Chapter 2 - Health Insurance Concepts

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Chapter 2: Health Insurance Concepts

Certificate in Health Insurance

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Certificate in Health Insurance TCS Business Domain Academy

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Contents

Chapter - 2 Health Insurance Concepts ............................................................................. 4
Introduction ...................................................................................................................... 4
2.1 Healthcare Financing ............................................................................................. 5
2.1.1 Healthcare ......................................................................................................... 5
2.1.2 Healthcare Financing ..................................................................................... 5
2.1.3 Financial Sourcing .............................................................................................. 5
2.1.4 Functions .......................................................................................................6
2.2 Health Insurance ....................................................................................................6
2.2.1 Definition of Health Insurance ........................................................................6
2.2.2 Health Insurance Plan / Policy ........................................................................6
2.3 Principles of Health Insurance Contracts ................................................................ 7
2.4 Basic Terminologies of Health Insurance ............................................................... 7
2.5 General Exclusions under coverage of Health Insurance ........................................9
2.6 Features of Health Insurance ............................................................................... 10
2.7 Health Insurance Framework ............................................................................... 12
2.7.1 Stakeholders .................................................................................................... 12
2.7.2 Transactions .................................................................................................... 13
2.7.3 Functions ......................................................................................................... 15
2.8 Values of health insurance ................................................................................... 16
Summary ........................................................................................................................ 18
References ...................................................................................................................... 20


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Chapter - 2 Health Insurance Concepts

Introduction
Unlike other types of insurance, where insured is aware and knowledgeable enough of the
associated perils and coverages. Health Insurance is one which involves a lot of medical
terminologies, declaration of pre-existing medical conditions, covered and uncovered
illnesses etc.., which makes it a bit complicated. Without proper knowledge of such
concepts it will be difficult to move forward. Hence, this chapter assists you to set aside
such complications and get a fair idea on certain vital aspects of Health Insurance. Most of
this chapter deals with the explanation of various terminologies inherent to Health
Insurance.

Learning Objectives
On completion of this chapter, you will understand the:
Definition of Health Insurance
Basic terminologies in Health Insurance
Health Insurance Framework
Features of a Health Insurance policy


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2.1 Healthcare Financing
2.1.1 Healthcare
The prevention, treatment, management of illness and the preservation of mental and
physical well-being through the services offered by the medical and allied health
professions is defined as healthcare.
2.1.2 Healthcare Financing
Healthcare financing include mobilization of funds for healthcare, allocation of funds and
mechanism of paying for healthcare.
2.1.3 Financial Sourcing
There are various ways of financing the health system:
Through revenues raised from general taxation, e.g. United Kingdom, Denmark
Through direct payments by patients, e.g. Myanmar
Through health insurance, e.g. Germany (social health insurance) and USA (private
health insurance)
Mixed a mixture of the above three mechanisms, e.g. India

Figure 1 Sources of healthcare financing
Source: Skehri/Savedoff (2005: 128)

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2.1.4 Functions
Health financing systems have three basic functions revenue collection, pooling of
revenue and purchasing of healthcare.
Revenue collection is the way the healthcare system receives money from
households, enterprises and donors. It can be through taxes, contributions to health
insurance or direct out-of-pocket payments.
Pooling is accumulation and management of revenues in such a way as to ensure
that the risk of having to pay for healthcare is borne by all members of the pool and
not by any individual contributor. In tax-based systems, pooling is done by the
concerned government organization, while in insurance schemes, pooling is done
by the insurer. There is no pooling in direct out-of-pocket payments.
Purchasing is the process by which pooled funds are paid to providers in order to
deliver a specified set of health interventions. Purchasing can be performed
passively or strategically.

2.2 Health Insurance
2.2.1 Definition of Health Insurance
Health Insurance can be defined as any form of insurance whose payment is contingent on
the insured incurring additional expenses or losing income because of incapacity or loss of
good health.
Insurer, in order to meet those expenses creates a pool of money collected as
premiums (value of which is arrived at by various calculation methodologies (which will be
discussed later in the chapter), and disburses them upon a valid claim (subject to the terms
and conditions of the policy) by the insured.
2.2.2 Health Insurance Plan / Policy
A health insurance provider/ health insurance company would design a product to meet the
medical needs of the insured, which is called as a health insurance policy. Each policy has
got its own features, terms and conditions depending on which the premiums collectible
will be defined.


