Inside Health Insurance: Part 1--Finances

To better appreciate how health insurance works; let’s take a look at what makes the financial side feasible. The underlying principle that guides any kind of insurance is based upon the law of large numbers. By pooling the risk of many, with each paying into what becomes a big pot of money, this law predicts with statistical certainty, that the amount needed by those who need to take OUT of the pot to pay for health care, will be less than the amount of money placed INTO the pot by the entire group, thus making sure all claims can be paid. In any given year, exactly who puts in and who takes out is uncertain. You may contribute for many years before you need to take anything substantial out, but because the pot is receiving from many like you who don’t use it often; it is sufficiently funded for those who need it.

What insurance companies have learned is that by “underwriting,” or determining the risk potential of applicants, before accepting them into the group, they can more accurately predict the probability of there being enough money to cover all potential claims. By imposing pre-existing condition waiting exclusions, or declining to cover someone with known immediate and expensive needs, it protects, not just the insurance company, but the whole group of people who depend upon the insurance company’s financial health in order to pay for their claims when they need it. Insurance companies are masters of statistics, and have experts who determine how to charge each participant proportionately, in order to make all the numbers work out for the insured and the insurance company.

Most carriers who offer health insurance are private businesses who seek to make a profit. Although technically, the Blue Cross and Blue Shields are non-profit, they do need to take in more premium dollars than they pay out to providers or they will have to close up their doors and go home, and millions of Americans would lose their health insurance coverage. Similarly if private insurers are forced into practices which reduce or eliminate their profitability, they will exit the market, reducing competition and further causing cost of insurance and care to rise.

Even though most people hate to pay insurance premiums when they are healthy, they are thankful for the coverage when they have an expensive or catastrophic claim. Having a financially healthy company behind your health insurance plan is the ONLY way to be certain that no unforeseen medical situation will threaten your health or your personal financial well being.