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Health insurance is a type of insurance whereby the insurer pays the medical costs of the insured if the insured becomes sick due to covered causes, or due to accidents. The insurer may be a private organization or a government agency. Market-based health care systems such as that in the United States rely primarily on private health insurance.

History and evolution

The concept of health insurance was proposed in 1694 by Hugh the Elder Chamberlen from the Peter Chamberlen family. In the late 19th century, early health insurance was actually disability insurance, in the sense that it covered only the cost of emergency care for injuries that could lead to a disability. This payment model continued until the start of the 21st century in some jurisdictions (like California), where all laws regulating health insurance actually referred to disability insurance.See California Insurance Code Section 106 (defining disability insurance).http://caselaw.lp.findlaw.com/cacodes/ins/100-124.5.html In 2001, the California Legislature added subdivision (b), which defines "health insurance" as "an individual or group disability insurance policy that provides coverage for hospital, medical, or surgical benefits." Patients were expected to pay all other health care costs out of their own pockets, under what is known as the fee-for-service business model. During the middle to late 20th century, traditional disability insurance evolved into modern health insurance programs. Today, most comprehensive private health insurance programs cover the cost of routine, preventive, and emergency health care procedures, and also most prescription drugs, but this was not always the case.

Private health insurance

The largest difference between private sector health insurance and life insurance is that for life insurance, a person may purchase guaranteed renewable insurance for the whole of the insured's life at a constant premium rate, while health insurance is generally purchased year by year with generally no assurance of renewability and if renewable no guarantee that premium rates will not increase.

Before buying health insurance, a person typically fills out a comprehensive medical history form that asks whether the person smokes, how much the person weighs, and has the person ever been treated for any of a long list of diseases. Applicants can get discounts if they do not smoke and live a healthy lifestyle, which might encourage some people to quit smoking or make other improvements in their lifestyle. The medical history is also used to screen out persons with pre-existing medical conditions.

A health insurance policy is a legal, binding contract between the insurance company and the customer.

Critics of private health insurance claim that this conflict of interest between the needs of insurance companies to remain solvent versus the needs of their customers to remain healthy is why state and federal regulation of health insurance companies is necessary. Some say that this conflict exists in a liberal healthcare system because of the unpredictability of how patients respond to medical treatment, but proponents of regulation argue that too many health insurance companies put their desire for profits above the welfare of the consumer or patient.

The following is a hypothetical example of a situation that might confront an insurance company: Suppose that a large number of customers of a particular insurance company contracted a rare disease and the hospital charged 10 million dollars a patient to treat them. The insurance company would then be faced with a choice of paying all claims without complaint (thus losing money and possibly going out of business) or denying the claims (thus outraging patients and their families, discouraging potential customers, and becoming a target for lawsuits and legislation).

Health insurance companies and consumer advocates agree that private health insurance faces unique problems. Health insurance companies use the term "adverse selection" to describe the tendency for sick people to be more likely to sign up for health insurance. Insurance companies say that asymmetry of information about a person's health and behavior is likely to lead to adverse selection and (ex-ante) moral hazard. Health insurance companies say, that in essence, those seeking health insurance are likely to be those with existing medical problems or those who are likely to have future medical problems, and that those who take out insurance may engage in risky behavior, such as smoking and excessive alcohol consumption, which an otherwise sane person would not do. Insurance companies say that the cost of providing health insurance to these bad risks raises the cost of insurance to the 'good' insurance risks, possibly pricing them out of the market, and could create a situation in a market where insurance was uneconomical for private insurance companies to provide.

Ex-post moral hazard is in essence the consequence of reduced prices for medical care. Since most insurance plans, whether public or private, reduce the out-of pocket cost of medical care, the behavior of individuals will be affected by those reduced prices. In the same way that people treat water with little care when it is very inexpensive, people will also tend to over-use medical care when the out-of pocket costs are small. Of course, medical care still needs to be financed, and so taxes or premiums will be higher than the optimal amount. This inflation of taxes or premiums to cover the choices made under subsidized prices is what is termed ex-post moral hazard, and is a different phenomena than the ex-ante moral hazard mentioned above.