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2.3 Principles of Health Insurance Contracts

Like in any other insurance contract, health insurance is based on four underlying
principles:-
Utmost Good Faith: This principle mainly deals with disclosure and undue
advantage. Disclosure is where both the parties of the contract should not conceal
any vital information that is essential in writing a contract (ex: insured not disclosing
medical history) as well not misrepresenting any of the terms of the contract.
Undue advantage is where one of the parties of contract tries to take advantage
over the other by having prior knowledge of superior information about a certain
material aspect of the contract.
Indemnity: Upon suffering a covered loss, the insured is entitled to receive a
compensation from the insurer, which would make good in full or in part the loss
suffered by the insured, but would not place the insured at an advantage over
his/her pre-loss position.
Insurable Interest: The insured should have an insurable event in the subject
matter of insurance, i.e. the insured must suffer a loss if the insurable event takes
place, or the insured continues to receive financial gain by the non-occurrence of
the event. Insurable interest does exist in the case of ones own illness or that of a
close member of the family.
Proximate cause: The loss should be directly caused by a covered peril, and should
not be due to a peril which is not covered. For example, if complications due to HIV
positive status are not covered in the insurance, costs incurred on opportunistic
infections occurring because of suffering with HIV will also not be payable by the
insurer.
2.4 Basic Terminologies of Health Insurance

Health insurance is like any other form of insurance where people pool the risks of medical
expenses. Both government as well as private organizations offer insurance policies. Also
there are several non-profit organizations that manage the insurance.

Health insurance is categorized into two types - the individual health insurances and the
group health insurances. Group health insurances are available under organization or a

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company where the coverage is provided only to its employees and their dependants. In
exchange the government provides the organization with certain tax benefits.

There are normally the following concepts applicable to any health insurance policy:
Premium: This is paid by the policy holder to the policy provider. It is usually paid on
a monthly or on quarterly basis. It is dependent on the deductible, co-payments and
the coverage.

Deductible: This amount is paid by the policy holder as well. For example, a policy
holder of a plan might need to at least pay about $500 in a year, before the health
insurer providers cover the expenses of the medical cure. It might take several visits
before one reach the full amount of the deductible. After that limit is reached, the
insurance company starts paying for the particular care.

Co-payment: This amount is paid by the policy holder as well. This is paid before
the insurance provider starts paying the expenses of the service. For example, the
policy holder is required to pay $60 dollar to the doctor or when they are obtaining
prescription. This co-payment will be done each time they acquire the service.

Co-insurance: Besides paying for the co-payment, an insurer may also be required
to pay a certain amount of money as co-insurance. This is a percentage of the total
expenses of the policyholder. For example, an insurer is required to may 30% as co-
insurance. At this stage, if they undergo any surgery they will pay 30 % of the cost
while the insurance company will pay 70 percent. It is over and above the cost of the
co-payment.

Exclusions: All different services under the medical service which are not covered
under any single insurance policy are exclusion. At this stage, the insurer has to pay
the full cost of the service.

Coverage limits: Certain insurance companies pay for a particular service only to a
particular dollar amount. The excess charge is paid by the policy holder. Certain
companies even engage this limitation to the annual charge coverage or to lifetime

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charge coverage. The beneficiaries are not paid if the service charge exceeds the
mentioned limit.

Out-of-pocket maximums: This is similar to coverage limit, but in this case the
insured's out of the pocket limits ends, instead of the insurance provider's limits.
Insurance company pays the remaining charge.

Capitation: Capitation is the amount paid by an insurer to a healthcare provider in
exchange of which the healthcare provider agrees to treat all the members of
insurer.

