WHAT IS HEALTH INSURANCE ?
Basic Definitions and Principles
People buy insurance to protect themselves against possible financial loss in the
future. Such losses may be due to a motor vehicle collision, natural disaster, or other
circumstance. For patients, financial losses may result from the use of medical
services. Health insurance then provides protection against the possibility of
financial loss due to health care use. In addition, since people do not know ahead of
time exactly what their health care expenses will be, paying for health insurance on
a regular basis helps smooth out their spending.
The concept underlying insurance is “risk;” i.e., the likelihood and magnitude
of financial loss. In any type of insurance arrangement, all parties seek to minimize
their own risk. In health insurance, consumers and insurers approach the
management of insurance risk differently. From the consumer’s point of view, a
person (or family) buys health insurance for protection against financial losses
resulting from the future use of medical care. From the insurer’s point of view, it
employs a variety of methods to minimize the risk it takes on when providing health
coverage to consumers, so as to assure that it operates a profitable business. One
method is to cover only those expenses arising from a pre-defined set of services
(generally called “covered” services). Another method for limiting risk is to
encourage healthier people to obtain health coverage, presumably because healthier
people would not need as many medical services as sicker people.
While the methods employed by an insurer differ from those of a consumer,
each person or entity has the same goal: to minimize risk in an uncertain future. It
is this uncertainty of the future and risk of loss which form the context for insurance,
and the strategies to make financial loss more predictable and manageable which
drive insurance arrangements.
People buy insurance to protect themselves against possible financial loss in the
future. Such losses may be due to a motor vehicle collision, natural disaster, or other
circumstance. For patients, financial losses may result from the use of medical
services. Health insurance then provides protection against the possibility of
financial loss due to health care use. In addition, since people do not know ahead of
time exactly what their health care expenses will be, paying for health insurance on
a regular basis helps smooth out their spending.
The concept underlying insurance is “risk;” i.e., the likelihood and magnitude
of financial loss. In any type of insurance arrangement, all parties seek to minimize
their own risk. In health insurance, consumers and insurers approach the
management of insurance risk differently. From the consumer’s point of view, a
person (or family) buys health insurance for protection against financial losses
resulting from the future use of medical care. From the insurer’s point of view, it
employs a variety of methods to minimize the risk it takes on when providing health
coverage to consumers, so as to assure that it operates a profitable business. One
method is to cover only those expenses arising from a pre-defined set of services
(generally called “covered” services). Another method for limiting risk is to
encourage healthier people to obtain health coverage, presumably because healthier
people would not need as many medical services as sicker people.
While the methods employed by an insurer differ from those of a consumer,
each person or entity has the same goal: to minimize risk in an uncertain future. It
is this uncertainty of the future and risk of loss which form the context for insurance,
and the strategies to make financial loss more predictable and manageable which
drive insurance arrangements.
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