Health Insurance

Health Insurance companies play a major role as a third-party payer to control medical costs of consumers. They serve many roles such as:
- an intermediary between the consumer and the health care producer
- a controller of medical costs
- a manager of financial risk associated with the purchase of medical services

There are different ways in which a consumer is required to pay for his/her health insurance. Some of these are:
- a deductible - "an annual out-of-pocket, lump-sum payment for medical services that a consumer must pay before medical insurance provides
reimbursement"
- coinsurance - "a component of a medical insurance plan in which consumers pay a fixed percentage of the cost of medical care"
- copayment - "a fixed amount paid by consumers for medical care that is independent of the market price"
An insurance company sets these premiums by using community and experience ratings. A community rating bases expected medical benefits on the risk characteristics of the entire plan membership as a whole. An experience rating is determined by placing groups of individuals into different risk categories based on various identifiable personal characterisitcs.

On the downside of health insurance, the problem of moral hazard is created. This problem exists because consumers are willing to be more risky or "alter their behavior because they are no longer liable for the full cost of their actions." This problem motivates health insurance providers to raise their premiums so that consumers don't alter their behavior as much.

There are many people that are not insured and there a many reasons why this can happen. People may be uninsured because they simply can't afford it or they may believe that they will benefit greater by not having to pay for insurance. Also, there are three other types of uninsurance and they are:
- Frictional uninsurance - "The condition of individuals who are uninsured because they are temporarily between jobs or searching for a suitable insurance policy."
- Structurally uninsured - "The condition of individuals who are uninsured on a long-run basis because of, for example, chronic illnesses, preexisting conditions, or insufficient income."
- Cyclical uninsurance - "The condition of individuals who are uninsured because of variations in the business cycle."