Pre-Existing Condition: An illness, symptom, disease or a physical condition which
already exists prior to commence in coverage of Health Insurance.
2.5 General Exclusions under coverage of Health Insurance

Surgery and other procedures for the purpose of correcting refractive errors
In-Vitro Fertilization and Infertility treatment
Treatment relating to sexual dysfunction
Treatment relating to or forming part of Organ Transplants including maintenance
medication in the private sector
Treatment for cosmetic purposes
Treatment relating to or arising from participation in professional sporting activities
Examinations for insurance, school, association, emigration, visa, employment or
similar purposes
Anti-alcohol and anti-smoking drugs
Obesity
Educational Therapy
Protective gear
All costs relating to or forming part of the treatment of HIV/AIDS
Costs associated with or arising out of willful self-injury, suicide or attempted
suicide
Hearing devices including cochlear implant devices, whether introduced internally
or not, as well as the maintenance of these devices

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Household remedies, contraceptives, patent medicines, non-ethical and all
proprietary preparations including but not limited to vitamins, minerals, face
creams, body lotions, soaps, shampoos, and laxatives
All costs arising from injury or illness for which any other party is liable unless the
scheme is satisfied that there is no reasonable prospect of the member recovering
adequate damages from the other party
All treatment and costs incurred for which benefits are not specifically provided
2.6 Features of Health Insurance

Reimbursement system: This system refers to the manner in which the claims are
settled. This characteristics of a health insurance system can be described as
follows:
In the traditional indemnity system, customers first incur expenditure on
services and later submit claim to insurance company for reimbursement (e.g.
Mediclaim of US).
In case of Managed indemnity, a Third Party Administrator (TPA) takes care
of the claim settlement of enrollees and directly reimburses service provider.
Insurer pays service provider a fixed amount, out of which provider will serve
health needs of enrollees for a specific period.
Reimbursement can be fee-for-service, which would involve charging for each
individual service, such as in-patient bed-days, drugs, investigations, etc..,
Case specific reimbursement is based on the category of patient admitted.
Under this system admissions are grouped into categories called as
Diagnostic Related Groups (DRGs), which is based on their clinical
characteristics.

Services covered by insurance: Coverage of services varies with each insurance
policy. Some cover only curative services whereas others cover primary OPD (Out
Patient Department) care as well. Coverage varies according to the extent of
hospitalization also.

Role of the insurer: The insuring institution can play either an active or a passive
role. If it is a mere funding entity and is not directly involved in the provision of
healthcare services, controlling of costs becomes difficult. It develops mechanisms

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of cost sharing to mitigate the negative impacts and beneficiaries are asked to pay
an amount each time they use the services as deductibles (the insured pays a
specific amount before receiving insurance benefits) or co-payment (a fixed
percentage of cost of service is paid by the beneficiary to the insurance company).
On the other hand, if the insurance company is a managed care organization
(directly involved in organizing and providing healthcare services) it can enforce
cost discipline more rigorously.

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2.7 Health Insurance Framework

Depending on the situation and requirements various constituents make up a health
insurance system. They are termed as design features. In order to get an understanding on
the system, some of the generic constituents are depicted below. This framework assists in
understanding the functioning and the structure of a health insurance system.

Figure 2 Framework of Health Insurance
Source: http://www.whoindia.org/LinkFiles/Health_Insurance_Health_Insurance_Training_Manual.pdf
2.7.1 Stakeholders
All together there are 4 types of stakeholders in this whole gamut of framework.
They are:-
Community: In any health insurance system people are the recipients of the
benefits. They are the ones who would contribute towards the health insurance
fund (except in the case of social healthcare schemes). They can take several forms,
depending on the situation, like:-
Civil servants in a country
Voluntary participants in case of a private health insurance scheme
Villagers in a village or employees in an organization

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Providers: They can either be public or private providers, and at times they can be a
combination of both. Depending on the penetration of insurance, efficiency of the
system, policies and the economic status of the country, it may choose between
public and private or both to provide social healthcare schemes. E.g. in Belgium,
both public and private providers are contracted by the insurers. In India, public
providers are used to provide social health insurance for industrial workers and
private health insurance schemes empanel private hospitals.