Critics of private health insurance state that those who are sick should be able to get health insurance because they need it the most and that if everyone had health insurance, adverse selection would not be a problem.

With publicly funded health insurance the good and the bad risks all receive coverage without regard to their health status, which eliminates the problem of adverse selection, although it introduces a problem of moral hazard.

Insurance companies explain the economics of insurance by saying that, in general, if many sick people buy health insurance from a private health insurance company, but few healthy people buy it, the price of the insurance rises. (Critics of private health insurance point out that few sick people are allowed to buy health insurance). Insurance companies also say that if more healthy people buy health insurance, but few sick people buy it, the price drops. In other words, the price drops if more money goes in and less is paid out.

Because of advances in medicine and medical technology, medical treatment is more expensive, and people in developed countries are living longer. The population of those countries is aging, and a larger group of senior citizens requires more medical care than a young healthier population. (A similar rise in costs is evident in Social Security in the United States.) These factors cause an increase in the price of health insurance.

Some other factors that cause an increase in health insurance prices are health related: insufficient exercise; unhealthy food choices; a shortage of doctors in impoverished or rural areas; excessive alcohol use, smoking, street drugs, obesity, among some parts of the population; and the modern sedentary lifestyle of the middle classes.

In theory, people could lower health insurance prices by doing the opposite of the above; that is, by exercising, eating healthy food, avoiding addictive substances, etc. Healthier lifestyles protect the body from some, although not all, diseases, and with fewer diseases, the expenses borne by insurance companies would likely drop.

Under these circumstances, the consumer would hope to benefit from the savings; however, critics of private health insurance claim that too much of the insurance premiums are paid out in executive salaries or retained as profits by the company.

Common complaints of private insurance

Some common complaints about private health insurance include:

# Insurance companies do not announce their health insurance premiums more than a year in advance. This means that, if one becomes ill, he or she may find that their premiums have greatly increased. BUPA does not penalise indiviudals who claim but spreads the cost across the customer base.
# If insurance companies try to charge different people different amounts based on their own personal health, people will feel they are unfairly treated.
# When a claim is made, particularly for a sizeable amount, it may be deemed in the best interest of the insurance company to use paperwork and bureaucracy to attempt to avoid payment of the claim or, at a minimum, greatly delay it.
# Health insurance is often only widely available at a reasonable cost through an employer-sponsored group plan. This means that unemployed individuals and self-employed individuals are at a disadvantage.
# Employers can write some or all of their employee health insurance premiums off of their taxable income whereas traditionally individuals have had to pay taxes on income used to fund health insurance. This reduces the employee's bargaining power in negotiating service with the insurance provider and also increases their dependence on the employer.
# Experimental treatments are generally not covered. This practice is especially criticized by those who have already tried, and not benefited from, all "standard" medical treatments for their condition. It also leads to many insurers claiming or attempting to claim that procedures are still "experimental" well after they have become standard medical practice in many instances.
# The Health Maintenance Organization (HMO) type of health insurance plan has been criticized for excessive cost-cutting policies.
# As the health care recipient is not directly involved in payment of health care services and products, they are less likely to scrutinize or negotiate the costs of the health care received. To care providers, insured care recipients are essentially seen as customers with relatively limitless financial resources who don't look at prices. The health care company has few popular and many unpopular ways of controlling this market force.
# Some health care providers end up with different sets of rates for the same procedure. One for people with insurance and another for those without.

