Insurance isn’t the easiest subject to master—people still go to college to be actuaries, after all—but a basic level of know-how is essential to understanding why your health insurance will soon cost more.
Insurance exists to help people protect themselves against risks like car accidents, house fires, or medical emergencies. An insurance policy is purchased before one of those events occurs. The policyholder (or their employer) then makes a monthly payment to the insurance company called a premium.
If a policyholder has an accident, his house burns down, or he has to go to the emergency room, the insurance company typically reimburses him (or his care provider, repairman, or home builder) for most of the costs related to the event.
The reason that insurance is affordable (and less than the cost of, say, replacing your house) is that most people who pay premiums in a given year don’t have a reason to file a major claim. For the few who do, the insurance company uses everyone else’s premiums to cover the cost.
There’s one caveat to keeping costs low: You can’t buy an insurance policy after you’ve incurred a loss. For instance, if companies are forced to sell someone a fire insurance policy after their house has burned down, costs will rise for everyone—and very few people will opt to buy insurance before disaster strikes. Unfortunately, regulations in the healthcare law will create a similar situation in the health insurance market.