Medical Insurance

What It Means

Medical, or health, insurance is a contract under which a private medical insurance company or a government agency promises to pay for or provide health-care services. In most cases the people who are insured pay a set monthly amount, called a premium, for medical insurance. The insurance company compensates customers (called the insured) for qualifying medical expenses or sometimes pays the health-care provider directly. The insurance contract often must be renewed every year, at which time the premiums may go up. Medical insurance is a form of financial protection for the insured, who, though they must pay monthly premiums, will be guaranteed against significant monetary loss in case of illness or injury.

Medical insurance exists in every country in the world, though the form it takes varies. The United States is the only developed, industrial nation without a universal health-care system (one in which all residents have access to health care regardless of their ability to pay or of their medical condition), though 27 percent of the population is insured by tax-financed government programs, such as Medicare and Medicaid. Under a fully public medical insurance system, the national government serves as an insurance company, collecting health-care fees (in taxes and government subsidies) and paying out costs. In contrast, private medical insurance companies are generally for-profit businesses that work with providers (physicians, hospitals, and others who supply health-care services) to offer several options in insurance plans. The financial goal of private-sector insurance is to end up with a profit after customers’ claims (requests for payment of medical expenses) are paid out of the premiums the company takes in.

The United States has a market-based system in which the private sector rather than the government provides most of the health care and insurance and in which costs are determined by market forces, such as supply (what providers are willing to provide and at what price) and demand (what consumers want and are willing to pay for). The federal government allows individual states to regulate the health-insurance system, including the insurance companies’ conduct in marketing (advertising and selling their services), underwriting (selecting who and what they will cover and, conversely, which policyholders and risks they will deny for coverage), and rate setting.

About 60 percent of Americans obtain medical insurance through their workplace, which subscribes to and partially funds a group plan for employees. Insured employees pay a small part of the premium and, for a higher amount, can also cover spouses and children up to the age of 21, if the children are still in school. Federal law does not require workplaces to provide medical insurance packages to employees, though many states require employers to buy workers’ compensation insurance, which pays for care related to injuries suffered when a worker is on the job. Part-time workers and those who work for businesses with few employees often cannot get medical insurance through their workplace. State teachers associations, bar associations (for lawyers), and other work-related support groups sometimes provide insurance for members who qualify. Nine percent of Americans subscribe to individual medical insurance plans, which are costly and offer more limited options. Other people qualify for government-sponsored insurance (Medicare or Medicaid). Approximately 16 percent of Americans (more than 45 million people) are uninsured.

When Did It Begin

Injury and illness have always posed financial risks to people, and the idea of moderating the risks by spreading them out over time and over groups of people has been around since the days of the Roman Empire, when artisans organized rudimentary forms of medical insurance. The craft guilds in medieval England (the medieval period lasted from about 500 to about 1500) also insured members against losses due to illness and injury, and the practice eventually led in the nineteenth century to English mutual aid societies (voluntary organizations that collected dues and assisted members in need). The idea of mutual aid spread through Europe alongside industrialization, though participation was low and the organizations were not able to pay adequate benefits. Germany passed the first national compulsory medical insurance law (under which the government was required to make health care accessible to everyone) in 1883. By 1920 many European countries had nationalized medical insurance (governments used taxes to run hospitals and pay doctors) in place. Today more than 60 countries have compulsory governmental medical insurance programs.

In the United States the first mutual protection association was established in San Francisco in 1851. In the 1870s railroad and mining industries began hiring company doctors to treat workers. The department store chain Montgomery Ward developed one of the first group medical insurance plans (in 1910). Before 1920 most Americans spent relatively little on medical treatment. A household’s main illness-related expense was lost wages from missed work. Private companies did not offer medical insurance. Proposals for universal health care were defeated by physicians and pharmacists, who feared their businesses would suffer, and by a lack of perceived need on the part of the population.

An increased demand for medical care in the United States in the 1920s coincided with advances in medical science and higher standards for physician licensing; medical costs began to rise. In 1929 Blue Cross established the first prepaid hospital care plan for Dallas public school teachers, who paid 50 cents a month for a guarantee of 21 days of hospital services. These plans became more common during the Great Depression (which lasted from 1929 to about 1939), when patients and hospitals both had less income. The first prepaid plan that covered physicians’ services was established in 1939 by physicians hoping to fight both hospital control of insurance and those who promoted compulsory insurance. The American Medical Association lobbied to defeat nationalized medical insurance proposals, including one made by President Harry S. Truman (1884–1972), in 1935 and 1949.

