What is Private Health Insurance?

Like other types of insurance, private health insurance is a way of protecting yourself from the financial consequences of a loss. Health insurance also covers the cost of preventative medicine as a way to avert illness and control costs. Health insurance can come in the form of a traditional policy or a health plan and it can be s public or private health insurance.

Private Health Insurance

While the government and non-profit organizations run public health insurance programs, for-profit companies run private health insurance. The need to create profits results in higher consumer premiums for private insurance.

The need for health insurance is great. According to the Obama administration, more than half of all American personal bankruptcies result from medical bills, and approximately one-third of American workers have no health insurance. In addition, Americans are paying more than ever for their portion of insurance costs.

Tenets of Insurance

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The basic tenet of insurance is based on the law of large numbers. This statistical law says that predictions made based on data from large groups are more accurate than predictions made based on small groups. This means that insurance companies can estimate how much medical care will cost for a large population and then base premiums on the expected costs, plus the cost to run the insurance company.  Because it is harder to predict the cost of medical care for small groups, insurance companies charge higher rates for individual or small group plans, ensuring they can cover all medical costs and still turn a profit.

Adverse selection is another tenet of insurance that can cause problems for insurers. This is the tendency for those who most need health insurance to be most likely to seek it. Those who are very healthy are less likely to buy health insurance. Sipping on health insurance can be a major problem for a normally healthy patient who falls ill. It is also problematic for insurance companies who need a large number of healthy policyholders in order to sustain the premiums used to pay for the medical needs of the ill.

Private health insurance benefits are paid in exchange for a premium that can be paid weekly, monthly or yearly. In most cases, the employer administers the insurance and pays a portion of the premium. Most people have their private health insurance premiums deducted from their paychecks.

Deductibles and Copayments

Deductibles are common to most insurance plans and private health insurance is no exception. The difference with health insurance is that they most frequently charge a co-payment that applies for each doctor visit or prescription, rather than being a lump amount applied to each incidence of illness. Other forms of insurance typically charge a yearly deductible or a deductible for each “occurrence” or each event that triggers a claim.

Private health insurance does charges a deductible, but it usually applies to hospital stays. Many will pay a $500 deductible and the health insurance will cover the remainder of the cost when a serious illness occurs. Private health insurance usually has a limit on the lifetime dollar amount of coverage, such as $1 Million. Lower limits can cause a big problem in the event of catastrophic illness.

Health Plan Models

Some private health insurance runs on a health plan model, in which a group of doctors agrees to charge patients a lower rate in order to get that group of business. This model is becoming less common because it often results in overbooked offices and long waits for treatment. Private health insurers still use a similar model, but often provide incentives for patients to seek member physicians, such as a lower co-payment.

When someone with private health insurance needs to see a specialist, prior authorization is usually required. This means that the primary care physician, or the patient’s regular doctor, must authorize treatment through a procedure established by the insurance company. While the insurer asks that authorization be obtained prior to seeing a specialist, they will often accept authorization after the fact.

Explanation of Benefits

Private health insurance companies send statements that explain what fees doctors have charged and what portion of fees are the patient’s responsibility. This type of statement is called an explanation of benefits. Because the patients’ out of pocket expenses are sometimes tax deductible, such statements should be kept until tax time. Patients should also secure a statement from the pharmacy detailing prescription costs to be sure they have accounted for all medical expenses at tax time.