Purpose and Need for Health Insurance
Health insurance is a critical component of financial planning, protecting individuals and families from the potentially devastating costs of medical care.
The Healthcare Cost Crisis
Healthcare costs in the United States continue to rise significantly:
| Year | Average Annual Premium (Family) | Average Deductible (Single) |
|---|---|---|
| 2010 | $13,770 | $917 |
| 2015 | $17,545 | $1,318 |
| 2020 | $21,342 | $1,644 |
| 2024 | $25,572 | $1,735 |
The Risk of Being Uninsured
| Scenario | Potential Cost |
|---|---|
| Emergency room visit | $1,000 - $10,000+ |
| Appendectomy | $15,000 - $40,000 |
| Heart attack treatment | $50,000 - $200,000+ |
| Cancer treatment (annual) | $100,000 - $1,000,000+ |
| Childbirth (uncomplicated) | $10,000 - $30,000 |
Key Point: A single major medical event can lead to bankruptcy for uninsured individuals.
Types of Health Risk
Health insurance addresses multiple types of financial risk:
Medical Expense Risk
The risk of incurring medical expenses due to:
- Illness or disease
- Accidents and injuries
- Preventive care and wellness
- Chronic condition management
- Prescription medications
Income Loss Risk
The risk of losing income due to:
- Inability to work during illness
- Recovery time after surgery
- Long-term disability
- Mental health conditions
The Insurance Solution
Health insurance transfers financial risk from the individual to the insurer through the pooling of risk:
| Concept | Description |
|---|---|
| Risk pooling | Large groups share the cost of healthcare |
| Premium | Regular payment for coverage |
| Benefits | Payments made by insurer for covered services |
| Cost-sharing | Portion of costs paid by insured |
How Risk Pooling Works
Example: 10,000 people pay $500/month = $60 million annual premium pool
- 9,500 have minimal claims ($20 million)
- 450 have moderate claims ($15 million)
- 50 have major claims ($25 million)
Total claims: $60 million (balanced by premiums)
Types of Healthcare Coverage
Medical Expense Insurance
Pays for costs of medical treatment:
| Coverage Type | Description |
|---|---|
| Hospital expense | Room, board, nursing care |
| Surgical expense | Surgeon and operating room fees |
| Physician expense | Doctor visits and consultations |
| Major medical | Comprehensive coverage with high limits |
| Comprehensive medical | Combines basic and major medical |
Disability Income Insurance
Replaces income when unable to work:
| Feature | Description |
|---|---|
| Short-term disability | Coverage for weeks to months |
| Long-term disability | Coverage for years or until retirement |
| Benefit period | How long benefits are paid |
| Elimination period | Waiting period before benefits begin |
Supplemental Coverage
Fills gaps in primary health insurance:
| Type | Purpose |
|---|---|
| Dental insurance | Covers dental care expenses |
| Vision insurance | Covers eye exams and eyewear |
| Critical illness | Lump sum payment upon diagnosis |
| Hospital indemnity | Fixed daily benefit during hospitalization |
| Accident insurance | Benefits for accidental injuries |
Sources of Health Insurance
Employer-Sponsored Insurance
- Most common source of coverage in the U.S.
- Employer typically pays portion of premium
- Group rates generally lower than individual
- Subject to ERISA regulations
- Continuation rights under COBRA
Individual Insurance
- Purchased directly from insurer or marketplace
- Individual underwriting may apply
- ACA protections for essential health benefits
- Premium tax credits may be available
- Guaranteed issue during open enrollment
Government Programs
| Program | Eligibility |
|---|---|
| Medicare | Age 65+, disabled, ESRD |
| Medicaid | Low-income individuals/families |
| CHIP | Children in families above Medicaid limits |
| TRICARE | Military members and families |
| VA Healthcare | Veterans |
The Affordable Care Act (ACA)
The ACA (2010) significantly reformed health insurance:
Key ACA Provisions
| Provision | Description |
|---|---|
| Guaranteed issue | Cannot be denied for pre-existing conditions |
| Community rating | Limited premium variation |
| Essential health benefits | 10 categories of required coverage |
| Preventive care | Required without cost-sharing |
| Dependent coverage | Children covered until age 26 |
| Out-of-pocket maximum | Limits annual cost-sharing |
Essential Health Benefits (EHBs)
All ACA-compliant plans must cover:
- Ambulatory patient services
- Emergency services
- Hospitalization
- Maternity and newborn care
- Mental health and substance use disorder services
- Prescription drugs
- Rehabilitative services and devices
- Laboratory services
- Preventive and wellness services
- Pediatric services (including dental and vision)
Health Insurance Marketplace
The ACA created health insurance marketplaces (exchanges):
| Feature | Description |
|---|---|
| Open enrollment | Annual period to enroll or change plans |
| Special enrollment | Life events allow mid-year changes |
| Metal tiers | Bronze, Silver, Gold, Platinum |
| Premium tax credits | Subsidies based on income |
| Cost-sharing reductions | Lower deductibles/copays for qualifying individuals |
Metal Tier System
| Tier | Actuarial Value | Typical Use Case |
|---|---|---|
| Bronze | 60% | Low premiums, high cost-sharing; healthy individuals |
| Silver | 70% | Moderate premiums; qualifies for CSR subsidies |
| Gold | 80% | Higher premiums, lower cost-sharing |
| Platinum | 90% | Highest premiums, lowest cost-sharing |
Exam Tip: Actuarial value represents the percentage of average healthcare costs the plan pays. The rest is paid by the insured through cost-sharing.
What is the primary purpose of health insurance?
Under the ACA, until what age must health insurance plans allow children to remain on their parents' policy?
Which metal tier in the ACA marketplace has the highest actuarial value?
20.2 Key Health Insurance Concepts
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