How Health Insurance Works | Personal Finance Series

in this video we're gonna be talking a little bit about health insurance and how it works now our focus really is going to be on kind of the general concept of health insurance and so know that there are going to be differences with regards to health insurance depending upon the type of plan you have and depending upon the type of health insurance coverage you have whether it's more of a managed plan through an employer maybe it's a plan that you purchased on kind of an open market and you are sort of self insured or you're insured through maybe a government

program like American Medicare or Medicaid and so we're talking about the general idea of health insurance here so for this to work we have two parties right this is kind of a basic concept of markets where you have mutual beneficial exchanges between two parties so on one hand we have the insured the insured is interested in health care coverage on the other hand we have an insurer and insurer is a big company and that provides access to health care insurance or helps to subsidize the risk to an extent and so they're interested in premiums they have shareholders

typically although not always so the way this arrangement is going to work is the insured is going to commit to make some kind of monthly premium payment and in return the insurer is going to agree to certain coverage within policy limits now every health insurance policy has certain terms and conditions which of course you'd want to read up on to make sure what is covered and what isn't but this is the basic idea of the relationship the purpose of doing all this is twofold at least from the

perspective of the insured the first thing is we have what we call risk transfer so by purchasing health insurance or having access to health insurance what this allows us to do is take the risk of becoming injured or becoming ill and ultimately transferring it to another party so instead of paying the full cost of an emergency room visit we're transferring the risk to the insurer which thus limits our risk right the only way to avoid risk entirely is

probably not to do anything so because the things that we do during the day whether it's going to work and driving in a car and other things we incur some element of risk we're inherently transferring that risk to the insure the other thing that we do here is we also engage in risk reduction we engage in risk reduction because in the event that something does take place the cost to us is minimized because we have health insurance coverage and so we will pay a certain amount but our policy

limit also allows us to have additional coverage beyond a certain point now the other element here with regards to coverages has to do with what we call deductibles so every health insurance policy much like your auto insurance has a deductible this deductible represents the initial amount of money that you're responsible for let's say if you were to go to the ER and your er deductible is $1,000 and let's just say by chance that

the ER visit comes out to $300 well your deductible in this case is $1,000 so the amount of the expense has to actually exceed that before it kicks in so in this case you'd be responsible for the $300 ER visit depending upon how much other coverage you've used over the course of the year now in another example let's say you still have a thousand dollar deductible but your ER visit is 1,300 well in this case your policy is going to cover the $300 and

you have that thousand dollar deductible now many policies contain a deductible per person and then also per family and so what you need to be able to do is you need to exceed your deductible first before the health insurance coverage begins to kick in the good thing about this is this is not per occurrence typically this is usually over the course of a given calendar year so chances are by going to the doctor several times you're going to go you're going to exceed your deductible at some point unless you have a very high deductible in which case you're not

paying a great deal in insurance for that particular coverage that's kind of the trade-off now the other element here that many insurance coverages offer another component to that is what we call a copay now copay is essentially that initial amount of money that you pay for a visit and this is what we call your out-of-pocket so many standard office visits come with a copay your copay might be let's say twenty dollars it might be fifty and so every time you go

to see your primary care physician you're gonna pay twenty to fifty dollars depending upon ultimately what your coverage entails that's just simply out-of-pocket now the other element is what we call coinsurance now this is how the coverage or what you go and seek treatment for how it's divided up as an example coinsurance might be 80/20 what this typically means is that 80% of what is considered to be reasonable is

covered by the insurer and then 20% is covered by the insured so it's a way to sort of have an element of shared responsibility so that the insurance company isn't covering everything and there's a little bit of responsibility on the insured who is of course seeking treatment now some policies have completely 100 percent coinsurance or zero percent rather which means that the insurance company is going to cover everything and you don't you're not

going to get a bill in the mail now going back to kind of the coverage aspect of it there's an important component in every insurance policy which is known as use UCR which stands for usual customary and reasonable and so this is a this is an amount of money that is per procedure that is dictated by the insurance company and so what

they do is kind of a market survey to determine how much things cost in a given area and they have agreed-upon limits for how much they'll pay for so as an example if your insurance you go to the doctor and you have a bill for a hundred and fifty dollars for a procedure and your coinsurance is actually $100 or your UCR I'm sorry your UCR for that procedures $100 well then the insurance company is going to pay the $100 the primary care physician then essentially

just discounts their cost from 150 to 104 and that's based upon an agreement between the insurance company and your primary care physician so that's a little bit about how you see our reductions work and if you look at the explanation of benefits that you often receive in the mail you'll be able to see what the billed amount was by your primary care physician and then ultimately what the UCR adjusted amount was which was the amount the health insurance company agreed to pay the great thing is that your coinsurance is

based upon this amount so it's not based upon the inflated amount that the doctor is billing for but it's based upon the UCR adjusted amount which of course means that you're going to spend less money out-of-pocket now ultimately there are different types of health insurance coverage there different levels of insurance coverage and so those levels typically have an effect on a couple of things depending upon how much you pay for it will affect your copay you and your coinsurance and then obviously your

deductible as well now if you're lucky enough to have some kind of employer sponsored plan your employer will actually take take care of a portion of this monthly premium depending upon who you're employed with it might be a set dollar amount it might be a percentage but that is one way that employers try to offer attractive benefits is by covering a percentage of health insurance and there might be a little bit taken out of your check before taxes are removed so that's a little about how health care in general or health

insurance rather works from a transactional standpoint again from the standpoint of the insured we're trying to transfer and reduce our risk by having an insurer be able to step in and cover certain procedures and certain types of visits that we think that we might potentially use and then in turn we're paying some kind of monthly premium along with that we're sponsible for i deductible we have a copay and then we potentially pay a percentage of each transaction if coinsurance is on the policy