health insurance

health insurance, system for the financing of medical expenses by means of contributions or taxes paid into a common fund to pay for all or part of health services specified in an insurance policy or the law. The key elements common to most health insurance plans are advance payment of premiums or taxes, pooling of funds, and eligibility for benefits on the basis of contributions or employment.

Health insurance may apply to a limited or comprehensive range of medical services and may provide for full or partial payment of the costs of specific services. Benefits may consist of the right to certain medical services or reimbursement to the insured for specified medical costs. Some types of health insurance may also include income benefits for working time lost because of sickness (i.e., disability leave) or parental leave.

A health insurance system that is organized and administered by an insurance company or other private agency, with the provisions specified in a contract, is known as private, or voluntary, health insurance. Private health insurance is usually financed on a group basis, but most plans also provide for individual policies. Private group plans are usually financed by groups of employees whose payments may be subsidized by their employer, with the money going into a special fund. Insurance of hospital costs is the most prevalent form of private health insurance coverage; another type is major medical expense protection, which provides protection against large medical costs but avoids the financial and administrative burdens involved in insuring small costs.

Any system that is financed by legally mandated compulsory contributions or by taxes and whose provisions are specified by legal statute is known as a government insurance or social insurance. This type of medical insurance plan dates from 1883, when the government of Germany initiated a plan based on contributions by employers and employees in particular industries. In the United States, Medicare and Medicaid—medical insurance for the elderly and the poor, respectively—are government insurance programs. The distinction between public and private programs is not always clear, because some governments subsidize private insurance programs.

Quite different, however, are government medical care programs (which are sometimes characterized as “socialized medicine” in the United States). In these systems, which are usually financed from general tax revenues, doctors are employed, directly or indirectly, by a government agency, and hospitals and other health facilities are owned or operated by the government. The National Health Service in the United Kingdom and the Veterans Health Administration program operated by the U.S. Department of Veterans Affairs are examples of such systems.

In the United States, health maintenance organizations (HMOs) became popular in the late 20th century as a way to control medical costs through the use of prenegotiated fees for medical services and prescription medicines. An alternative to the HMO is the preferred provider organization (PPO), also known as a participating provider option, which offers features of traditional fee-for-service insurance plans, such as the ability of patients to choose their own health care providers, but also follows the lower-cost strategies of HMOs. For example, those enrolled in a PPO can see any medical provider at any time, without a referral from a primary care physician; however, if the insured uses one of the insurance company’s “preferred providers,” the company generally pays a higher percentage of the cost. In both HMOs and PPOs, the insured is usually responsible for a certain portion of the cost of the medical services, with a co-payment fee (paid by the insured at the time of an office visit) being one of the most common charges.