Glossary

How Health Insurance Works

It’s easy to take for granted, but health insurance is pretty amazing – you might even say that having good health insurance is the next best thing to being healthy. For all that, though, lots of people who have health insurance don’t really know how it works.

Basically, you pay a set amount each month, called a premium or dues, for health insurance coverage. You become a member of a group, or plan, that shares the cost of medical services needed by the members of the plan. Each member pays “just in case” they need care. In turn, you won’t have to pay the true cost of care when you need it, which can be really high if you pay it all yourself.

Howhealthinsuranceworks

So everyone’s combined payments cover everyone’s costs for care. Spreading the costs among the group protects you if it costs more for your care than the amount you actually paid in premiums. Most plans also have you share in the costs up to a certain amount through a copayment, coinsurance, or deductible for services, but it’s still probably much less than paying for health care on your own.  

Sometimes, you may need more care than other people in your plan; sometimes less. But the point is, you’re covered – just in case.

So how do health insurers know how much to charge for dues?

  1. First, they look at how much they spent on care for that plan in previous years.
  2. Then they calculate the cost of care everyone in the plan is likely to need in the next year based on: 
    • The plan’s history. 
    • Changes in the group (things like age, health status, habits, and more). 
    • The fees they have negotiated to pay doctors for services.
    • Administration costs to manage the health plan.
  3. That number, divided by the number of members in the plan, sets the annual cost of membership.

It’s an educated guess, which is why in some years premiums collected are more than the cost of care and in other years insurers lose money.

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