The 6 Functions of Health Insurance



Huge differences in health-care spending reflect this disparity. In 2016, the richest 5% of health-care spenders in the United States accounted for 50% of total spending, or about $50 000 per individual. According to health spending, the lower half of the population accounted for only 3% of overall health spending in 2016, or $276 per person. People in both groups purchase health insurance, but the benefits they receive are not the same.

Our health insurance system performs at least six functions to enable everyone to benefit from being insured, in addition to helping individuals keep well and improve their health when they get sick. However, these functions are not necessarily compatible.

1. Individuals with catastrophic health events are financially protected.

Individuals are protected by health insurance, just as they are by vehicle insurance, from unforeseeable and financially devastating catastrophes. Catastrophic health occurrences, like vehicle crashes, are uncommon and impossible to forecast, and their costs are well beyond most people’s means. Drugs to treat cancer or multiple sclerosis can cost over $10,000 per month, which is prohibitively expensive for all but the wealthy. Organ failure that necessitates a transplant might cost hundreds of thousands of dollars. Capping yearly out-of-pocket payments, eliminating lifetime benefit restrictions, and ensuring coverage for those with previous diseases are all policies aimed at strengthening this function of health insurance.

2. Access to a large number of people for a minimal charge. 

Although the basic aim of insurance is to provide protection against catastrophic catastrophes, health insurance in the United States serves a function that is more akin to a club membership than car insurance. Beneficiaries gain access to free or low-cost services, such as basic doctor visits, in exchange for an annual fee. These services are typically predictable, such as well-child visits for parents with youngsters or medication refills for persons taking cholesterol-lowering drugs. The goal of policies geared at the club membership function is to tailor policies to the demands of members. Enrolling in Part D prescription drug coverage, for example, requires Medicare beneficiaries to identify the prescriptions they are already taking in order to find the plan that best subsidizes those goods.

3. Dealing with health-care providers.

Health insurers use their bargaining position to get price concessions from physicians, hospitals, and health-care systems, or to screen high-cost providers out of their networks. Even if patients pay out of pocket for services, they are eligible for these reductions (with the exception of prescription drugs, for patients often pay list prices even when they have insurance). Policies that focus on this aspect of health insurance have an impact on clinicians’ and hospitals’ negotiating power with insurers. Medicare, for example, uses fee schedules to determine payment rates rather than allowing health-care providers to utilize their market power to raise prices. The Affordable Care Act (ACA) pushed insurers to build “narrow” networks. Commercial plans might benefit from networks of clinicians and hospitals that can help them negotiate reduced costs. Consolidation of insurance companies also improves the insurer’s negotiating position.

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4. Improving and ensuring clinician and hospital quality. 

Measurement efforts have been created by both commercial and government insurers with the goal of monitoring and improving hospital quality. Quality ratings that help patients and plans choose which hospitals to use, as well as the exclusion of specific hospitals from delivering particular treatments based on quality, are examples. There are quality ratings for Medicare Advantage programs. Medicare only allows facilities with sufficient volume and experience to undertake the transcatheter aortic valve replacement surgery. More thorough measures and quality measurement are the focus of policies aimed at this role of health insurance.

5. Encouraging people to maintain their health. 

Health insurers have been experimenting with benefit designs that incentivize healthy behavior for the past decade. This includes discounts on premiums for people who join health clubs or quit smoking. Another example is value-based insurance design (VBID). Individuals with VBID-style policies pay little or no out-of-pocket for health care that are deemed helpful, such as preventive services and certain medications that avoid consequences from diseases like diabetes.

6. Transfer of wealth.

Health insurance is a large-scale wealth transfer tool. The wealthiest pay more in taxes to fund Medicare and Medicaid than the poor. The wealthy, on the other hand, gain disproportionately from employer-paid health insurance premiums that are subsidized by the government. Policies, such as the present debate over the “Cadillac tax,” which would limit the tax subsidy for extremely generous insurance plans, frequently target these transfers. For example, under the Affordable Care Act, premium differentials between young and old were limited to 1 to 3, but one of the bills meant to repeal the ACA proposed increasing the ratio to 1 to 5. (lessening the wealth transfer from younger to more elderly individuals). Subsidies for rural hospitals help to move money from cities and suburbs to rural areas.

Health insurance, of course, works by risk pooling, or moving resources from the healthy to the sick.

The fact that health insurance serves so many distinct purposes may explain why policymakers can come up with such divergent reform proposals. The goal of providing better catastrophic financial protection, which relies on pooling the risk of many people who will not be affected, is at odds with the goal of selling insurance that is highly personalized to a patient’s predicted needs. Encouragement of narrow networks may result in reduced prices, but it comes at the expense of eliminating high-quality providers (if prices are concordant with quality).

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While the following list attempts to summarize the functions of health insurance in the United States, it would be significantly more concise if we simply discussed what health insurance does well. Although insurers may negotiate lower unit rates, health-care costs in the United States are still higher than in other wealthy countries. Despite the fact that many people have prescription drug insurance, Americans are six times more likely than people in other nations to avoid taking prescriptions because of out-of-pocket costs. Similarly, insurance may be intended to encourage people to adopt better habits, but the United States has higher rates of diabetes, obesity, and maternal mortality than Europe.

Even with quality-control measures in place, the maternal death rate in the United States is more than three times higher than in Canada, France, or Australia.

Of fact, discussing the functions of health insurance ignores a sizable portion of the population in the United States: the 29.3 million people who have no health insurance at all.

Types of Health Insurance

1. Health Insurance for Individuals

Individual Health Insurance in India is a distinct health insurance plan purchased for each family member that provides a separate sum promised. Groups and organizations are not eligible for this sort of health insurance. Pre- and post-hospitalization, pregnancy and new-born, emergency medical services, critical illnesses, diagnostic tests, doctor’s consultation fees, and many other things are covered under the Individual Health Insurance plan. Health insurance is becoming mandatory in India due to soaring medical prices. After all, it provides financial security, preventive healthcare, prescription drug coverage, cashless treatments, and tax advantages.

2. Health Insurance for Families

Family Health Insurance, also known as a Family Floater Plan, is a sort of health insurance that covers you, your dependent children, your spouse, and your dependent parents for a set price against illnesses and other disorders. In a nutshell, this plan protects all members of your family under a single umbrella. The premium for your family floater plan is determined by the sum guaranteed and the age of the oldest family member. Benefits include the restoration of exhausted coverage, the simple addition of a new family member, a refund on a high amount-guaranteed, a rise in the sum assured, day-care treatments, daily cash allowance, ambulance expenses, in-patient hospitalization, and more.