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Health insurance has a long and complex history that started hundreds of years ago and continues to evolve today. In countries without a national or socialized health care system, health insurance comes in two main forms. These are scheduled health insurance and comprehensive health insurance. The latter involves varying degrees of coverage for every aspect of health care, including doctor visits, prescription drugs, hospital stays, and surgery. One of the main benefits provided by comprehensive health insurance is that the insured is protected from large, unexpected medical bills that could result in undue financial stress or even financial ruin.
An insurance company that offers comprehensive health insurance pays for health care services in exchange for monthly premiums, as well as applicable co-pays and deductibles paid by the insured. In most instances, this type of insurance pays for everything over a certain fixed amount, called the deductible, which the insured is required to pay out of his own pocket. Co-pays, or coinsurance payments, serve the same function, except that they can represent either a fixed quantity or a percentage.
Comprehensive health insurance plans are usually quite costly if paid completely by the policy holder. This is because of the high potential payout offered with a comprehensive policy, as well as the variety of services that are covered in some way. Most comprehensive plans have a limit as to the amount that they will pay in coverage over a person's lifetime, but these amounts can be in the millions of U.S. Dollars (USD). When an insurance company is exposed to this type of risk, it makes up for the risk in the form of higher premiums.
There are also other reasons why comprehensive health insurance tends to be so expensive, which is a topic of no small controversy in many places. The first is one that economists refer to as adverse selection. This means that there is a tendency for people to buy insurance only when they anticipate needing it. This means that there is a higher level of risk built into the system, which must be compensated for by higher premiums. This can be comparatively detrimental to those who, in contrast, buy insurance only as a safety net.
Another issue is the behavioral tendency known as the moral hazard. Put simply, those with insurance may be less careful about their health, or their medical expenses if they do become sick, simply because they know they are covered by insurance. Moral hazard is partially remedied by the presence of deductibles and co-pays, which place some responsibility with the consumer of health care.
@dfoster85 - Oops, I think you were mixing up "moral hazard" and "adverse selection." People buying insurance only when they need it is inverse selection.
Another difference between individual plans and group plans is that in the United States, at least, individual plans tended to have lower lifetime limits on coverage. But since 2010, lifetime limits have actually been illegal - which is really great news for that tiny percentage of people with very high healthcare costs. What are they supposed to do after they "cap out"?
Individual plans, basically the only option for self-employed health insurance, have also come under fire for have high rates of rescission, which is when a person gets sick and the insurance company
goes through their application with a fine-tooth comb looking for a reason to cancel it - like a misstatement on the application. The 2010 health care law in the US was supposed to help with that practice, but I haven't heard whether it has been successful. Group plans didn't have that issue because the policies were not individually underwritten.
I think it's important to differentiate between individual health insurance and group health insurance plans. Individual plans are particularly subject to the moral hazard, which is why they have traditionally had so many limits.
Imagine a self-employed man in his late 20s who's always enjoyed excellent health. He might not see much reason to buy health insurance. Then, let's say, he gets married, and he and his wife want to have a baby. Now all of a sudden they do need insurance - with a maternity care rider. Maternity care riders in particular tend to be very expensive because people don't buy them unless they think they'll get pregnant!
But if the same person got a job at a big company, he might be offered insurance free or at a low cost. He might just go ahead and sign up - no reason not to. There's thus less moral hazard there.