Organizer: An organizer is an institution which manages the policy/scheme. It could
be an entity within the government, an NGO (Non-Government Organization) or a
community-based organization and in some cases the organizer is not relevant (ex:
private health insurance).
An organisers primary function is to orchestrate various stakeholders and take
charge of the operations. It performs a dual role, in governance and as an
administrator. Operations include following activities:-
Creating awareness
Collecting and pooling the revenue
Purchasing healthcare
Reimbursing claims and monitoring the entire system

Insurer: Insurers primary responsibilities include, managing the fund and accepting
the risk. Many a times it is the same institution that acts as an organizer and an
insurer. The insurer develops the product and manages the risk, so that the insured
get their benefit. Every country has got its own regulatory bodies for insurance,
which lays policies and guidelines for issuing licenses, functioning of insurance
activity and handling of fraud & grievances. Registration is a must in order to
become a private insurer.
2.7.2 Transactions
Also there are 3 kinds of transactions or exchanges that take place in the whole of the
process. They are:-
Premium: Premium is the amount collected from the insured. It may be a onetime
premium or collected monthly/ quarterly/ annually. The premium is determined

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based on the probable size of expense (in accordance with associated risk) that an
insurer can incur.

It can be calculated based on the following methods:
Risk-rated premium Here the premium calculation is based on the risk
covered. So a person with a chronic illness and a high probability of falling sick
will have a higher premium compared to a young and healthy adult who has a
low probability of falling sick. Hence in this kind of calculation, the premium for
different individuals may vary for same amount of insurance cover. Thus the
elderly or those with poor health generally pay more. Risk-rated premiums will
be in terms of equity issues, as those who need healthcare more (and probably
cannot afford it) are asked to pay more. This type of premium is mainly
deployed by private insurers for insuring individuals.
Community-rated premium Here it is a mix of all risk categories (high risk and
low risk) and a common premium is applicable to the entire group reflecting the
average risk of illness. This brings down the premium to an affordable level,
enabling everyone in the group to participate. This is more equitable than the
risk-rated premium as everybody shares the cost of illness equally. This is
usually used in community health insurance schemes.
Income-rated premiums It is prominent in social health insurance schemes.
Here the premium is in accordance to the income levels. People with higher
income levels pay a higher premium and vice versa. The total premium
collected is expected to suffice the cost of the insurance policy. When compared
among the three, it is the most equitable type of premium.

Premiums can either be voluntary or mandatory. Most of the social health insurance
schemes are mandatory where it is compulsory to contribute to the fund, which is
why the size of such pools are high enabling a mix of all risk rated categories(high
risk and low risk). But when it comes to private health insurance, premiums are
voluntary.

Benefit package: It is the return for the contribution. Generally the constituents of
a benefit package are the events that have least probability but associated with a
higher cost, e.g. hospitalization. On the other hand, there exist schemes which

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provide just the opposite, where it covers events with higher probability and lower
associated cost, e.g. outpatient visits. And a combination of both is also possible.
Premiums are directly proportional to the benefit package. Also most private health
insurance schemes usually exclude some conditions from the cover. For example,
many insurers do not cover treatment of HIV-AIDS. Similarly, treatment of chronic
conditions or very expensive procedures is excluded.

Payments: There are basically two ways of settling insurance claims. One is the
third party payment mechanism, where the organizer pays directly to the provider.
This form of reimbursement has the least burden for the patient. On the other
hand, many private health insurance schemes have an indemnity mechanism,
where the patient pays the bills upfront and is reimbursed by the insurer after
submitting the bills and documents. The disadvantage is that the patient has to
make arrangements for paying the bill. This can have repercussions, both on access
to healthcare and financial protection. The reimbursement to the provider can be
either a fee for service or a case-based payment or a capitation payment. The fee
for service in an insurance scheme is dangerous as it can lead to irrational therapy
and cost escalation.
2.7.3 Functions
There are three managerial functions that are performed to enable smooth functioning of
the system, which include:-

Administration: The insurer usually has to perform many administrative functions
apart from the onerous task of managing the funds. These include:
Creating and maintaining insurance awareness among the insured
Fixing premiums and benefit packages
Processing claims
Negotiating with providers
Redressing grievances
Providing feedback to the insured

Risk management: Health insurance has many risks to manage, e.g. moral hazard,
adverse selection, fraud and cost escalation. An effective system will introduce
measures to minimize these risks.

