9.1 Health Insurance Concepts and Defining the Insured

Health insurance transfers the financial risk of medical expense and income loss from the individual to an insurer through the pooling of risk. Premiums from many insureds fund the claims of the few who incur losses in any given period. Unlike life insurance, where the loss event (death) is certain and only timing is unknown, health claims are frequent, recurring, and partly within the insured's control, which drives the heavy use of cost-sharing and morbidity-based rating.

Morbidity vs Mortality

Health premiums are built on morbidity tables, which measure the incidence of sickness and disability at each age, rather than the mortality tables used for life insurance. Morbidity rates rise with age and reflect the probability of illness, frequency of claims, and average duration of disability.

Who Is the Insured?

Health policies must clearly define the persons covered. The exam tests these distinctions precisely:

Defining Dependents

Under the Affordable Care Act (ACA), plans offering dependent coverage must extend it to adult children up to age 26, regardless of marital status, residency, student status, or financial dependence. Newborns are covered automatically from the moment of birth, and the insured must notify the insurer within the policy's window (commonly 31 days) to continue coverage and add premium.

Core Cost-Sharing Concepts

The insured shares costs through several mechanisms. Memorize the order in which they apply: the deductible is satisfied first, then coinsurance applies, until the out-of-pocket maximum is reached, after which the plan pays 100%.

Worked Example: Cost-Sharing

A plan has a $2,000 deductible, 80/20 coinsurance, and a $6,000 out-of-pocket maximum. The insured incurs $32,000 in covered charges:

Deductible:        Insured pays $2,000  (remaining bill $30,000)
Coinsurance 20%:   20% of $30,000 = $6,000
But deductible + coinsurance cannot exceed the OOP max:
  $2,000 + $6,000 = $8,000 > $6,000 cap
Insured pays only $6,000 total; insurer pays $26,000.

Trap: Premiums do not count toward the deductible or out-of-pocket maximum. Only cost-sharing on covered, in-network services counts.

Eligibility and Insurable Interest

For an applicant to obtain health coverage on another person, an insurable interest must exist at the time of application — typically a family relationship or a bona fide business relationship. Unlike life insurance, health policies do not name a separate beneficiary; benefits are generally paid to the provider (assignment of benefits) or reimbursed to the insured.

Common ACA Consumer Protections to Memorize

• Guaranteed issue — insurers cannot decline an applicant for pre-existing conditions in the individual and small-group markets.
• No pre-existing condition exclusions — coverage of existing conditions begins immediately.
• Essential Health Benefits (EHBs) — ten categories including ambulatory care, emergency services, hospitalization, maternity, mental health, prescription drugs, rehabilitative services, lab, preventive/wellness, and pediatric care.
• No lifetime or annual dollar limits on essential health benefits.
• Metal tiers — Bronze (60% actuarial value), Silver (70%), Gold (80%), Platinum (90%) describe the share of costs the plan pays on average.

Group vs Individual

A group health plan covers members under a master contract issued to an employer or association; each member receives a certificate of coverage, not a policy. Group plans use experience or community rating and require a minimum participation percentage to deter adverse selection.

An individual policy is owned directly by the insured and is medically underwritten only where permitted; the ACA bars health-status underwriting in most individual markets.

Sources of Health Coverage and Loss-of-Income vs. Expense

The exam wants you to separate the two broad purposes of health insurance: medical expense coverage pays providers for the cost of care, while disability income coverage replaces a portion of lost wages when the insured cannot work. A single claim can implicate both — a heart attack generates hospital bills (medical expense) and weeks of lost income (disability) — and the products are underwritten and taxed differently.

Where coverage comes from

Rating methods tied to morbidity

Because premiums rest on morbidity, insurers price groups by community rating (everyone in an area pays the same, used in ACA individual/small-group) or experience rating (the group's own claim history sets the rate, common in large groups). A worked point: an employer whose group ran 130% of expected claims will see an experience-rated renewal increase, whereas the same group in a pure community-rated pool would not. Knowing which rating method a market uses explains why small-group ACA premiums cannot reflect one employee's diagnosis.