What exactly does your health insurance provider do, and what does it matter to you? In this multi-part series, we discuss in detail the 8 primary functions of your health plan:
- Negotiate prices with a network of doctors and hospitals.
- Design insurance plans.
- Set premium rates for the insurance plans it offers.
- Collect premiums.
- Monitor the use of medical services by members to make sure expenses are appropriate and allowable.
- Pay claims submitted by its network of doctors and hospitals on behalf of its members.
- Deny claims, in some cases.
- Return money to shareholders and pay executive salaries.
In the first post in this series, we began with an examination of your health insurance provider’s role in creating healthcare networks of hospitals and other providers (primary function 1). That network plays an important part in its members’ cost of healthcare.
Now, let’s take a deeper dive into the other part of your healthcare cost burden: monthly premiums and cost sharing based on your insurance plan. We will address primary functions 2, 3 and 4 in this second installment of “What You Should Know About Your Health Insurance Provider.”
WHAT DOES YOUR MONTHLY HEALTH INSURANCE PREMIUM PAY FOR?
The amount of money you pay each month for your health insurance is determined by your insurer. This figure is a combination of many factors, and it amounts to more than what your actual medical expenses are projected to be. Shockingly, a report released earlier this year states that just over 23% of healthcare premium spending is on prescription drugs. This highlights an increasing concern over rising drug prices and how they affect insurance affordability.
So, what does your health insurance premium pay for? A lot more than just your medical care. Health insurance companies calculate your monthly premium by estimating what they are likely to have to spend on medical care for you in the coming year, and then they add a bunch more to pay for administrative fees, executive salaries and shareholder profit. The insurance company’s profit is the amount it charges you over and above what it expects to pay out to doctors and hospitals.
HOW DO INSURANCE COMPANIES DESIGN HEALTH PLANS?
Health insurance plans are complicated, and that’s exactly what health insurance providers want. They design complex charts filled with services, coinsurance amounts, deductibles, and maximum out of pocket expenses, leaving it up to the health plan enrollee to determine what best suits them.
Most often, cost is a primary factor for enrollees. Your health insurance company knows this, in fact, they count on it. It isn’t a coincidence that nearly 80% of us are over insured by roughly $600 each year.
Value-based care initiatives affect the way that health insurance plans are designed. For example, certain preventive wellness measures are covered at 100% with the belief that this will decrease greater medical expenses (to the health plan) down the road.
Insurance companies design health plans in three parts:
- Annual Deductible
Your annual deductible is a set dollar amount that you must pay before your health insurance covers any of your medical bills. Annual deductibles are divided by an amount you pay for an individual or a family, and they reset every year (much like other types of insurance, such as auto or homeowner’s).
Example: If your daughter has a rash and you bring her to the pediatrician before you have met your $2,000 deductible, you will be billed $87 for the check-up (the “special” negotiated rate your insurance company cut with your provider). If this is your first visit to a doctor in the calendar year, your deductible is now $1917. Your insurance company loves it when you do not meet your deductible, because they have collected a premium from you for 12 months and not paid any part of your medical bills.
- Bill Split (Copay or Coinsurance)
If you meet your deductible, you move into the next element of your health insurance plan, which is how you split your medical bills with your insurer. The terms used here are copay or coinsurance. A copay is a set dollar amount that you pay for medical visits. Coinsurance, on the other hand, is a percentage you pay of the total cost.
Example: If you have a $20 copay, that’s what you would pay at the pediatrician. If you are responsible for 20% coinsurance, you’d pay slightly less – $17.40. This assumes a trip to your pediatrician would be $87 out-of-pocket. It’s safe to say that your insurance company will try to pay as little of your medical bill as possible.
- Maximum Out-of-Pocket
Maximum out-of-pocket is the most you can pay for covered services in the calendar year. Similar to deductibles, these maximum out-of-pocket amounts are different for an individual and a family. If you meet the maximum out-of-pocket amount, your insurance company pays for 100% of your covered medical care. This is a scenario your insurance company hates.
“In addition to high health care costs as a consequence of the largely unregulated bilateral oligopolies in most local markets in the US, health costs are high also due to the high administrative costs of private health insurers.” – AnEconomicSense.Org
The impact health insurers have on public health when they design health plans is significant. “The welfare impact of these benefit design decisions are potentially very large as the level and nature of consumption of health care services critically depends on how health insurers design their products in equilibrium,” according to the authors of “Externalities and Benefit Design in Health Insurance.”
What this means is that if a plan is inaccessible to an enrollee (perhaps, because out-of-pocket costs are too high), that enrollee is less likely to use their insurance. Who does that benefit? Insurance companies.
WHAT’S THE DIFFERENCE BETWEEN A GOLD, SILVER, OR BRONZE PLAN?
Many of you are familiar with the different “tiers” for health insurance plans that were introduced by the Affordable Care Act. Each tier is named after a precious metal, with the most precious metal (platinum) presumably indicating that a plan covers more medical expenses than the least precious metal, bronze. These tiers were supposed to make it easier for consumers to comparison shop.
The problem with labeling plans in this way is that consumers associate price with value. A gold plan is surely better than a bronze plan, right? The answer is, “It depends.”
- It depends on how much more expensive the premium is for the gold plan and on the type and quantity of medical services you will need.
- It depends on your specific healthcare needs, including what types of medication you take.
Why are there so many different plans? Although each health insurance company offers dozens, maybe even hundreds of different plan designs, evidence shows that having so many options is not in your best interest. Without the proper tools (sometimes called “health finders” or “benefit decision support tools,” though not made equally), the chance that you’ll pick the right plan for your actual medical usage is statistically stacked against you.
”If you are simply sticking with an old plan with a low deductible, that may well be a wrong and costly choice.” – NY Times
Rather than helping consumers, the tiers cater more to the health insurance companies themselves. In fact, the plan levels relate to actuarial values. Your insurance company uses complicated mathematical models based on actuarial tables to predict the likelihood of different costly medical events.
This means that they have a pretty good idea how much they will spend to provide medical care for a risk pool (a risk pool is the entire group of people that are covered by an insurance plan). Based on their knowledge, they design health insurance plans. They do this to drive profit, not value to you the consumer.
A CLEAR DIFFERENCE
Why are we telling you this? Because there’s a better way to choose your health insurance. Clear Health Analytics offers Daizy, a health plan decision tool that gives users health plan choices that suit their actual needs.
Get a clearer picture of your health care options. Learn more here.
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