In the national debate over the rising cost of health care, the question of how health insurance companies work is very rarely addressed from a factual basis. Rather, proponents on all sides of the argument talk about things like the consumer’s right to healthcare, the uncaring nature of insurance companies, and whether or not the federal government should be involved.
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Lost in the discussion about health insurance is the fact that insurance is a business. This is a point that cannot be left out of the equation if Americans are to have an honest discussion about health insurance.
Businesses require money to operate and profit to continue operating. Without those two ingredients the entire health insurance industry collapses, leaving everyone uncovered regardless of their age, skin color, sex, or education level.
The Mechanics of Health Insurance
The Learning Channel’s “How Stuff Works” describes health insurance as a “gamble” between you, your health care providers, and your insurance company. The idea behind the gambling comparison clearly illustrates four things:
- you are paying your health insurance premiums in the hope you’ll be covered
- your doctor provides you healthcare services and hopes he’ll be paid
- your insurance company collects premiums from you with the hope that they will take more in than they pay out
Therefore, all three entities involved are assuming a certain amount of risk.
Health insurance is a contract between you and your health insurance provider. You are agreeing to pay monthly premiums in exchange for your provider’s guarantee to pay your medical bills up to the limits prescribed in the policy. The practical mechanics of this arrangement dictate that your insurance company collects premiums from all its customers and then pays their bills collectively as they use healthcare services.
Third Party Payment System
The Merriam-Webster Online Dictionary defines insurance as a “contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.” The historic nature of insurance policies in the United States suggests that what most of us know as modern health insurance is really not insurance at all. Rather, we have health plans which serve as nothing more than third party payment systems.
In other words, classic health insurance provides monetary protection against financial loss in the event of some unknown event in the future. Your homeowners insurance will cover you against the loss from a fire; your automobile insurance protects you in case of a future accident; business insurance covers you against financial loss in the event of a future lawsuit.
In all three of these cases, insurance company payouts are never guaranteed. They are always contingent on the actual occurrence of a future peril.
The first health insurance policies in the United States were developed on the same principles. However, today’s HMO (Health Maintenance Organization) insurance plans don’t work the same way.
Rather than protecting you against some future peril, health insurance companies are trying to prevent such future peril by managing your routine health care costs. So what we have is not traditional insurance, it is simply a system whereby your health insurance provider acts as a middleman to pay your bills.
Comparing Current Health Insurance with Auto Insurance
To help you understand our current system, consider what your auto insurance policy would look like if it was structured like your health insurance. With auto insurance, you only receive a check from your insurance company if you have an accident. If your auto insurance was structured like your health insurance, it would pay for your gasoline, your new tires, the new stereo and CD changer, and so on.
The structure of the modern HMO is one of the largest contributing factors to the skyrocketing cost of health care in America. Since most of us never see our hospital bills we have no idea that a routine test for something like strep throat can cost hundreds of dollars.
If we were forced to pay these bills ourselves, most of us would quickly come to realize that there are lots of things we are opting for that are completely unnecessary. Health care costs would come down very quickly as a result.
Health insurance companies operate by collecting enough premiums to make the investments necessary to cover all of their payouts. But since most of them operate like third party payment systems, their investments rarely keep up with payouts. Therefore, they must collect more in premiums in order to stay in business.
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