How Does Health Insurance Work?

Link to Open Enrollment

file8921303951830Insurance is an enormous industry: back in 2006, non-life insurance claims averaged almost a billion dollars – every day. But where did insurance get started, and why is insurance, especially health insurance, such an important issue in today’s society?

As far as we know, the first form of insurance was ship insurance; the ancient Greeks had a policy where an insurer would provide a sum of money to a merchant before a voyage that would then be paid back (with interest) if the venture was a success but forgiven if the ship was lost. Obviously, this isn’t how insurance works today, and this type of insurance wouldn’t really work for things like health care or even disasters.

Today, insurance, on the most basic level, is an even redistribution of risk: people who are at risk for something happening to them pay whatever their relative proportion of risk is. For example, people who live near rivers pay flood insurance because they are at risk for having a flood do damage to their property; people who are not in or near flood zones do not pay flood insurance because the chances of damage occurring because of a flood are extremely low.

This is, fundamentally, how health insurance works too, but it’s a lot more complicated for a wide variety of reasons. First, there are a lot of different risks to account for since basically every health condition or disease has a different level of risk associated with it; your risk of breaking a bone is different than your risk for getting cancer, and those two different conditions cost vastly different amounts to treat. Secondly, it’s hard to put a value on medical care. It’s fairly easy to calculate damage to a house or to a vehicle, but how much is your health worth? How much is saving a life worth? These are much more difficult questions to try and answer.

Health insurance is also more complicated because of who needs it and when. Many people who are young and healthy choose not to get insurance because they don’t plan on needing it – they figure they will get insurance later on in life when they may start developing more health issues. But what if they do get sick or injured and don’t have insurance? What if they can’t afford to pay for it?

Furthermore, what if everyone started to buy insurance only when they needed it later in life? Once people reach the age of 50, health care is almost a certainty – in other words, after the age of 50, health care is not something that might be needed (which is what insurance usually covers), it is something that people will absolutely need.

So, if insurance companies charged people based solely on their risk profile and their age, younger people would be charged less and older people would be charged more – a lot more. However, almost everyone is eventually going to need health care, so when you pay for insurance, you’re essentially paying for the risk of health problems you might experience distributed over the course of your own entire lifetime. You might pay for health insurance when you’re young and healthy and might not need it that often, but that’s because you’re almost certainly going to need health care when you get older.

Further complicating all of this is the fact that some people either (1) participate in behaviors such as smoking that are known to increase their risk for certain health problems or (2) discover serious (and thus expensive) health conditions before they have insurance. These groups of people still need health care, but they also put a strain on insurance because their risk levels are so high.

All of this is also tied up with ethics and important questions about society – does everyone have the right to receive health care and be healthy? Should the government be responsible for people’s health and well-being? Should we put a dollar value on someone’s health or life? Is the health of individuals more important than the financial success of businesses? These are all difficult questions to answer, and we will no doubt continue to debate these issues in the years to come.

What is clear among all these difficult and complex issues related to health insurance is that every individual should definitely get insured and should find a health care provider that they can trust. Meritage Medical Network is a top-rated healthcare network representing our local physician members. We provide health care and administer benefits for HMO members in Marin, Napa, and Sonoma Counties in California, and our expert medical and administrative staff are dedicated to ensuring that you receive the highest quality health care available. So if you’re searching for an insurance plan or changing insurance plans during open enrollment, make sure you find a plan that includes Meritage Medical Network.


Kaplan, M., & Kaplan, E. (2006). Chances are… Adventures in probability. New York, NY: Penguin.


Link to Open Enrollment
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