Health Insurance Basics
Health insurance is offered through private commercial insurers, service organizations, or the government as outlined below:
- Commercial Insurance Companies
- Service Organizations - HMOs and PPOs
- Government (Federal) - Social Security Disability Income, Medicare, TRI-CARE (which absorbed the former CHAMPUS program in the 1990s)
- Government (State) - Medicaid
Commercial insurers
Some insurance companies specialize in only one or two types of insurance, but most offer both life insurance and health insurance. Health insurance may be offered through either an individual or a group policy, with certain provisions common to both. The unique characteristics of group health insurance will be discussed later in the text.
Service providers
Some organizations provide protection against the financial loss caused by illness and accidents, similar to private insurance companies. However, these organizations differ from private insurers in important ways. Examples of service providers include health maintenance organizations (HMOs) and preferred provider organizations (PPOs).
Government insurers
Federal, state, and local governments provide social insurance to segments of the population who might otherwise be without coverage.
- The federal government offers TRICARE for military members and their families, as well as Medicare, which is the health insurance part of Social Security.
- State governments provide unemployment insurance, workers’ compensation programs, and state-run medical expense insurance plans for the financially needy (Medicaid).
Health insurance is a broad term that includes:
- Medical Expense Insurance
- Accidental Death and Dismemberment Insurance
- Dental Insurance
- Long Term Care (LTC) Insurance
- Disability Income Insurance
In all forms, health insurance offers protection against financial loss resulting from illness or accidental injury.
Underwriting
Like life insurance underwriters, health insurance underwriters analyze applicants to determine whether they represent an insurable risk. Underwriters decide whether an applicant is insurable and, if so, at what rate.
Many of the same applicant characteristics and hazards matter to both health and life underwriters, but often for different reasons.
Age
Age can directly affect expected health. Very young and very old people tend to become ill more often than people in the middle age ranges, and their illnesses may last longer or be more severe.
Gender
Federal law now requires health insurance to use a unisex rating. Premiums cannot differ by gender.
Financial status
Especially with disability income insurance, the applicant’s current income relative to the amount of insurance being applied for is important in underwriting.
Occupation
Occupation matters to the health underwriter for obvious reasons. This applies whether the applicant is seeking medical expense reimbursement insurance or disability income insurance. If an applicant for disability insurance has two jobs, the policy will usually be underwritten based on the more hazardous occupation.
Medical condition
The most significant factor in evaluating a health insurance application is the applicant’s current physical condition and past medical history.
Other factors
Health underwriters are concerned about moral and morale hazards, just as life underwriters are. For example:
- What are the applicant’s hobbies and avocations?
- Does the applicant drink alcohol excessively or abuse drugs?
Answers to many of these questions come from the application. Health underwriters also use the same resources as life underwriters, including the Medical Information Bureau and consumer investigation reports.
Underwriting the substandard risk
Health underwriters have several options for setting rates for applicants who represent a substandard risk. Techniques for handling substandard risks include:
Exclusions
If an applicant appears to be at particularly high risk for a certain illness or injury, the underwriter may propose excluding that illness or injury from coverage. For example, a person with a history of back problems might be offered a health policy that excludes coverage for spine-related medical expenses.
Modification of coverage
Insurers may offer a policy that is modified to reflect the greater risk posed by the applicant. Unlike an exclusion, a modified policy does not remove coverage for a specific illness. Instead, it may reduce benefits paid for certain medical care if the applicant appears predisposed to claims for a specific medical problem.
Extra premiums
When possible, most insurers prefer to handle substandard risks by charging an extra premium (rating) while providing full coverage.
Health insurance claims
The challenges facing the health claim examiner differ from those of the life claim examiner. With life insurance, if the insured has died within the terms of the policy, the death benefit is paid.
Health insurance claims involve more variables. The cost of medical care depends on the type and severity of the illness or injury. Claims can also be complex, with bills coming from multiple providers. The claim examiner must review each bill to determine whether it is a covered expense and whether it falls within the policy’s coverage.
The principle of indemnity states that no one should profit from an insurance claim. Some insureds have coverage through two or more policies. When that happens, claim examiners must communicate to ensure the combined amount paid does not exceed 100% of the medical expense.
Through “Other Insurance” clauses:
- One policy is designated the primary insurance and pays its full policy obligations.
- Any other insurance then pays only the amount needed to bring the total benefit paid to no more than 100% of total costs.
Other considerations depend on the type of health insurance involved. Disability claims present challenges that differ from medical expense reimbursement claims. As you review each type of health insurance in detail, these unique considerations will become evident.
Lesson summary
Health insurance is offered through various avenues including commercial insurance companies, service organizations, and government programs. Here is a breakdown of how health insurance is provided:
-
Commercial Insurance Companies
-
Service Organizations (HMOs and PPOs)
-
Government (Federal)–TRICARE (which absorbed the former CHAMPUS program in the 1990s). Social Security Disability Insurance (SSDI) is not health insurance; it’s a cash benefit and generally confers Medicare eligibility after a 24-month waiting period (limited exceptions apply).
-
Government (State)–Medicaid
Health insurance encompasses various types of coverage such as medical expense insurance, dental insurance, disability income insurance, and more to protect against financial losses due to illness or injury. Underwriting for health insurance involves evaluating factors like age, gender, financial status, occupation, and medical condition to determine insurability and rates.
For applicants deemed substandard risks, health underwriters have options such as exclusions, modifications of coverage, and charging extra premiums. Health insurance claims are subject to a different set of challenges compared to life insurance claims due to the complexities of medical care and potential overlapping coverage from multiple policies.
An important principle is indemnity, ensuring that no one profits from an insurance claim. Coordination between different insurers is necessary to prevent overpayment, designating primary insurance and coordinating payouts to avoid exceeding total costs.
Each type of health insurance, whether medical expense insurance, accidental death and dismemberment insurance, dental insurance, long term care insurance, or disability income insurance, presents unique challenges regarding claims processing.