Can you explain how health insurance works?

Explaining a health insurance plan in detail could fill volumes, but explaining the basics is fairly simple to do. Bear in mind that this explanation is a simplified explanation, and may not go into the specifics of how your premiums are used, the type and quality of care you receive, or other factors.

Consider a common HMO plan. In essence, it works much the same as a savings account in which many different people contribute. As the premiums are paid into the account, the cash value grows and in turn earns more interest. This allows the value of the coverage to increase, which in turn makes it possible to pay the medical bills of the HMO members. Maintenance and administration costs for the health insurance group are deducted from the group account, and the remaining value of the account is used for the payment of medical costs. However, since the cost of medical care can be very high, especially for certain procedures, the account would be quickly drained.

To prevent this draining the group health insurance account, the cost of medical care is offset by member participation in the form of copays and coinsurance. With copays, a relatively small percentage of each procedure must be paid by the insured. This does not cover the cost of the procedure, but it does reduce the costs enough to allow the group account to continue to grow and be of use to others. Coinsurance is a further limiting factor where the person receiving care is responsible for paying a defined percentage of the cost. Coinsurance and copayments combined eliminate the financial drain on the account so that the HMO remains effective for all members. Without these devices, the HMO would not be able to continue paying for medical care and the plan would become bankrupt.

When you make a doctor's appointment, or after receiving treatment, you will then be asked for you insurance information. This gives the caregiver the necessary information to file the costs with your insurer and receive payment in your name. If your health insurance requires copays or has a coinsurance factor, the next step is for you to pay those amounts. The same is true of deductibles, based on the idea that minor costs, which could be a major burden for health insurance, are referred back to the patient, reserving the majority of the group account for more expensive procedures.

This why most policies include limits. When you enroll in the plan, your health insurance group is categorized according to the collected statistics of medical care. These statistics indicate that an average person would require a specific amount of care over a defined period of time, and the limits of your policy correspond to that amount of care.