Understand the Concept of Health Insurance

It is pretty clear from questions we get about health insurance in California that a good explanation of insurance and how it works is needed.

Insurance (including health) is all about spreading risks.  Risk doesn't mean that something will happen but that there is a chance of happening.  We all individually have a risk or chance of a major illness.  Our behavior, life style, and genetics may affect that risk but it is never zero and rarely 100%.  We tend to be somewhere in between.  Very common misconceptions of insurance can be found in questions that are frequently asked to us.  The whole concept of insurance is that you will take your individual risks and spread them among many other people so that if they actually occur, you will not be overwhelmed.  You can either pay a $50,000 surgery bill once or pay a few hundred dollars a month in level premium.  You're essentially spreading your risks over a longer period of time.  

Let's look at some of the questions we receive.

I am healthy...Why should I get health insurance?  Like the stock market, past experience is no guarantee for the future.  Some things are out of our hands.  Accidents are a common example.  You may exercise regularly, eat well, and in general...take good care of yourself.  This does not mean that a car accident or some other type of injury can be avoided.  Insurance is there to cover the "What If".  Some people incorrectly assume the "What If" will never happen to them.  On average, each person will have a significant medical injury/illness every seven years.  It may never happen to you (rare) but the odds are not in your favor.  With each passing decades of a person's life, his/her medical expenses double on average.  This is why rates go up as you get older with age 60-64 being the most expensive time to insure (Medicare takes over at age 65 which helps reduce your out-of-pocket).  People, in general over-estimate their health and under-estimate their risk.  They also do not understand the costs involved.  Simple surgeries such as ACL repair (pretty common knee surgery as the result of injury) can run $20,000-30,000.  More involved procedures can be $100,000+.  The question is this...if that happens to you...can you afford to pay it?  Or more importantly, would you want to.  Will you lose your house or be in debt to the hospital for ever?  In California, one half of all bankruptcies are the result of a sudden illness or injury.

I don't have any claims...Why do my rates keep going up?  Again, you are spreading your risks among many other people in your general area, age band, and plan selection.  Your premium changes as a direct result of claims for that group of people (including you) and legislation passed by the State (such as mandated benefits).  By law, each carrier has to state their Loss Ratio which essentially says for every dollar of premium, how much goes directly to pay for medical services (i.e. doctor/hospital re-imbursements, RX re-imbursement, etc).  This number tends to stay pretty stable for the major health carriers and runs around 85%.   This means that for every dollar of premium, 85 cents is going directly to pay for claims.  The other 15% would be overhead, expenses, marketing, and profit (the non-profits have about the same Loss ratio which is interesting).  Rates are going up because the total medical expenditure has skyrocketed over the last 10 years.  Increasing advanced diagnostics (MRI's, PET scans, etc), hospital cost-shifting (for the un-insured), and brand prescriptions have been a big part of this.  In general, medical care is becoming more expensive relative to the rest of economy.  Medicare validates this and is under increasing pressure.

If I get sick, I will just get insurance then.  California health insurance is medically underwritten.  This means that you must qualify for coverage based on health.  Small Group and company insurance is guaranteed issue which means you do NOT need to qualify based on health.  If your health changes, you may not be able to qualify.  Aside from the potentially huge costs you already incurred, your options may be limited to Government plans which are very expensive and can have limits.  The best time to get insurance is when you're healthy.  This is especially common for maternity coverage.  We receive may inquiries from people who have found out they are pregnant.  We will be unable to qualify for individual/family coverage at that point.  Again, State programs such as AIM or MRMIP are required then. 

The carriers just raise rates to increase their profits.  Again, the profit margin of the large companies run around 4% (for those that are for-profit).  That rate changes very little.  What has changed is the way people use healthcare.  Keep in mind that a recent statistic estimated that 50% of health care costs are preventable or the result of lifestyle choices.  Lung Cancer and Diabetes are two of the mostly costly illnesses to treat and a large percentage are due to smoking and obesity (the latter is rapidly expanding in the U.S.)

Government sponsored or Single Payer health care would be better.  There are pro's and con's to every system.  Ultimately, the only thing that will reduce costs is if people collectively take better care of themselves (HSA's address this with an individual financial incentive...typically the only thing that works) or if care is rationed.  For example, in Canada, if you want an MRI, you go on a waiting list which typically runs 6 months.  There are more MRI's in Minneapolis-St Paul than all of Canada. The question with our current system is whether we can (or are willing to) afford this access to care.  The interesting thing is that people who are strongly in favor of Single Payer typically despise HMO's.  What they don't realize is that they are one in the same.  The reason Single Payer plans ration care is because they are fixed dollar.  You have an allotted budget for health care for the year.  You divvy up that budget ($25,000 million for MRI's, $1 billion for hospital, etc).  Let's say in our example, the $25m of MRI's affords 10 million MRI's.  That's the number...no more.  They ration care based on that.  HMO's are also fixed dollar plans.  Each doctor is given a certain amount per enrollee and he/she (or the medical group) works within that budget.  Our system increases the premium based on the claims but there is no rationing of care (although some management on behalf of carriers).  If a person medically needs 6 MRI's in a year (say to watch the advance or status of cancer), then that's what they get.  The issue with our system is cost (escalating) and uninsured.  Something must be done about the uninsured and the individual States will probably lead the way there.  Ultimately, there's no free ride in the universe.  You either must reduce medical costs or ration care in any system.  France has double the tax and unemployed we have.  Something has to give in either system and most likely, the best approach is in the middle.

Just to recap, Insurance, whether health, life, or disability is used to take your individual risks and spread over a large number of people and a longer period of time.  Instead of paying $50,000 one month (which would bankrupt many people), you pay $200 monthly.  We are taking out the peaks of medical costs and making it more manageable with a more stable monthly premium.  The health insurance carrier is essentially the entity that manages the incoming monthly premium and outgoing medical reimbursement for all the people in the risk pool.