During World War II (1939–45) the U.S. government began providing tax benefits to employers and workers who participated in private medical insurance plans. The number of employers offering medical insurance through the workplace grew, and through these plans insurance companies targeted a relatively young, healthy population that would be profitable to work with. The number of people with medical insurance rose from fewer than 20,000 in 1940 to more than 120,000 in 1960. By 1959 more than 75 percent of Americans had medical insurance. In his 1960 presidential campaign John F. Kennedy (1917–63) supported the Medicare program, which, along with Medicaid, was signed into law by President Lyndon B. Johnson (1908–73) in 1965. Former president Truman was the first to enroll in Medicare.

More Detailed Information

Four distinct kinds of medical insurance are available in the United States: indemnity plans, two types of managed-care plans, and government-provided insurance. Many insurance plans combine features of the different types.

Indemnity (or traditional) insurance plans pay for some expenses, though usually at a set percentage of the cost (for instance, the insurance company pays 80 percent and the insured pays 20 percent; the 20 percent is called a coinsurance payment) up to a certain limit per year (the out-of-pocket maximum), beyond which the company pays 100 percent of qualifying expenses. The insured can choose any standard health-care provider or hospital and must pay for whatever services are not covered by the plan. In addition to premiums and coinsurance, the insured must pay a deductible each year. A deductible is a fixed initial sum, ranging from a few hundred to several thousand dollars, in qualified medical costs that the insured pays before insurance coverage takes over its part. Many insurance plans allow the insured to choose among deductible amounts: a higher deductible means a lower premium and vice versa. Plans that have very high deductibles and that are designed to cover only long-term or catastrophic illness or injury are called major-medical plans. Indemnity plans are the most flexible medical insurance coverage in terms of choice, but they often cost more than managed-care plans.

Both health maintenance organizations (HMOs) and preferred provider organizations (PPOs) are types of managed care, a concept that began to influence health-care policy in the 1980s. Managed care was designed to reduce medical costs in several ways, including by encouraging doctors and patients to choose less expensive forms of care, by reviewing services patients or doctors request to determine whether they are medically necessary, and by controlling admissions to hospitals and lengths of hospital stays. HMOs provide the actual health services to their clients rather than reimbursing patients for medical expenses. They require that the insured’s health care be coordinated through a primary care physician (PCP), who must be consulted first and who can then write out a referral for any specialist care. The insured must choose providers and hospitals from a list of those associated with the HMO and must pay a co-payment (a standard fee, usually $10 or $20) at the time of service. HMOs provide insurance coverage through employers and are usually the least expensive type of private insurance.

PPOs are insurance companies that work with networks of physicians and hospitals who agree to provide medical services and supervision at reduced fees to people insured under their plan. Most PPO plans require payment of a deductible and coinsurance. The insured may choose to receive services from a doctor or an institution not on the plan (these are called out-of-network providers), but the insured will have to pay a larger portion of the bill and in some cases the whole bill.

The U.S. government provides some insurance programs that are free or inexpensive for qualified users and that are funded by federal income taxes and some premiums. These include Medicare, which covers U.S. citizens who are 65 or older, people with disabilities, and others with specific illnesses; Medicaid (this program is cofunded by the states, which administer the program), for people who live on very low incomes or who have a disability not covered by Medicare; the State Children’s Health Insurance Program, which covers children of low-income families; and the U.S. Department of Veterans Affairs, which covers injured veterans (former members of the armed services) and currently active servicemen and women.

People usually need to begin thinking about medical insurance when they turn 21 or graduate from college; they may be covered under family insurance plans or children’s health-care programs until they are 21, and most universities provide students with medical insurance. It is commonly considered risky to forgo insurance altogether, because an accident or illness can use up savings and lead to large debts. Also many insurers refuse to cover any condition that develops during a gap in coverage. There are benefits to going directly from one group medical insurance plan to another, such as that preexisting conditions (these may include bunions, asthma, depression, cancer, and so forth) may continue to be covered if the lapse in coverage is 30 days or less. Full-time jobs often come with medical insurance benefits (even if there has been a gap in coverage), but sometimes employees cannot enroll in a plan until they have been on the job for several months, and any health care related to preexisting conditions may not be covered for a certain period of time after the policy does become effective.

