point-of -Service or POS:

PPO: See Preferred Provider Organization

Preferred Provider Organization or PPO:

Preauthorization or Precertification:

Stop Loss:

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary, therefore, the information should be relied upon when coordinated with individual professional advice.