One of the questions that many ask is this: How does health insurance work?
It’s a basic question about the way the insurance system is set up, and why someone might be able to have the heath insurance company pay for their high costs.
You Pay Now, the Health Insurance Company Pays Later
Health insurance is all about risk. If you have a major health catastrophe, you the run risk of becoming financially insolvent as a result. For you, health insurance helps reduce that risk. You pay a smaller amount of money each month — your premium — and the health insurance company agrees to cover your bigger costs.
As long as you are up to date on your premium, the health insurance company should cover what it has agreed to when something expensive happens to you. So, if you end up in the hospital, a large portion of your bill is covered by the insurance company, since you have already been paying premiums.
For the health insurance company, it’s about risk as well. The premium you pay is taken by the company and used to cover costs. It is also invested so that it grows on behalf of the insurance company. Additionally, even though you are paying premiums, you are still required to pay some of your costs out of pocket. You might have a co-pay of $25 for a visit to the doctor’s office, or you might not have prescription drug coverage and have to cover the entire cost of your medications. In some cases, you might still be required to cover 20% of your hospital costs, while the insurance company covers the other 80%. So, if you have an accident that results in a $10,000 bill, you might have to pay $2,000 of it on your own, while the insurance company covers the other $8,000. For you, that is still more manageable; you don’t have to come up with the entire amount all at once.
The health insurance company makes it a point to base how much you pay in premiums based on the risk that they will have to pay out on your medical costs. So, if it is likely that you will have a major health problem, you will likely pay a bigger premium. If you don’t have a lot of health care needs, you will have a lower premium, since the health insurance company isn’t as worried about actually having to make a pay out.
Peace of Mind
Really, health insurance is about peace of mind. When you purchase health insurance, you are really trying to keep high health care costs from overwhelming you. You pay between $300 and $700 (or more) per month, depending on your coverage and the conditions of those in your family, so that if something major happens down the road you don’t have to come up with $20,000 all at once to pay the hospital bill. Additionally, health insurance can make the costs associated with chronic conditions a little more manageable on a regular basis. It’s still expensive and difficult for many families, but still often better than the alternative of complete financial catastrophe in the event of an unexpected medical emergency.