What is insurance?

To understand medical insurance, you have to know a little about insurance in general. First, let’s look at a typical definition of insurance:

“The act or business, through legal means (normally a written contract), of protecting an individual’s person or property against loss or harm arising out of specified circumstances in return for payment, which is called a premium.”

The insuring party (called the insurer) agrees to indemnify (or reimburse) the insured for loss that occurs under the terms of the insurance contract.

Now that we know that insurance is basically financial protection against loss or harm, let’s break it into smaller pieces. Insurance, as we know it, is a written agreement called a policy, between two parties (or entities), whereby one entity (the insurance company) promises to pay a specific sum of money to a second entity (often an individual, or it could be another company) if certain specified undesirable events occur. Examples of undesirable events include a windstorm blowing a tree over on a house, a car being stolen, or—as in the case of medical insurance—an illness or injury. In return for this promise for financial protection against loss, the second entity (the insured) periodically pays a specific sum of money (premium) to the insurance company in exchange for this protection.

Now that you now have a better understanding of what insurance is in general, let’s look at medical insurance (or health insurance, as it is frequently called). Medical insurance narrows down the “undesirable events” mentioned earlier to illnesses and injuries. The insurance company promises to pay part (or sometimes all, depending on the policy) of the financial expenses incurred as a result of medical procedures, services, and certain supplies performed or provided by healthcare professionals if and when an individual becomes sick or injured. Some insurance policies also pay medical expenses even if the individual is not sick or injured. Healthcare providers and companies that sell health insurance have determined that it is often less costly to keep an individual well or to catch an emerging illness in its early stages, when it is more treatable, than to pay more exorbitant expenses later on should that individual become seriously ill. This practice is referred to as preventive medicine.

History

Insurance is not a recent phenomenon. The word insurance is derived from the Latin word securitas, which translates into the English word security.

From the beginning of time, people have looked for ways to ease some of the hardships of human existence. It has been common knowledge down through the ages that it has been difficult for any one individual to survive for long on his or her own. Prehistoric humans quickly learned that to survive, the resources of others must be pooled.

The beginnings of modern health insurance occurred in England in 1850, when a company offered coverage for medical expenses for bodily injuries that did not result in death. By the end of that same year in the United States, the Franklin Health Assurance Company of Massachusetts began offering medical expense coverage on a basis resembling health insurance as we know it now. By 1866, many other insurance companies began writing health insurance policies. These early policies were mostly for loss of income and provided health benefits for a few of the serious diseases that were common at that time—typhus, typhoid, scarlet fever, smallpox, diphtheria, and diabetes. People did not refer to these arrangements as insurance, but the concept was the same.

In the United States, the birth of health insurance came in 1929 when Justin Ford Kimball, an official at Baylor University in Dallas, Texas, introduced a plan to guarantee schoolteachers 21 days of hospital care for $6 a year. Other employee groups in Dallas soon joined the plan, and the idea caught on nationwide. This plan eventually evolved into what we now know as Blue Cross. The Blue Shield concept grew out of the lumber and mining camps of the Pacific Northwest at the turn of the 20th century. Employers, wanting to provide medical care for their workers, paid monthly fees to “medical service bureaus,” which were composed of groups of physicians. The Blue Cross and Blue Shield plans traditionally established premiums by community rating—that is, everybody in the community paid the same premium.

To explore more interesting and detailed facts related to the history of insurance, refer to the list of websites at the end of this chapter.

Metamorphosis of medical insurance