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Congress has seen a renewed interest in questions related to the market for private health
insurance since the passage of the Patient Protection and Affordable Care Act (ACA; P.L. 111-
148, as amended). Recent health insurance marketplace changes include a different way to
purchase health insurance (exchanges) and a new system of categorizing the generosity of plans’
health coverage based on the names of various metals (e.g., bronze and silver).1
Some consumers
may face different choices of health insurance plans than in the past. Not all consumers are
comfortable with the various concepts governing which health insurance plan might be best for
them.
This report provides an overview of private-sector (as opposed to government-provided) health
insurance.It serves as an introduction to health insurance from the point of view of consumers
under the age of 65 who purchase a health insurance plan.2
No background in health insurance is
assumed, and all terms are defined. The report therefore can be viewed as an introduction to the
more comprehensive discussion of health insurance found in the Congressional Research Service
(CRS) health insurance primer.
The consumer’s decision to purchase health care, however, is more complicated. Health care can be expensive, especially for major illnesses or injuries. In addition, the consumer may not know in advance when (if at all) over the course of a year he or she will purchase the health services, what services he or she will need, and how much the services will cost. Each of these characteristics of health care decreases the consumer’s ability to plan financially and increases the exposure to financial risk. Few other goods and services have these characteristics. When a consumer thinks about other large expenditures, four years of college might come to mind. However, the potential students and their parents know when college expenses will become due well in advance of the due date. It is much easier to predict that Junior will need $20,000 in August 2015 to pay freshman tuition than that Junior will need $5,000 to pay for health care after he breaks his leg skiing over winter break. Health care also may differ from other types of unpredictable expenditures. If a consumer were unexpectedly invited to a black-tie event, she may decide to purchase a gown. Even though this purchase was unpredictable, the cost of the gown often is a much smaller percentage of her monthly income than the cost of most medical treatments. Finally, consumers are likely to know what types of gowns (and milk) they prefer. They may be less clear whether they need a cast or a splint to repair their injured ankle. Consumers therefore are more likely to rely on their doctors’ opinions when using health care than on their grocery clerks’ opinions when buying milk. All these features increase the financial riskiness and unpredictability associated with using health care.
From an Employer or Other Group
Some consumers obtain health insurance plans offered by employers to their employees and their employees’ dependents as fringe benefits.9 When employees obtain health insurance through their employer, the cost of the health insurance plan often is shared between the employee and the employer.10 In addition, other groups whose members share a common bond, such as labor unions and some other associations, can offer members an opportunity to purchase health insurance through the group. If an employee purchases insurance offered through his or her employer (employer-sponsored insurance, or ESI), the employee enrolls in a plan through the employer without interacting with salespeople and other representatives of health insurers. ESI is therefore relatively easy to obtain. If an employee does not want to accept an offer of group insurance, he or she is free to purchase health insurance from another source. When a consumer with ESI leaves his or her place of employment for any reason, that consumer may lose health insurance. Those who retire any time after reaching the age of 65 usually will be eligible for Medicare, the federal health insurance entitlement program for those with disabilities and those aged 65 and older.11 Consumers terminated from employment without cause generally are eligible for COBRA, a federal program through which certain terminated consumers may continue to receive their ESI for a period of time as long as they pay the total cost of the insurance plan.12 Consumers also may be eligible for other federal and state health insurance programs or can choose to purchase private insurance that is not from a group.
Not from a Group
Consumers who are not offered or who do not purchase group insurance may use insurance brokers and agents, including web-based brokers, to learn about health insurance plans.13 Brokers and agents are licensed by the states and generally are paid on commission by insurers. Agents work with one insurer, whereas brokers can work with more than one insurer. Consumers may purchase health insurance policies either directly from insurers (perhaps represented by brokers and agents) or from exchanges, which sell the insurers’ plans. Insurance exchanges serve as marketplaces for health insurance plans in that they facilitate transactions between the buyers of insurance (consumers) and sellers of insurance (insurers). In general, consumers must use exchanges in their states of residence.
What Is Health Insurance?