There are many things to keep in mind when selecting medical insurance. Even work-related insurance often involves choosing among several plans. Good questions to ask include the following: How much are the premium, deductible, and co-pay or coinsurance amounts? What medical services does the policy cover and exclude? Are preexisting conditions covered? Does the policy cover enrollees right away, or is there a waiting period? Does the plan limit the choice of providers? Does it require preapproval for certain services? What are the out-of-pocket and lifetime maximum expenses that the insured may be responsible for?

When a person goes to a health-care provider’s office, he or she usually has to show proof of insurance or sign an agreement to pay in part or in full. Uninsured people may have to pay up front, and a person on an HMO plan may need to pay a co-payment. The health-care provider most often bills the insurance company and receives payment from the company directly and then bills the patient for any remaining amount. The insurance company usually has a schedule of fees it considers reasonable for each service or procedure. The provider must discount the rest of the bill for those on HMO or PPO plans; in some cases the insured must pay the difference. Prescription drugs are often covered under a separate plan with the same insurance company. Pharmacies usually bill the insurance company directly; they have the insurance schedule in their computers and charge only the uncovered portion of the charges.

Recent Trends

Medical costs in the United States are rising quickly, partly because of costly advanced technology (which American health-care providers use earlier and more often than do doctors in other countries) and partly because people are living longer. The baby-boom generation (those born during an era of high birth rates after the end of World War II) is beginning to reach retirement age and can expect to live another two decades, with associated medical costs. In 2004, however, life expectancy in the United States (77 years) was lower than in 22 other nations, including Japan, Australia, New Zealand, Canada, and nearly all the western European countries.

Associated costs that are rising include hospital stays and specialist charges. The price of a day in the hospital rose from less than $200 in 1965 to more than $1,200 in 2004. Patients are seeing specialists more often, and charges for their services are nearly twice as high as for more general practitioners. Americans do not go to the doctor or hospital more than people in other countries, but the treatment they get is more intensive and the costs are higher. Insurance premiums are also skyrocketing. In 2006 a single person who had insurance through work paid approximately $627 a year in insurance premiums, while the employer paid an additional $3,615 for that worker; a family of four paid $2,973, with the employer contributing another $8,508. To make matters worse, fewer employers are offering health benefits to their employees: 69 percent in 2000, as compared to 60 percent in 2005.

Americans spend more on health care than do people in any other country: in 2005 the United States spent $5,267 per person, compared with $2,931 in both Great Britain and Canada; 14.6 percent of the U.S. gross domestic product (the total financial value of all goods and services produced in the country in a given time period) goes to medical costs, as opposed to 9.6 percent in Great Britain and Canada. Also in 2005, 7.3 percent of U.S. national health spending went to administration and insurance costs, compared to only 1.9 percent in France. Many agree that the situation is not sustainable.

In 1976 some states began providing medical insurance plans for people unable to get medical insurance in other ways (because of preexisting conditions or self-employment), usually at a higher cost. In 2006 Massachusetts was the first state to pass a universal health-insurance coverage plan, and California, Maine, and Vermont are working on similar plans, with at least 15 other states considering this option.

At the federal level efforts to reform medical insurance practices have largely failed. President Bill Clinton (b. 1946) set up the Task Force on National Health Care Reform in 1992, charging it to come up with a plan that would provide universal health care for all Americans. Hillary Rodham Clinton (b. 1947) headed the committee, whose bill was finally defeated by Republican opposition and competing Democratic plans in 1994. A decade later President George W. Bush (b. 1946) signed the Medicare Prescription Drug, Improvement, and Modernization Act into law in 2003; it was to help senior citizens pay for their prescription drug costs. Opponents criticized the bill for its complexity and cost, and when the plan went into effect on January 1, 2006, some seniors were confused by its options and regulations and were concerned that the promised discounts would not materialize.