Private health insurance in USA refer to health care coverage offered by private sector like private insurance companies, or entities or groups or self-insurers, as opposed to government run programs like Medicare and Medicaid. It includes plans provided through an employer or purchased directly by individual/families/groups.
Some popular private insurance companies are BCBS, Cigna, Aetna, UHC, Humana, Meridian.
As, this is the core lesson that highly impact on medical billing field, so understanding these private insurance processing is crucial. As this topic goes very lengthy so, we have divided this topic into parts to make it easy to understand. So, let's start topic:
How health insurance Works?
Risk Pooling
Health insurance uses risk pooling to manage risk by collecting premiums from a large, diverse group of people (policyholders) and using those funds to pay for the treatments of a smaller portion of that group. This strategy spreads the cost of treatment across all participants, ensuring that individual claims don’t cause a high financial loss for any one person. In this way, some insurance companies (those that operate for profit) can also earn profit from the amount of money left over.
In short, health insurance companies, groups, or self-insurers collect premiums from a large group of people (including both healthy and high-risk individuals) and use these funds to pay claims for those who need care. Any remaining funds are either kept as profit (for profit-based insurers) or reinvested to improve coverage and services (for non-profit insurers), all as part of the risk pooling system.
Balance Pooling: The contributions from all members, including those who don't file a claim, cover the costs of the claims made by others.
Key factors for an effective risk pool:
- Size:
A larger pool allows for better distribution of risk, making premiums more stable.
- Diversity:
A mix of high-risk and low-risk members creates a more balanced and sustainable pool.
- Predictability:
Using statistical models and the "law of large numbers," insurers can predict the total number of claims and the overall costs within the pool, allowing them to set fair premiums.
Why it matters:
- Affordability:
Risk pooling makes insurance affordable because no single individual has to bear the full financial burden of a catastrophic loss.
- Stability:
The shared fund provides financial stability for both insurers and policyholders.
- Protection:
It protects individuals and businesses by ensuring that they have financial support when unexpected events occur.
Major pathways used by private health insurers to provide coverages to individual / patients.
- Group Health Plans (GHP)
This is a general term for a single health insurance policy issued to a group of people, such as employees of a company, union members, or members of an association and their dependents (such as spouses and children). The employer, organization, or other group administrator purchases the policy to cover all eligible members. This type of plan is a common employee benefits, often offered at a lower premium cost than individual plans (ACA Marketplace plans).
Here's a more detailed breakdown:- Cost Advantages:
Group plans often offer lower premiums than individual health insurance plans due to the collective purchasing power of the group.
- Employer Responsibilities:
Employers with 20 or more employees are often required to offer their group health plan to employees who are 65 or older, including their dependents, according to the Social Security Administration (SSA).
- Potential Tax Benefits:
Employers may also receive tax advantages (tax-free/reduction) for offering group health insurance plans.
- Cost Advantages:
- ACA Marketplace
ACA Marketplace is federal arranged platform where different private insurers offers variety of plans according to the federal rules and regulations to individuals / families for buying and comparing the plans and benefits. (we will discuss further below)
- Direct Purchase
Individuals can indeed purchase health insurance directly from private insurers like Cigna, Aetna, or Blue Cross Blue Shield, bypassing the ACA Marketplace. These plans offer a wider variety of options, including both ACA-compliant and non-ACA plans, but they do not offer subsidies and may have higher out-of-pocket costs, especially with limited-benefit or short-term plans. Consumer protections, such as coverage for pre-existing conditions, are only guaranteed for ACA-compliant plans, even when purchased directly from an insurer.
Federal Laws for Private Health Sector
There are two major Federal laws ACA and ERISA that regulates private health sector that are compliance with them.
- ACA Act 2010
ACA stands for the Affordable Care Act, also known as Obamacare. It is a U.S. health reform law passed on March 23, 2010, under President Barack Obama. The law was introduced to provide affordable and comprehensive health coverage, especially for Americans who previously had no insurance.
Patient Protection and Affordable Care Act is another name of ACA.The three main purposes of the ACA are:
- To make health insurance more affordable and accessible.
- To expand Medicaid coverage to more low-income individuals.
- To improve the quality of healthcare while controlling costs.
The law was designed to:
- Make health coverage more affordable.
- Help people with pre-existing conditions (those already suffering from illness).
- Improve the quality of care.
- Protect patients’ rights.
- Reduce the number of uninsured Americans.
ACA Marketplace
The ACA Marketplace (Health Insurance Marketplace) is a federal and state-level platform where individuals and families can compare and enroll in private health insurance plans. It serves as a central hub/one-stop shop for accessing affordable, regulated coverage options.
Key Features of ACA Marketplace Plans
- Basic Coverage Rules:
- All plans are based on Managed Care models: HMO, PPO, or EPO.
- Plans are split into Metal Tiers (Bronze, Silver, Gold, Platinum) based on cost-sharing.
- Preventive care is free: includes vaccines, screenings, wellness checks, etc.
- ACA 10 EHB: Must be fulfill all 10 Essential Health Benefits (EHB) described into the law.
