Healthcare System Basics: How does your insurance work?

In case you had any doubts, our insurance system is what it is through a series of piecemeal programs and pieces of legislation that were not planned in advance, and so lead to the intricate and often inscrutable maze that we now have to navigate as consumers and providers. The basic premise of insurance of any kind is that a large group of people gets together and pools their risk of, say, getting sick. This group is gambling that, while everyone gets sick at some point, it is rare for everyone to get sick at the same time. The central “pot” of money created by paying premiums is supposed to be enough to cover everyone’s illness at any given time, provided that there is no catastrophic population wide illness affecting everyone. (How this becomes a profitable endeavor is a whole other blog.). Problems ensue when there are too many sick people in the pool, too many people get sick at the same time, or when the cost of the medical care out paces the premium contributions made. The last issue is what has lead to high deductible plans, which we will discuss below.

For me, one of the most disturbing parts of our system is that private insurance companies are really all about profit. They are business entities interested only in maximizing profit for the shareholders. That is what leads to many of the absurdities of our system. The decisions made by insurance companies with respect to your healthcare is driven by profit margin, not an interest in your health or the health of society at large. The same is true of physician reimbursement; the payment per visit is entirely determined by the insurance company and these payments drop yearly. Ironically, primary care and health counseling are usually the most poorly reimbursed when compared to procedures and surgeries, though they save the most money in the long run. The result is that consumers have to fight to get their care covered and providers have to fight to get paid fairly. We have decided, in our practice, to prioritize good medicine with longer visits and more attention to patients, despite the low reimbursement for such services.

Many of you have wondered what impact “Obama care” will have on you. For the most part, the answer is very little. Under the new health plan, you are entitled to one well woman exam without copay. You are entitled to birth control pills and some other forms of contraception free of charge.  However you are not entitled to the birth control of your choice, only to the limited options offered by your insurance plan. If you are under 26 years of age, you can now stay enrolled on your parents’ insurance plan. Finally, pre-existing conditions will no longer be allowed to be used by insurance plans as a way to exclude you from coverage: this is probably the most significant change since, not long ago, a history of an abnormal pap was enough to make you ineligible for insurance. Not much else has changed, much to my disappointment. Personally, I had hoped for a more fundamental change of paradigm that would grant every American some minimum standard of healthcare. No such luck.

OK, so on to a definition of terms: Usual and Customary fee schedule, Explanation of Benefits (EOB), Copay, and Deductible.

The insurance company sets the “usual and customary” fee schedule. They use a complex algorithm to determine the price that they feel is justified for every service rendered. When a physician agrees to participate in an insurance plan, she agrees to accept this fee regardless of her actual costs and charges. These fees are usually tied in a systematic way to Medicare fees and tend to change on a yearly basis. In the end, it is the insurance company that determines what a provider will get for the services rendered, not the provider herself.

The explanation of benefits (or EOB) is not a bill. It is a document sent to you by your insurance company telling you who got paid how much for each service/ test and what you owe your provider. In one format or another you will see listed the amount billed (by the provider), the amount allowed (by the insurance company…. that’s the usual and customary fee schedule), your deductible (getting to that), the copay, the amount paid to the provider, and the amount you owe your provider. You should not read the EOB as a bill, it is just documentation of where money went. Providers will then bill you for the outstanding balance that the insurance company says you owe. The interesting thing here for providers is that they can’t bill you more (that would violate their contract with the insurance company) but they can’t waive the copays and fees either (that is considered fraud in an audit).

Copay is the amount of money, determined by your insurance plan, which you owe a provider at the time of the visit. It is usually a fixed amount and depends on whether the type of service offered is primary care, specialty care, or emergency care. The insurance company then pays for some percentage (up to 100%) of the bill for that visit. How much that turns out to be depends largely on the deductible in your plan and how much of it you have met.

Deductibles…one of the more insidious pieces of our system. So, you sign up for insurance and pay your premiums monthly, reliably and on time. In return you expect that your medical expenses will be covered, not withstanding a copay or two. No such luck for most of us. One way to pay lower premiums and save in the short term is to sign up for a high deductible plan. That means that you have agreed to pay for the first $1000 or $5000 or $10,000 of your medical expenses up front. Once you exceed the deductible amount, the insurance company will start to pay for your expenses, or at least some percentage thereof. So, if  you call my office, for example, and ask if a service is covered… we check to see that we take your insurance, if so, the answer is yes. However, what of office staff can’t know is what your deductible is and how much of it you have already spent. If you have not spent much of it, you are still responsible for the office / lab fees, even though we take your insurance, because you have not yet met your financial obligation to the insurance company. This is amazingly frustrating and upsetting for patients and providers, but clearly it works well for the insurance companies.

Ok, so in a nutshell, that is how our crazy insurance system works (at the moment). For most of us, our insurance gives us one check up a year, some services, some medications, and the piece of mind that if something really really bad happens (say a bike accident) your big expenses will be covered (minus your deductible and copays of course) and you won’t go bankrupt by going to the hospital.  When you have an office visit with a provider for services other than that one check up you will owe some amount of money to that provider determined by your insurance through some intersection of copay, deductible, and percentage of coverage for that service. Hopefully this will clarify at least some of the questions you may have about health coverage at this moment in history. I suspect things will be changing in the coming years, but it is unclear what shape it will take.