Health insurance

Health insurance is a system used to manage the financial risks of medical expenses. It works by sharing these risks among a large group of people known as a risk pool. When many individuals join together, an insurer can estimate the total expected costs for sickness or injury. To pay for these benefits, the insurer establishes a routine finance structure. This structure usually involves collecting regular payments called premiums or using payroll taxes.

An insurance policy is a formal contract between a provider and an individual. This provider can be a private insurance company or a government agency. In some cases, a sponsor like an employer or a community organization signs the contract. These agreements can be renewed monthly or annually. Some private plans are lifelong, while national plans may be mandatory for all citizens. The contract specifies exactly which medical costs are covered in a document called an "Evidence of Coverage."

There are two primary ways these systems are funded: through taxes or through private payments. Private-funded plans include employer-sponsored programs, such as those under the Employee Retirement Income Security Act of 1974, known as ERISA. These ERISA plans are overseen by the U.S. Department of Labor rather than state regulators. If a person needs to appeal a decision, they can contact their Employer's Plan Fiduciary. If the issue remains unresolved, it can be escalated to the Department of Labor or even a federal court.

Understanding the specific costs of insurance requires knowing several technical terms. A premium is the amount paid to keep the coverage active. In the United States, five factors determine this price: age, location, tobacco use, enrollment type, and the chosen plan category. A deductible is the amount a person must pay out-of-pocket before the insurer begins to pay. For example, a person might have a $7,500 annual deductible.

Other costs include co-payments and coinsurance. A co-payment is a fixed fee paid every time a specific service is used, such as $45 for a doctor visit. Coinsurance is a percentage of the total cost that the insured person pays. For instance, a person might pay 20% of a surgery cost while the insurer pays 80%. Some plans also have coverage limits or an "out-of-pocket maximum." The maximum is a specific dollar amount where the insurer begins paying all remaining covered costs for the year.

Insurance plans also manage which doctors and medicines are used. An in-network provider is a doctor who has a contract to accept discounted rates from the insurer. Using these providers generally costs the patient less. Out-of-network providers have no such contract, so patients may face much higher bills. Insurers also use a "formulary," which is a specific list of drugs the plan agrees to cover. For some services, a patient might even need "prior authorization," which is a formal certification from the insurer before the service happens.

Different nations have developed very different models for health coverage. Australia uses a public system called Medicare, which is funded by a 2% tax levy on all taxpayers. In Quebec, Canada, prescription drug insurance is a universal requirement. A 2007 study by The Commonwealth Fund compared several countries, including Australia, Germany, and the U.S. The study found that the U.S. system is the most expensive but performs differently than others. Notably, the U.S. was the only country in that study without universal health insurance coverage.

These differences in design lead to different experiences for citizens. The study showed that people in the United States often face more out-of-pocket expenses and more denied insurance payments. They also deal with more paperwork and more disputes with insurance companies than people in other studied nations. All health systems attempt to manage spending through cost-effectiveness analysis. This helps ensure that the system remains functional even as costs change due to factors like age or low competition.