How health insurance works: An intro to risk sharing | hioscar Blog | Oscar
How health insurance works: An intro to risk sharing
How well do you understand what you’re buying? Let’s dig into risk sharing and its impact on your plan.
How Insurance Works Oscar Health Insurance
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Insurance gives you financial protection from bad things that happen in life. Like the little old man who scrapes your bumper in the parking lot. Or your cat who knocks over a candle and sets your couch on fire. Or your nephew who drops your iPhone and breaks the screen (for the third time).
Generally, insurance works because the likelihood of something unfortunate happening to you – the risk – is low. The rest of the time, you’re responsible for taking care of your car, home, and personal property. Insurance only enters the equation when something goes wrong.
But health insurance… health insurance is special. While it’s built on the same kind of model as other types of insurance, it’s much more complicated – and you'll probably use it a lot more often.
Here’s the bad news: If you don’t take the time to understand how health insurance actually works, it’s easy to make financially regrettable decisions when it comes to your health care and coverage. Which means you should spend some time learning about it.
Here’s the good news: We’re here to make it easy.
This is your primer on risk and how it works in health insurance. Let’s dig into the underlying risk model insurance is built on, why it matters, and how it impacts your ability to buy (and keep) a health insurance plan.
What is risk sharing?
An important component of all health insurance is risk sharing. Here's a quick example of how this works.
Say you buy insurance for your new car. You and all the other people who buy a plan from your insurance company are part of a group.
Within this group, most people’s cars are safe during the year, and luckily, so is yours. But some unlucky people experience damage from accidents and natural disasters. The insurance company uses the money everyone paid for their insurance plans to cover the damage to these few vehicles.
Ta da! You’ve officially shared risk with everyone in the group by paying premiums into the same pot. This money is used to pay for any car issues people in your group (including you!) have during the year.
In health insurance, risk sharing works the same way. A group of people who’ve bought plans from the same source share the “risk” of their individual health needs. The key difference is that you get more value out of health insurance than car insurance, because you can also use it to pay for routine care as you need it, in addition to protecting your bank account from the cost of a health emergency.
Unlike other types of insurance, when it comes to health insurance, risk is shared in three different ways:
By the insurance company and the people who buy plans from them (called members).
By the insurance company and the medical professionals who provide care for their members.
By sharing the risk, you, your insurance company, and doctors / hospitals are protected from individually bearing the costs for those who need a lot of health care or have medical emergencies during the year.
From a statistical perspective, risk sharing works best when there are more people in a group – and this is especially true for health insurance. If only sick people sign up, then the probability of risk is high across the board, and everyone – consumers, insurers, and medical professionals – end up paying more. If there’s a good mix of healthy and sick people, the probability of risk is lower, and costs stay down.
Why should you participate in risk sharing?
If you’re a healthy person, it might seem crazy to pay lots of money every month for insurance. Why put your hard-earned cash into a pot with a group of people who might get sick? We feel you.
But here’s the thing about life: It’s unpredictable. You may be healthy today, but something could change literally overnight. By buying health insurance, you protect yourself from unforeseen and ongoing medical costs that could put a strain on your finances – or worst-case scenario, drive you into bankruptcy. NerdWallet reported in 2013 (opens in new tab) that over 20% of adults in America struggled to pay their medical bills, and three in five bankruptcies were due to medical bills.
Having health insurance provides more than medical coverage. It gives you peace of mind that you won’t have a catastrophic financial situation when you’re dealing with a health issue. And let’s be honest: Wrestling with your finances is the last thing you want to do when you’re sick or injured.
If you have “higher medical risk,” do you pay more for health insurance?
The rules around risk, pricing, and plan access are different than they used to be. Before the Affordable Care Act (opens in new tab) was passed in 2010, insurance companies varied their prices for each individual person – and even denied coverage to some people – based on risk factors like age and health history. Today, for individual and small group plans (opens in new tab), everyone of the same age pays the same amount for the same plan from a specific insurer in the same region, regardless of their health history or current condition.
Here are some of the key ACA changes in effect today:
Insurers can’t prevent higher-risk people from signing up because of a pre-existing condition (opens in new tab) – which includes everything from taking anti-anxiety medication to having diabetes to being a cancer survivor.
People with health issues can't be charged more than healthy people for the same plan.
Women can't be charged more than men for the same plan.
Every individual or small group health insurance plan has to provide a core set of essential health benefits (opens in new tab). These benefits include things like free annual checkups and vaccines, and coverage for maternity and newborn care, chronic disease management, and mental health services, among others.
There are now federal limits on how much insurers can vary their prices based on someone’s age. Individual states have put even stricter guidelines in place around age-related price differences (or outlawed them altogether).
What happens if you lose your health insurance?
Losing your health insurance is a big deal. Unlike, say, your TV streaming subscription, there are strict rules around when you can sign up for health insurance and what happens if you miss payments during the middle of the year.
In most cases, you can only sign up for health insurance during Open Enrollment (opens in new tab) – an annual signup period that starts November 1 and usually runs through December. This prevents people from signing up only after they get sick or injured, which would impact everyone’s premiums.
Many of the seemingly arbitrary rules around how insurance works, when you can get insurance, and why your plan might be canceled are built on an underlying risk model and the complexities that stem from it.
Some parting words of advice:
Get health insurance, even if you don’t think you need it. The potential costs of not having a plan far exceed the money you’ll save by going uninsured.
