Chapter 1-Lesson 1, 2, 3, 4

How Insurance Works

There are many different insurance companies to work with (government and hundreds of others) but all of them use the same terminology and forms.

Lesson 3 will cover an introduction to insurance languages and you will also learn about providers, payers, deductibles, copayments, premiums and schedules of benefits. Also you will learn about different insurance programs from government (Medicare, Medicaid) to managed care approaches of HMO's and PPO's.

Medical Insurance

Medical insurance is a contract between an insurance company(carrier) and an individual or a group (the insured). This contract states that in the event of certain injuries or illnesses, the insurance company will pay some or all of the medical bills for the insured. For this coverage, the insurance carrier collects payments from the insured. Payments are called premiums.

Premiums are always paid in advance either monthly, quarterly, semi-annually or annually, depending on the coverage provided by the insurance carrier. When the carrier pays for treatment based on a policy, it is paying benefits. The insurance carrier collects premiums from many people and only pays benefits to relatively few. That is how insurance companies make their money.

Insurance Terminology

In this section, we will cover some basic insurance concepts that will help you function intelligently when you run across insurance terminology. Terms:

Provider - The provider is the person or organization that provides medical services. Doctors are an example of providers.

Claim Form - The claim form is the document that the medical claims specialist fills out in order to submit an insurance claim to an insurance carrier. The most common insurance forms are the HCFA-1500 and HCFA-1450.

Deductible - The amount of money an individual must pay before insurance benefits begin is called the deductible. Usually a policy will pay nothing of the first $250, $500 or $1000 of medical charges and then a percentage of everything above that amount every year. On the explanation of benefits, any amount that is "applied to deductible" is a covered charge that is subtracted from your total deductible amount. The insurance carrier does not pay any money on "applied to deductible" charges.

For example, imagine that you, a patient, have a medical policy that has a $250 deductible and, after the deductible is paid, 80% coverage. So far this year, you have spent $200 of your own money on medical care, and that medical care has been defined as covered under your insurance policy. For the insurance company to begin to pay 80% of your covered medical care costs, you must still pay out $50 more for covered charges. After you have met the $250 deductible, your medical insurance benefits will begin and the carrier will pay 80% of each claim you submit for covered charges for the rest of the year.

Copayment

A copayment is a flat amount of money (usually $10-$15) paid by the patient. For example, many policies have a copayment for prescription drugs. That means every time a person fills a prescription, it costs them no more than their copayment, but they must pay that copayment every time they fill a prescription. Some policies require copayments even after the deductible has been met. Other policies have no deductible, but a copayment is required every time any type of medical care is received. Copayments are paid immediately at the time of service.

Reasonable and Customary

The phrase reasonable and customary (R&C) refers to price guidelines used by insurance carriers for different procedures. Usually a carrier will only pay up to the maximum on their reasonable and customary fee, regardless of the actual cost to the patient of a procedure. For example, if a patient has knee surgery and the doctor charges $1000, the insurance company compares that fee to its reasonable and customary scale. If the R&C scale gives a $900 limit for that particular procedure, then the patient is responsible for the extra $100. Fees that exceed the reasonable and customary scale are disallowed by the carrier. Many private insurance carriers have adopted the reasonable and customary guidelines for their coverage. Many government insurance programs also use reasonable and customary guidelines.

Explanation of Benefits

The explanation of benefits (EOB) is a document that explains how much the insurance company paid and how much is disallowed (charges that exceed reasonable and customary charges are disallowed). A typical explanation of benefits looks like this:

Bill From Doctor $50.00

Disallowed: - 6.00

Allowable Charge: 44.00

Applied to Deductible: -15.00

Amount due from Carrier 29.00

The insurance company sends an explanation of benefits every time you submit a claim. Even if the carrier is paying nothing on the claim, it will still send this document explaining why. As you can see from the example above, the insurance carrier is paying $29.00 of a $50.00 charge. That means the patient is responsible for the remaining $21.00. As a medical claims specialist, you can see how valuable the explanation of benefits is.  

