538 Chapter 13 Insurance and Risk Management
Health insurance can be purchased as an individual policy by an individual to cover
himself and his immediate family. Traditionally, though, health insurance coverage has
been provided as a benefit of employment. In that case, the insurance company offers a
policy to a company’s employees as a group, as a group policy. The connection of this
very important insurance coverage to employment makes health insurance a particularly
challenging issue for businesses. The cost of providing health insurance to its employees
can be a huge expense for a business; at the same time, employers who do not offer good
health benefits run the risk of losing their best workers to competitors who offer better
benefits.
Regardless of how it is purchased, health insurance is an expensive proposition. Costs
for hospitalization, prescription drugs, and the services of doctors and other health care
professionals can quickly add up to shockingly large totals, and so the insurance coverage
to pay these costs is similarly expensive. For those fortunate enough to have group insur-
ance coverage with premiums subsidized or entirely paid for as a benefit of employment,
these costs are not felt so directly, though the business providing that coverage certainly
feels the expense. For the self-employed or those whose employers do not provide group
coverage, the cost can be exorbitant.
The prohibitive cost of this insurance actually makes the cost picture worse; since the
cost is so high, many people choose to “do without.” Yet the people most likely to feel that
they can afford to do without are also the people least likely to need the coverage. When
the healthiest people choose to opt out of insurance coverage, they do not remove much
cost from the system, leaving nearly the same total cost to be spread over a smaller num-
ber of policies. This raises the premium costs ever higher, potentially creating a vicious
circle where costs keep rising, increasing the incentive for more people to opt out of health
coverage, leading to even higher costs per policy, and so on.
The traditional approach to health care funding in the United States is the source
of much debate, much of it highly political and much of that bitter and angry. It is
likely that much will change in the health care funding arena in the next decade, and it
is certain that any changes that do occur will make some people very happy and others
very unhappy. What those changes will actually turn out to be, though, is anyone’s
guess at this point. What is certain, though, is that health insurance coverage is an
enormously important consideration both for employees and for employers. Whether
you are looking at this area primarily as an individual looking to better understand your
own options, or as a business owner looking to control your costs while at the same
time attracting and holding on to the best employees, health insurance is an important
consideration.Types of Health Insurance—Indemnity Plans
The most traditional type of health insurance coverage is an indemnity plan. While
many variations on this type of plan exist, one common form was a hospitalization
policy in combination with a major medical policy. (The well-known Blue Cross and
Blue Shield plans were originally of this type, with the Blue Cross providing the hos-
pitalization coverage and the Blue Shield offering the major medical.) As the name
suggests, a hospitalization policy is intended to cover the costs of hospitalization, some-
times also with a basic medical plan that provides a certain dollar benefit toward certain
specified services. A major medical policy covers medically necessary services and
items not covered by the basic medical and hospitalization policy, such as prescription
drugs. Major medical plans often come with a deductible (an amount that you must pay
yourself before coverage kicks in) and coinsurance (a percent of the claim that you
must pay yourself ).
When an insured person has a medical claim to be covered under a deductible and coin-
surance plan, she submits that claim to the insurer. The insurer then verifies that the claim
is a legitimate one for a covered service, and then reimburses the insured for the amount
required under the policy.