- Financial Help (Federal Subsidies):
- Premium Tax Credit lowers your monthly premiums (insurance bill) - (if your income qualifies).
- Cost-Sharing Reductions (CSR) help lower deductibles and co-pays (available only on Silver plans).
- Consumer Protections:
- Community Rating & Coverage Guarantee: Insurance company can't be denied coverage due to pre-existing conditions (already suffering from illness) or gender (sex) or age nor apply premiums rates based on these things.
- Dependent Coverage: Young adults can stay on their parent’s plan until age 26.
- No Limits: Insurance must cover essential services without yearly or lifetime caps.
- Enrollment Timeframes:
- Open Enrollment (OEP): Typically runs on every year from Nov 1 to Dec 15.
- Special Enrollment (SEP): Available after qualifying life events (like marriage, having a baby, or moving).
ACA 10 Essential Health Benefits (EHB)
These 10 EHBs are created to provide comprehensive health care coverage that includes everything that any person needs, All ACA compliance plans must follow these 10 EHBs, it includes:
- Ambulatory Patient Services
Outpatient care you get without being admitted to a hospital, which includes doctor visits, outpatient surgery, same day clinic visits.
- Emergency Services
ER visits, covered at in-network & out-of-network; no prior authorization required (referral).
- Hospitalization
Inpatient care you get with being admitted to a hospital, which includes surgery, overnight stays, room & board, nursing, physician services.
- Maternity & Newborn Care
Care before, during, and after childbirth. It covers both the mother and newborn, including prenatal visits, delivery, and postnatal checkups.
- Mental Health & Substance Use Disorder Services
Behavioral health treatment, includes counseling, psychotherapy, inpatient mental care; parity law requires equal coverage as medical care.
- Prescription Drugs
All qualified health plans must cover at least one drug in every therapeutic class/category. Formularies vary, but coverage must include both generic and brand-name options.
- Rehabilitative & Habilitative Services and Devices
Rehabilitative: Help recover skills lost due to injury/illness (e.g., physical therapy after a stroke).
Habilitative: Help acquire or improve skills never developed (e.g., speech therapy for a child with developmental delays).
Also includes durable medical equipment (wheelchairs, prosthetics, etc.). - Laboratory Services
Diagnostic tests (blood work, x-rays) + preventive screenings.
- Preventive & Wellness Services
Preventive services must be covered without cost-sharing when provided in-network. (vaccines, mammograms, diabetes care, smoking cessation).
- Pediatric Services (Including Oral and Vision Care)
Covers children’s health needs beyond standard benefits. This includes dental (checkups, fillings, etc.) and vision (eye exams, glasses/contacts) for kids.
Note: Adult dental and vision are not required under ACA EHB rules.
ACA MLR Percentage Rule
MLR stands for Medical Loss Ratio, all ACA compliant insurers must spends 80 - 85% (80% - individual or small group markets & 85% - larger group markets) of premiums amount on actual health care and improvement of quality of care. This rule applies on whole pool mean:
MLR is calculated on the insurer’s total premiums collected across the whole pool, not patient by patient.
If the insurer spends less than required, they must rebate the difference to policyholders, based on the amount of premiums paid, not the amount of care used.Example: Small Group Market (80% rule)
Total premiums collected: $100,000,000
Medical care + quality improvement spent: $75,000,000
MLR = $75,000,000 ÷ $100,000,000 = 75%
The requirement is 80%.
The insurer only spent 75%, so they are 5% short.Rebate Calculation
Excess amount = 5% of total premiums
5% of $100,000,000 = $5,000,000
The insurer must rebate $5 million total back to policyholders.How Rebates Are Distributed
Rebates are proportional to premiums paid.
For example:Employer A paid $1,000,000 in premiums → gets $50,000 back (5%).
Employer B paid $100,000 in premiums → gets $5,000 back.
Not based on whether their employees had claims or not.Key Point to Remember:
MLR rebates are based on total premiums, spread back pro-rata by premium contribution, and not tied to individual usage of care.
Do All Plans Have to Follow the ACA?
Mostly yes—but with a few exceptions.
- All major health plans compliant with ACA, including:
- Individual plans
- ACA Marketplace (Obamacare) plans
- Employer-sponsored plans
- However, some plans are not fully required to follow ACA, such as:
- Grandfathered plans (old plans in place before March 23, 2010 that haven't changed much)
- Short-term Medical Plans (STM)
- Health cost sharing ministries (not insurance company, community founded based on religious)
- Association Health Plans (AHP) or Farm Bureau Plans
- Traditional Indemnity Plans
These plans may not cover all 10 essential health benefits or may have more limits or partially compliant. We will discuss about these plans in detail later in this chapter.
In short,
The ACA is a law that improves health insurance for everyone by making it more fair, affordable, and complete. It controls employer plans too, requiring them to offer quality coverage—but a few old or limited plans may not follow all ACA rules. - ERISA Act 1974
ERISA stands for the Employee Retirement Income Security Act of 1974. It is a federal law in the United States that sets rules for private employers who offer retirement plans (like pensions or 401(k)s) and health benefit plans to their employees. President Gerald Ford signed the ERISA into law on September 2, 1974.
