How Insurance Works

The more you understand about the basics of health insurance, the better prepared you’ll be to make informed decisions about your own coverage. Here’s a summary of how health insurance works.

Insurers Manage Risk

Having health insurance is a way to protect you against the “risk” that you may need very expensive healthcare. With a health plan, you limit your risk to predictable costs such as premiums, deductibles, coinsurance, and copayments. Here’s how insurers manage risk:

  • A lot of people buy insurance; some need a lot of healthcare and some need very little.
  • Insurers pool together all members’ premiums and use that money to pay the doctors, hospitals, pharmacies, and other healthcare providers that members visit.
  • Insurers use mathematical formulas to estimate healthcare costs over a large pool of people. Then they use their estimates to determine premium rates.
  • The more people in the pool, the more costs can be spread out—which may make premiums lower for each person.

Where Your Premium Dollars Go

Premium dollars are used in three ways:

  1. To pay for the healthcare services members use (claims).
  2. To cover the insurer’s cost of doing business claims processing, customer service, and other operating costs. This may also include investments to improve quality of care. For example, Blue Cross is investing money in primary care and patient-centered medical homes, which improves quality of care for our members.
  3. Reserves. All insurers are required to have money in reserve (savings) to cover very high claims costs if necessary. For-profit companies can also use remaining premium dollars as profit. (We are a nonprofit insurer, so any remaining dollars go into reserves.)

Under healthcare reform, regulations require that 80 to 85 percent of each premium dollar must be used to pay claims, and the remaining 15 to 20 percent can be used for operating costs.

How Claims Are Paid

Here’s a quick overview of how members’ healthcare services are paid:
1. When you go to the doctor, they submit a claim to your health insurer to be paid for the service. The claim has detailed information about what services were provided, by whom and when.
2. Your insurance company pays the claim based on rates it has negotiated with the doctors and other healthcare providers in its network. Insurance companies negotiate lower rates than you would pay on your own.
3. The insurer pays your doctor its share of the claim. You may also owe part of the claim as a copayment, coinsurance, or deductible. Your doctor will probably ask you to pay a copayment (a flat amount) at the time of your visit. However, coinsurance and deductible amounts vary based on the cost of the service and whether or not you have met your deductible, so the doctor may wait to see what the insurer pays before sending you a bill. If you do have a deductible and/or coinsurance, the insurer will also send you an “explanation of benefits” statement, which tells you how much the doctor was paid and how much you owe. The explanation of benefits is not a bill; you should wait to get a bill from your doctor before paying your share.

The Role of Regulators

Health insurance is highly regulated, meaning that officials at the state and federal level have the ability to make rules about things like:

  • Premium rates
  • What services plans must cover
  • To whom plans must be offered

For example, in Rhode Island, Blue Cross works with both Federal and state regulators (the Office of the Health Insurance Commissioner). Plans related to Medicare are regulated by the federal Centers for Medicare & Medicaid Services (CMS).

Regulators make sure that insurers comply with the rules and requirements for health insurers. They may also approve premium rates and are often involved in approving communications to members, such as benefit summaries and other plan materials.

Plans for Specific Markets

Health plans are typically offered to three insurance “markets:”

  •  People who get their insurance through employers (group plans)
  •  People who buy directly from the insurer (direct plans)
  •  People who are eligible for federal Medicare or state Medicaid programs

Because people’s needs vary depending on their situation, different health plans are offered to different markets. Even within a market, a selection of health plan types may be offered. Premium rates also vary based on the demographics of each market, such as average age and health status. The choice of health plans and premium rates in each market represents how insurers believe they can manage risk within that pool of people most appropriately.