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Monitoring the system: Health insurance framework needs to be closely
monitored. There are many indicators that are specific to health insurance, e.g.
claims ratio, liquidity ratio, etc. (More details are given in the chapter on
Monitoring).
2.8 Values of health insurance

The entire health insurance concept is based on few or all of these below mentioned
values:-
Solidarity: This is one of the fundamental bases of a health insurance system,
especially social health insurance and community health insurance schemes. It
operates less in private health insurance schemes. It is defined as the awareness of
unity and a willingness to bear its consequences. It means that people accept that
the size of the return may not match the resources they have put in the system.

Risk pooling/sharing: Related to solidarity is risk pooling. It implies that there is
sharing of risks between the high-risk and the low risk populations. This is
traditionally shown as risk sharing between the healthy and the sick, between the
rich and the poor, and between the economically active and economically inactive.
Risk sharing builds on the concept of solidarity, where people are willing to
contribute for the sake of others. It can be graphically depicted as follows:

Figure 3 Pooling of risks

Equity: This is a very important value of health insurance and is one of the reasons
for introducing health insurance in countries. Under optimal conditions, health
insurance is more equitable than direct out-of-pocket payments and can be as

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progressive as tax-based financing. There is horizontal equity when for a particular
income level; equal contributions by members are used to meet the unequal needs
of these members. And vertical equity when across income levels, unequal
contributions are used equally to meet the needs of the members.

Participation/empowerment: Health insurance, by its contributory nature, can
allow people to express their concerns to the health services. Unlike user fees,
where the interaction between the patient and the health services is on an
individual basis, in health insurance there can be collective negotiation. This is
emphasized in community health insurance, as the distance between the insurer
and the health services is usually small. Thus, health insurance can be a tool for
empowerment of the patient community in relation to health services. This is
especially so since there is a guarantee of service in health insurance.


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Summary
The prevention, treatment, management of illness and the preservation of mental
and physical well-being through the services offered by the medical and allied
health professions is defined as healthcare.
Healthcare financing include mobilization of funds for healthcare, allocation of
funds and mechanism of paying for healthcare.
The basic functions of healthcare financing systems are:
Revenue collection
Pooling
Purchasing
Health Insurance can be defined as any form of insurance whose payment is
contingent on the insured incurring additional expenses or losing income because of
incapacity or loss of good health.
Principles of health insurance contracts:
Utmost Good Faith
Indemnity
Insurable Interest
Proximate cause
Basic Terminologies of Health Insurance
Premium
Deductible
Co-payment
Co-insurance
Exclusions
Coverage limits
Out-of-pocket maximums
Capitation
Pre-Existing Condition
Features of Health Insurance are:
Reimbursement system
Services covered by insurance
Role of the insurer


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Framework of Health Insurance are:
Stakeholders of health insurance are:
Community
Providers
Organizer
Insurer
Transactions involved in health insurance are:
Premiums which can be risk rated, community rated or income
rated
Benefit package
Payments
The three managerial functions of health insurance are:
Administration
Risk management
Monitoring the system
Values of health insurance are:
Solidarity
Risk pooling/sharing
Equity
Participation/empowerment


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References
http://www.whoindia.org/LinkFiles/Health_Insurance_Health_Insurance_Training_Manual.
pdf
World Health Organization (2002), World Health Report 2002: Reducing risks, promoting
healthy life, WHO: Geneva.
G. Carrin, C. James and D. Evans, Achieving Universal Health Coverage, WHO Geneva
2005
Institute of Public Health Bengaluru- India, Training Manual on Health Insurance

Notice
The information given in this course material is merely for reference. Certain third party
terminologies or matter that maybe appearing in the course are used only for contextual
identification and explanation, without an intention to infringe.

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Chapter 2 - Health Insurance Concepts

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Chapter 2: Health Insurance Concepts

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