It was created to protect employees and make sure they are treated fairly when it comes to the benefits promised by their employers.
Basically, ERISA rules apply to most Employer-Sponsored Insurance (ESI), Association Health Plans (AHP) and grandfathered plans. ACA requirements also apply to ESI & AHP under ERISA’s framework.Employer-Sponsored Insurance (ESI)
Employer-Sponsored Insurance is a type of group health plan that employers offer to their employees and their dependents as part of a benefits package.
Employers negotiate rates with insurance companies and contribute to the cost of premiums, while employees typically pay the remaining portion through payroll detections. There are two types of ESISelf-Funded
A self-funded employer-sponsored health insurance plan is one in which the employer assumes the financial risk of paying employees’ health claims directly, instead of paying fixed premiums to a traditional insurance company. This approach gives employers more control over benefit design and overall costs, but also requires them to fund and manage claims as they arise. While self-funded plans offer flexibility and potential cost savings, they also expose employers to greater financial risk if claims turn out to be higher than expected.
Fully Insured
A fully insured employer-sponsored health insurance plan is one in which the employer pays a fixed premium to an insurance company, and the insurer assumes the financial risk of covering employees’ health claims. The insurance company is responsible for managing claims, provider networks, and compliance with regulations. This approach gives employers predictable costs and shifts the financial risk to the insurer, but it generally offers less flexibility in plan design and may be more expensive over time compared to self-funded plans.
Key points of ESI:
- The broad category of group coverage offered by an employer
- Always under ERISA (unless a government or church plan, which are exempt)
- ACA impact depends on employer size:
- Small group (<50 employees)
Must follow all ACA rules (essential health benefits, guaranteed coverage (no premiums applied based on condition, gender or age), and other rules and restrictions)
Small group employers can purchase plans through ACA marketplace same like individuals. - Large group (50+ employees)
Partially ACA-compliant, mean large group employers have to follow certain ACA rules but have some exemptions like:
- Large group plans do not have to cover all 10 EHB benefits however, if they cover any of EHB, they cannot apply limits on coverage like lifetime or annual limits on coverage. However, 9th EHB "preventive care at zero cost" is compulsory.
- These plans can apply premiums on employees based on medical history (conditions), age, gender or geographical area (location), no penalties are applied.
Large employers cannot purchase plans through the ACA Marketplace (only individuals and small groups can). They will negotiates with insurers directly or offers self-funded plans.
Quick Summary
- Large employer-sponsored plans must follow core ACA protections: dependents up to 26, no preexisting condition exclusions, no lifetime/annual limits on EHBs, preventive services at zero cost, nondiscrimination, and employer mandate rules.
- But they do not have to cover all essential health benefits or follow community rating rules.
- Small group (<50 employees)
How does ERISA Control Employer-Sponsored Plans?
ERISA regulates how these benefit plans are managed, by setting rules such as:
- Disclosure: Employers must give clear information to employees about how the plan works, what it covers, and how it's funded.
- Fiduciary Responsibility: The people who manage the plan must act in the best interest of the employees—not for personal gain.
- Claim Appeals: If an employee’s benefit claim is denied, the plan must offer a fair and timely process to appeal the decision.
- Minimum Standards: ERISA sets basic rules about how plans should operate, including how benefits are earned and when they become guaranteed (vested).
- Ensures continuation rights (COBRA), privacy (HIPAA nondiscrimination). We will discuss about COBRA & HIPAA Later.
Do All Plans Follow ERISA?
No, not all benefit plans are covered by ERISA. It only applies to private-sector employers (like companies or businesses). Some plans are not covered, including:
- Government plans (for federal, state, or local employees)
- Health cost sharing ministries like Church or religious organization plans
- Plans for the self-employed without any employees
These types of plans are not regulated by ERISA, but they might be covered by other laws or rules.
State Laws for Private Health Sector
State law are the laws and regulations made by each U.S. state (through the state legislature and state insurance department).
These laws govern how insurance is sold, licensed, and regulated within that state.
Examples:- Licensing requirements for insurers (insurance companies)
- State-mandated benefits (like infertility treatment in some states)
- Rules for state-based marketplaces (like Covered California, NYSOH)
- Continuation of coverage laws beyond COBRA (sometimes called “mini-COBRA”)
How State Law Interacts with ACA and ERISA?
- ACA is federal law → sets minimum national standards.
States can add stricter rules, but cannot go below ACA standards.
- ERISA (federal law) → preempts (overrides) most state laws for self-funded employer plans.
Example: If a large employer self-insures, state insurance mandates generally don’t apply — ERISA rules apply instead.
- Fully insured employer plans → must follow both ACA and state insurance laws.
Easy Way to Remember
- Federal law (ACA/ERISA) = national minimum rules.
- State law = adds extra protections, mandates, or licensing requirements, unless ERISA preemption applies.
In short:
State law = rules made by each state regulating insurance, brokers, and health plans. States can go beyond ACA, but self-funded ERISA plans are mostly exempt from state insurance law.
0 Comments