Medical Coverage 101: How Does Health Insurance Work?
Health insurance, like other forms of insurance, is a way to share risk. (“Risk” in the insurance context means the possibility that a person will incur large expenses.) By spreading risk across a group of individuals (for example, an organization’s employee population), insurance minimizes the risk that each participant takes. A large group can also rely on statistics and probability to determine how much it will need to pay for health care costs in a given year.
So, with the concept of “risk” in mind, health insurance is based on the idea that everyone pays a set amount, and that at any given time, enough money is available to pay participants’ claims for their routine health care needs (e.g., doctor’s office visits) and to meet the needs of the small percentage of employees that have large expenses.
For most of us, when we buy insurance – including health insurance – we acknowledge that we will likely pay more in premiums than we receive in benefits. We are willing to take this chance because it is better than the alternative: the possibility that a serious injury or illness will result in financial distress or ruin. And while we may not think our premium contribution or what we pay at the point of care is a “small” amount, it’s balanced out when we consider the costs of an emergency coronary bypass surgery ($27,300 average negotiated cost), knee replacement surgery ($13,000 average negotiated cost), or the average cost of a premature baby’s first year of life (15 times higher than a full-term baby).
