Health Care and Ownership Society Page: 1, 2, 3, 4

1. What is health insurance?
2. Why do health insurance companies exist?
3. What might a standard individual health insurance policy look like?
4. What conditions must exist in order for companies to issue health insurance?
5. What is employer-sponsored health care and how did that system develop?
6. How does health insurance relate to an employee's health benefits package?
7. What is a Health Maintenance Organization (HMO)?
8. What is a Preferred Provider Organization (PPO)?
9. What was the "managed care backlash?"
10. What is a third party payer?
11. What is a Medical Savings Account?
12. What is a Health Savings Account?
13. What is a High Deductible Health Plan (HDHP)?
14. What are the benefits of HSAs for the account holder?
15. How will HSAs and HDHPs impact the health insurance market?
16. How will HSAs affect the Medicare program and its beneficiaries?
17. What can HSAs do to solve the "problem of the uninsured?"
18. Are HSAs only for healthy and wealthy people?
19. Can HSAs work for families?

What is health insurance?

Health insurance is a product that offers the purchaser the opportunity to defer risk or spread financial losses that result from severe injury or illness. More traditional forms of health insurance or "true insurance" are intended to protect against catastrophic financial losses-usually in the thousands to tens of thousands of dollars in a given year-that can bankrupt a family or individual, wipe out personal savings, or result in the loss of one's home, business, or property. In order to receive financial protection and the peace of mind it brings, the purchaser must pay a fee or monthly premium. The purchaser pays that premium even if he remains perfectly healthy; although he receives no medical services in return, he does enjoy the financial security and freedom, from fear of financial ruin, which his purchase brings. If the purchaser does get sick or injured, then he receives certain benefits, which-depending upon the contract-could include: medical, hospital, surgical, and emergency dental expenses. Some health insurance policies also pay financial benefits to compensate for loss of income, due to sickness or injury.

It is important to note that an insurance company can only insure against unforeseen events, such as disease or injury brought about by chance or accident, and cannot insure against anticipated medical costs, like yearly physicals, blood screenings, or other forms of preventative care. In recent decades, most health insurance has evolved to include preventative care as part of the benefits listed in the health insurance contract. As a result, health insurance has developed to take on the form of pre-paid health care, not true insurance. Premium and deductible levels have gradually increased to absorb the costs of these foreseen and predictable annual expenses. Although, the health insurance purchaser may not be aware of that fact, nevertheless, they are paying for those services in one form or another (either out-of-pocket spending or higher premiums and deductibles). The unfortunate result of that evolution in health insurance is it masks the actual cost of each procedure, doctor visit, or prescription, giving the individual an obscure sense of price, value, and quality. That has resulted in patient's dissatisfaction with both their providers and their insurers.

Why do health insurance companies exist?

Some companies are in the business of selling only health insurance, but many sell health insurance in addition to other insurance products. Insurance companies exist because most people are risk-averse and want to be able to predict their financial losses within a given year and across multiple years. That creates a market demand for protection from acute financial loss, or "risk-sharing." Before health insurance was invented, people had to save money for their future medical expenses, or rely on their family, community, or trade association in emergencies. The first health insurance pioneers were businessmen who invented methods of collecting monthly premiums, pooling risk among large groups of people, and paying out benefits to those who got sick. Given that few people will have extremely high medical bills in a given year period, everybody's premiums go to pay for the benefits of the sick. The money left over is used to pay salaries and other expenses, after which its remainder pays dividends to stockholders or to individual owners of the company.

Insurance markets create gains to trade between risk-averse customers and risk-neutral companies. Risk-averse people prefer the certain loss of a small amount of money to the equivalent probabilistic loss of a large amount of money. For example, the risk-averse person prefers the certain loss of $1,000 to the ten percent probability of losing $10,000 (.1 x $10,000 = $1,000) and therefore buys insurance. A risk-seeking person prefers the latter and deliberately does not buy insurance. A risk-neutral person is indifferent to either choice and therefore may or may not buy insurance.

What might a standard individual health insurance policy look like?

Let's say that an individual health insurance policy has a monthly premium of $50 ($600 per year) and a $500 total deductible. That means in a given year, the individual could expect to pay a minimum of $600 and a maximum of $1,100, making the individual's medical costs predictable and thus, less risky. The individual can budget for such predictable expenses and can therefore plan for the future. There is a wide variety of health insurance products on the market, therefore the dollar amount of premiums, deductibles, cost sharing arrangements, and co-payments can vary a lot, offering consumers the largest number of options for the widest variety of preferences.

What conditions must exist in order for companies to issue health insurance?

Certain conditions must exist in order for companies to be able to issue health insurance. First, people must have different preferences for risk. If all people were risk-neutral, then there would be no insurance market. Second, the company-which is risk-neutral-must take in more money in premiums than they pay out in benefits during a given period of time, which could be one year, or an average of several years. If expenditures, prices, or the composition of their risk-pool changes from year to year, they simply shift their premium rates accordingly. Third, risk-pools must be large enough to randomize the chances of large payouts, and to spread risk effectively. Fourth, in nearly all cases an insurance product must have a deductible or a certain amount of "first-dollar" costs that the policyholder must pay in addition to the monthly premiums. If the policyholder were not responsible for any first dollar expenses, then for the price of the total annual premium, the policyholder could consume unlimited amounts of medical care without ever questioning the necessity or total cost of such services, products, and procedures.

What is employer-sponsored health care and how did that system develop?

Employer-sponsored health care is a term that describes the current method through which most people in today's society purchase their health insurance. Many private sector, non-profit, and government employers offer their employees a benefits package in addition to their annual or hourly wages. It is helpful to think of these benefits not as "perks" but as an important part of one's compensation or total salary (in a broader sense). Those benefits usually are worth hundreds or thousands of dollars per year. For example, if your salary is $35,000 per year plus the equivalent of $5,000 per year in benefits, then you should think of your total salary or compensation as being $40,000 per year. An employee's benefits package might include health insurance, disability insurance, life insurance, 401 (k) retirement savings plans, profit-sharing, stock options, tuition reimbursement, day-care, maternity leave, paid vacation time, flexible spending accounts, transportation reimbursement and a number of other benefits.

In the early part of the 20th century workers usually received only wages in return for their work. People took money out of their wages and used it for health care, retirement savings, transportation, education, and insurance. People were more directly responsible for providing for their future financial needs and likely took greater care over planning for the future, selecting what to buy, and budgeting their income accordingly. During World War II, there was a government-imposed freeze on wages. Companies could no longer compete for better workers by offering better salaries or bonuses. Therefore, to attract better workers, they began offering "benefits" in the forms described above. Another advantage to businessmen was that health benefits given to their employees were not taxed. After wages were unfrozen, businessmen realized this tax-exemption was an incentive to continue providing a portion of the employee's total compensation in the form of health care. The tax-exemption on health care benefits eventually entrenched Americans in this system of employer-sponsored health care and third-party payments.

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