[MUSIC] Hi everyone. My name is Dr. Lacey Loomer. I'm a health economist and an assistant professor of health care management at University of Minnesota Duluth. My research focuses on cost, quality, and access of long term care. Today we will be covering insurance basics including why we buy insurance and some key health insurance terms to know. The first question we should consider is why do we buy health insurance in the first place? The main goal of insurance is to protect us against catastrophic risk of high costs. Similar to buying car insurance when a car accident happens, there are often high costs such as the cost of the car and perhaps medical costs. Most people would be unable to afford paying these out of pocket. So by purchasing car insurance, the insurance company protects us from bearing the full cost of the accident. In the case of health care, the example of the car accident can be any unexpected health emergency such as a heart attack or a diagnosis of cancer. Unlike car insurance, another reason we buy health insurance is to access the health care system. It is often very difficult to access healthcare providers without having health insurance. So let's discuss how insurance works in this simple example. First, let's consider that you have a 90% chance of incurring $0 in health expenses this upcoming year or you're going to stay healthy. But you also have a 10% chance of incurring $1,000 in expenses. If we were to calculate the expected expense due to health care this upcoming year. We would first multiply 0.9 or your probability of being healthy this upcoming year, by the amount expected that you would pay which is 0. You would get a sum of 0. Then we would multiply 0.1 or your probability of being sick or having some illness this year by the amount of the possible illness that it would cost you in health care expenditures then we would get a $100. When we sum the expected expense of being healthy, which is 0 and you're expected expense of being sick, which is 100, you would get a total expected health care expenses in the next year of $100. Knowing that I'm facing an expected health care expense of $100 in the next year, I would be willing to pay $100 in order to avoid losing $1,000. In fact, most of us would be what is called risk averse. So we may be willing to pay more than $100, say $110 to avoid paying $1,000. So let's extend this example to a small group of people, let's say 10. If health insurance company insurance co sells me and nine other people who have the same probability of being healthy or sick like me, the insurance company would make 10 multiplied by $110. So 10 people getting sold a policy of $110 or $1,100. Because there are 10 of us and we all face a 10% chance of incurring that $1,000 in health care expenses, one person of the 10 might get sick and the insurance company will cover the expenses for that person. The insurance company will then keep the extra $100 for administrative costs and profits. In this example, both the insurance company and the 10 people who purchase the insurance policy are all better off. In the United States, the majority of insurance is financed privately. About a half of Americans have health insurance through their employer, also known as employer based insurance. This means the employer and the employee split the total price of the health insurance plan. As the employer offers insurance as a benefit of employment. Then there are a small portion of people that are self insured through buying health insurance on marketplaces. We all have a large portion of the insurance market that is financed publicly or by government entities. The two biggest programs are the federally funded program known as Medicare, which provides health insurance for those 65 years and older or have serious disabilities. And Medicaid, which is funded by both federal and state governments and provides health insurance for low income Americans at low cost to them. Because Medicaid is partially funded by the states, there is a wide variability and Medicaid programs, including who is eligible and how much it costs. Finally, there are other government health care programs such as the veterans health affairs and Indian health services, which provides services to specific subgroups of Americans. Next we will discuss common terminology in health insurance. The first being a premium which is the amount charged by the insurer or in our example, previously the $110 to ensure against risk. This is often paid monthly. If you get it through your employer, it might be subtracted in each pay period. So how do we determine the price of the premium? Well, it's not as straightforward as an example I presented to you because generally we don't know our probabilities of being healthy and sick in the upcoming year. Generally insurance premiums are determined based on a risk rating. The riskier someone is to ensure or the higher the probability of getting sick the higher the premium. We categorize risk writing into three categories, experience rating, community rating, and adjusted community rating. Before the patient protection and affordable care act or the ACA, premiums were calculated based on the experience or past medical utilization using administrative claims data. The second category is community rating which is based on the experience or medical utilization of the population. Finally, the third category is called adjusted community rating, which is in between the first two categories mentioned. This is the type of rating that is now used due to the ACA. This rating takes into account some specific factors such as smoking. Insurers can charge higher premiums for persons who smoke compared to those who don't smoke at a ratio of 1.5:1. Second, insurers can charge higher premiums for older adults at a ratio of 3:1. Insurers group populations into age ranges, but the specific age ranges are set by the states. The ratio limits the amount an older individual will pay no more than three times, but a younger individual pays in premium dollars. Finally, the community part of the adjusted community rating is based on geographic regions within a given state. Premiums can vary between regions, but not within regions. In addition to the premium, health insurance plans have cost sharing when healthcare services are actually used. There are four common terms for caution. The first is the deductible. This is the amount that can the consumer or patient will pay before the insurance company contributes to payment for health care services. The second is a copayment, which is a flat or fixed fee every time someone uses healthcare. This amount is typically listed on your health insurance card and likely varies depending on whether you see a primary care physician or a specialist. The next term is coinsurance, instead of a flat fee, like a copayment, this is a proportion that you must pay every time you use medical care. This could be 10% of a specific procedure price. So depending on the procedure, 10% could be much higher than a flat fee. Finally, the last term is out of pocket maximum. This is a limit on what a consumer or patient has to pay in a given year to avoid catastrophic loss. Generally, there is a trade off between the premium or monthly payment and the cost sharing or deductible. What you pay before insurance contributes. High premiums are generally coupled with lower deductibles and low premiums are coupled with high deductibles. The recent trend in the United States is an increase in the number of people enrolled in high deductible health plans. This leads to a situation where someone may be insured, but with a high deductible, it may still be unaffordable for them to use health care. So why do we have cost sharing? Why do health insurance plans include cost sharing in addition to premiums? Well, cost sharing is also sometimes referred to as getting skin in the game. Theoretically, it helps expose consumers to a portion of the health care costs. And the goal is to reduce moral hazard. Moral hazard is a term that health economists used to refer to people changing their behavior after being insured and over utilizing health care. In some, the takeaways from insurance basics are as follows. The goal of insurance is to prevent against financial loss. The majority of Americans get insurance through their employer. And finally, various cost-sharing tools exist to discourage health care use. Thanks for your attention.