Types of Health Insurance

There are hundreds of private insurance companies that provide medical coverage for individuals and groups. These private insurance companies generally follow standards similar to the government programs we will cover here. This next part of the lesson is designed to introduce you to the many types of government sponsored insurance programs and each program's requirements for coverage.

Government Insurance Programs

Unless otherwise noted, these are federal programs.

Medicare - Medicare is a federal health plan covering people age 65 and older, and people with disabilities.

Medicaid - Medicaid is a state-sponsored insurance program for low-income people who otherwise wouldn't be able to afford health insurance.

CHAMPUS - CHAMPUS (Civilian Health and Medical Program of the Uniformed Services) provides medical coverage for the families of the various "uniformed" government services including the armed forces. It covers retired military personnel and their families. It also covers the families of the military personnel killed in active duty.

CHAMPVA - CHAMPVA (Civilian Health and Medical Program of Veterans Administration) is the program that covers veterans with permanent, service related disabilities. In the event the service member dies from a service related disability, CHAMPVA covers the family.

Workers' Compensation - Workers' Comp, a state-run program, pays the medical bills for people with job-related illnesses or injuries.

Private Insurance Companies - Traditional and Managed Care.

Private, Traditional Insurance - Twenty-five years ago, the traditional insurance concept was the only one around. The traditional insurance concept basically could be described as the following.

The insurance companies contracted with an individual to pay his or her medical bills based on a "fee for service" concept. Whatever the physician or medical provider charged was the amount on which the insurance company based its reimbursement.

Private insurance companies are in business to earn profits. They pay out benefits, but also take in much more in premiums.

Managed Care - As health care costs skyrocketed, many businesses that held group insurance policies for their employees began looking for ways to save money while still providing excellent health care coverage. The solution was "managed care".

Born in the 1980's, managed care introduced the concepts of "Health Maintenance Organizations" (HMO's) and "Preferred Provider Organizations" (PPO's). In both HMO's and PPO's there are groups of doctors who contract with the organization to charge set amounts for procedures. These amounts do not change and the additional fee (beyond a copayment that might be in the patient's policy).

An HMO is a prepaid health plan in which individuals receive medical services from participating physicians. HMO's encourage their members to practice preventive health care, often paying for routine physicals and tests designed to catch signs of illness before the person actually becomes sick. The patient is assigned a "primary physician" when he or she joins the HMO. This primary physician then oversees that patient.

PPO's contract with many doctors who agree to charge rates according to the PPO scale. These doctors are not "employed" by the PPO. Instead, they are independent offices, hospitals and clinics that have joined the PPO. When policy holders in a PPO go to a medical provider who is not part of the PPO network, that policy holder will see a large reduction in benefits.

Blue Cross/Blue Shield

The oldest and largest prepaid insurance carrier is Blue Cross/Blue Shield. Blue Cross provides hospital, outpatient and home care coverage. Blue Shield covers physician services and provides dental and vision care coverage.

Blue Cross/Blue Shield differs from the other private insurance providers in that it is not a commercial insurance company. Blue Cross/Blue Shield is a federation of nonprofit community insurance corporations. Even though Blue Cross/Blue Shield is not technically a government program, it must receive state government approval before it can raise its rates.

Just as the HMO and PPO managed care companies do, Blue Cross/Blue Shield contracts with doctors who agree to charge a set fee for procedures performed. Blue Cross/Blue Shield then reimburses the doctor directly for all charges.

Home / Lessons / Chapter 1 / Chapter 2 / Chapter 3 / Chapter 4 / Chapter 5 / Practice Tests / Answer Keys
How to use ElectroniClaim

Send mail to sales@electroniclaim.com with questions or comments about this web site.
(Last modified: July 5, 1999)
Copyright © 2000 Electroniclaim