This section of the report covers the differences between a consumer’s purchase of health care and his or her purchase of other goods and services. For example, budgeting for health care expenses may be more difficult than budgeting for other services. The purchase of health insurance reduces the risks and unpredictability inherent in a consumer’s health care expenses. The consumer pays for a health insurance policy and then is subsequently (partly) reimbursed for his or her future expenditures on health care.4The Challenges of Purchasing Health Care
A consumer may find the purchase of health care different from some other purchases. For example, a consumer buying a gallon of milk each week often knows in advance what kind of milk he or she wants and the approximate price of each variety of milk. In addition, expenditures on milk are rarely an especially high proportion of the consumer’s monthly spendingThe consumer’s decision to purchase health care, however, is more complicated. Health care can be expensive, especially for major illnesses or injuries. In addition, the consumer may not know in advance when (if at all) over the course of a year he or she will purchase the health services, what services he or she will need, and how much the services will cost. Each of these characteristics of health care decreases the consumer’s ability to plan financially and increases the exposure to financial risk. Few other goods and services have these characteristics. When a consumer thinks about other large expenditures, four years of college might come to mind. However, the potential students and their parents know when college expenses will become due well in advance of the due date. It is much easier to predict that Junior will need $20,000 in August 2015 to pay freshman tuition than that Junior will need $5,000 to pay for health care after he breaks his leg skiing over winter break. Health care also may differ from other types of unpredictable expenditures. If a consumer were unexpectedly invited to a black-tie event, she may decide to purchase a gown. Even though this purchase was unpredictable, the cost of the gown often is a much smaller percentage of her monthly income than the cost of most medical treatments. Finally, consumers are likely to know what types of gowns (and milk) they prefer. They may be less clear whether they need a cast or a splint to repair their injured ankle. Consumers therefore are more likely to rely on their doctors’ opinions when using health care than on their grocery clerks’ opinions when buying milk. All these features increase the financial riskiness and unpredictability associated with using health care.
Health Insurance Can Help Consumers Manage Risk
The purchase of health insurance reduces the risks and unpredictability inherent in a consumer’s cost of health care. Typically, a consumer selects a particular health insurance plan just before the start of the health insurance plan year and then pays a monthly premium to the health insurer.5 In return, if the consumer receives health care over the course of the year, the health insurer may pay some (or all) of the costs, depending on the details of the plan. For example, if the consumer does use health care, he or she often has to pay something out of his or her own pocket. The level of out-of-pocket (OOP) expenses varies across health insurance plans. Although health insurance may never make health care free of charge for the consumer, it often results in lower OOP expenses, especially when evaluated over the entire term of the plan.6 Not all holders of health insurance end up using health care over the year. However, when considered over a multiyear period, health insurance may help a consumer manage the risk associated with a large potential financial loss from health care costs.
How Can a Consumer Purchase Health Insurance?
A consumer may obtain health insurance from an employer (or other group) or individually from another source.From an Employer or Other Group
Some consumers obtain health insurance plans offered by employers to their employees and their employees’ dependents as fringe benefits.9 When employees obtain health insurance through their employer, the cost of the health insurance plan often is shared between the employee and the employer.10 In addition, other groups whose members share a common bond, such as labor unions and some other associations, can offer members an opportunity to purchase health insurance through the group. If an employee purchases insurance offered through his or her employer (employer-sponsored insurance, or ESI), the employee enrolls in a plan through the employer without interacting with salespeople and other representatives of health insurers. ESI is therefore relatively easy to obtain. If an employee does not want to accept an offer of group insurance, he or she is free to purchase health insurance from another source. When a consumer with ESI leaves his or her place of employment for any reason, that consumer may lose health insurance. Those who retire any time after reaching the age of 65 usually will be eligible for Medicare, the federal health insurance entitlement program for those with disabilities and those aged 65 and older.11 Consumers terminated from employment without cause generally are eligible for COBRA, a federal program through which certain terminated consumers may continue to receive their ESI for a period of time as long as they pay the total cost of the insurance plan.12 Consumers also may be eligible for other federal and state health insurance programs or can choose to purchase private insurance that is not from a group.
Not from a Group
Consumers who are not offered or who do not purchase group insurance may use insurance brokers and agents, including web-based brokers, to learn about health insurance plans.13 Brokers and agents are licensed by the states and generally are paid on commission by insurers. Agents work with one insurer, whereas brokers can work with more than one insurer. Consumers may purchase health insurance policies either directly from insurers (perhaps represented by brokers and agents) or from exchanges, which sell the insurers’ plans. Insurance exchanges serve as marketplaces for health insurance plans in that they facilitate transactions between the buyers of insurance (consumers) and sellers of insurance (insurers). In general, consumers must use exchanges in their states of residence.
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