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Congressional Research Service 
 
˜
 
The Library of Congress 
CRS Report for Congress
Received through the CRS Web
Order Code RL32237
Health Insurance: A Primer
Updated February 3, 2005
Bernadette FernandezAnalyst in Social LegislationDomestic Social Policy Division
 
Health Insurance: A Primer
Summary
People buy insurance to protect themselves against possible financial loss in thefuture. Such losses may be due to a motor vehicle collision, natural disaster, or othercircumstance. For patients, financial losses may result from the use of medicalservices. Health insurance then provides protection against the possibility of financial loss due to health care use. In addition, since people do not know ahead of time exactly what their health care expenses will be, paying for health insurance ona regular basis helps smooth out their spending.While health insurance continues to be mainly a private enterprise in thiscountry, government plays an increasingly significant role. Especially during thelatter half of the 20
th
century, the government both initiated and responded todynamics in medicine, the economy, and the workplace through legislation andpublic policies. For example, the Internal Revenue Service clarified that employercontributions to employee health benefits are exempt from taxation, whichencouraged the growth of employment-based health coverage. Given the frequentintroduction of legislation aimed at modifying or building on the current healthinsurance system, understanding the potential impact of such proposals requires aworking knowledge of how health insurance is designed, provided, purchased, andregulated. This report, which will be updated, provides basic information about thosetopics.Persons and families without health coverage are more likely than those withcoverage to forgo needed health care, which often leads to worse health outcomesand the need for expensive medical treatment. Since uninsured persons are morelikely to be poor than insured persons, the uninsured are less able to afford the healthcare they need. Uninsurance can lead to health care access problems forcommunities, such as overcrowding in emergency rooms. Furthermore, individualstates and the nation as a whole are affected through increased taxes and health careprices to cover uncompensated care expenses.Americans obtainhealth insurancein different settings and through a variety of methods. People may get health coverage through the private sector, or from apublicly funded program. Consumers may purchase health insurance on their own,as part of an employee group, or through a trade or professional association. A smallminority of employees get health insurance at no up-front cost because their employerpays the total insurance premium. However, 45 million Americans did not havehealth coverage for the entire year of 2003.Health insurance benefits are delivered and financed under different systems.The factors that distinguish one delivery system from another are many, includinghow health care is financed, how much access to providers and services is controlled,and how much authority the enrollee has to design her/his health plan. To illustrate,managed care is characterized by predetermined restrictions on accessing services,whereas individual decision-making regarding use of health benefits is a hallmark of consumer-driven health care. And as economic conditions change, a specificdelivery system may gain or lose the interest of affected parties.
 
Contents
Introduction......................................................1What Is Health Insurance?...........................................2Basic Definitions and Principles..................................2Uneven Distribution of Health Care Expenses...................2Risk Pool and Rate Setting..................................3Risk Pool Composition and Adverse Selection...................3Group Market, Nongroup Market, and Medical Underwriting.......4Fully Insured vs. Self-Insured Plans...........................5Self-only vs. Family Coverage................................5Administrative Expenses....................................5Tax Preference................................................6Health Insurance Regulation.....................................6Responsibility of the States..................................6Key Federal Statutes.......................................7Why Is Health Insurance Considered Important?.........................8Where Do People Get Health Insurance? ...............................9Employer-Sponsored Insurance..................................10Advantages..............................................11Disadvantages...........................................11Large vs. Small Groups....................................12Public Programs..............................................12Medicare...............................................12Medicaid and the State Children’s Health Insurance Program(SCHIP)............................................13Individual Health Insurance.....................................14State High-Risk Pools.........................................15The Uninsured...............................................15How Are Health Benefits Delivered and Financed?......................16Indemnity (Traditional) Insurance................................16Managed Care...............................................17Consumer-Driven Health Plans..................................18
List of Tables
Table 1. Health Insurance Coverage by Type of Insurance, 2003...........10
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