Publicly funded health insurance

Medicare

In the United States, government-funded Medicare programs help to insure the elderly and end stage renal disease patients. Some health care economists (Ewe Reinhardt of Princeton and Stuart Butler among others) assert that (the third party payment feature) these programs have had the unintended consequence of distorting the price of medical procedures. As a result, HCFA (the Health Care Financing Administration) has set up a list of procedures and corresponding prices under the Resource-Based Relative Value Scale (RBRVS).

Starting in 2006, Medicare Part D provides a program for the elderly to buy insurance for the purchase of prescription drugs. Critics have complained that the list prices of some drugs have increased dramatically in response to the increased funding that the net after insurance cost of many drugs have not decreased markedly. But for the purpose of insurance, if the risk of catastrophic high costs is truly shifted to the insurer, then the program can be said to be legitimate insurance.

Medicaid

While Medicaid was instituted for the very poor, beginning in 1972, the number of individuals in the United States who lacked any form of health insurance for any period during the year increased each year, every year with the exceptions of the years 1999 and 2000.

Common complaints of publicly funded medicine

# Price no longer influences the allocation of resources, thus removing a natural self-corrective mechanism for avoiding waste and inefficiency.
# Health care workers' pay is often not related to quality or speed of care. Thus very long waits can occur before care is received.
# Because publicly funded medicine is a form of socialism, many of the general concerns about socialism can be applied to this discussion.
# People are afraid that they cannot choose their own doctor. The state chooses for them.
# Countries which have publicly funded medicine don't do as much medical research and development as there is very low payoff to developing new drugs and medical techniques.
# By limiting the amount of money in the health care system through political mechanisms, shortages of health care resources (such as physicians, nurses, medical equipment, medical devices, pharmaceuticals, and hospitals) are more likely to occur.

Health insurance in the United States

According to the latest United States Census Bureau figures, approximately 85% of Americans have health insurance. Approximately 60% obtain health insurance through their place of employment or as individuals, and various government agencies provide health insurance to 25% of Americans."Income, Poverty, and Health Insurance Coverage in the United States: 2004." U.S. Census Bureau. Issued August 2005..

The shift to managed care in the U.S.

Through the 1990s, managed care grew from about 25% of U.S. employees to the vast majority.

Fewer U.S. employers offering retiree health benefits

According to 2000 U.S. census data http://www.cms.hhs.gov/TheChartSeries/03_Facts_Figures_1980_2000.asp#TopOfPage , the percentage of large firms (200 employees or more) offering health benefits to its retirees fell between 1988 and 2001 (excepting a spike in 1995).
*1988: 66%
*1991: 46%
*1993: 36%
*1995: 40%
*2000: 37%
*2001: 34%

Disparity in the rates of uninsured between U.S. states

According to 2000 U.S. census data http://www.cms.hhs.gov/TheChartSeries/03_Facts_Figures_1980_2000.asp , people living in the western and southern U.S. states are more likely to be uninsured.
*High (19%+) rate of uninsured: Alaska, Arizona, California, Florida, Idaho, Louisiana, Montana, New Mexico, Oklahoma, Texas, West Virginia
*Medium (14%-18.9%) rate of uninsured: Alabama, Arkansas, Colorado, Georgia, Illinois, Kentucky, Mississippi, New York, North Carolina, South Carolina, Virginia
*Low (7%-13.9%) rate of uninsured: all other states. Wisconsin and Rhode Island were tied for the lowest rates of individuals who lacked insurance at any point during the year (4% each).

Health insurance in Massachusetts

In 2006 Massachusetts signed into law legistration that requires all people to self-insure if they are not otherwise covered by an employer or other plan. Proponents of the legislation herald a solution to high levels of uninsured. Critics say people simply cannot afford it and this will take even more of their discretionary spending away.

References

External links

* Health insurance data from the US census
* History of Health Insurance in the United States
* Health Insurance and the acceptance of Alternative Medicine
* Maryland Health Insurance Resource
* Public's expectation from Health Insurance

Category:Insurance
Category:Healthcare
Category:Health economics
Category:Medicare and Medicaid (United States)