What is Health Insurance?

Health insurance is a way to pay for medical care. When you are injured or sick, your health insurance can protect you from paying the full cost of medical services. It works in the same way as your car or home insurance: you or your employer choose a plan and agree to pay a certain rate or premium each month. In return, your health insurance company agrees to pay part of the medical expenses that you cover.

Why think about a health insurance plan?

By becoming a member of a health insurance plan, you join a group of people who have also chosen the plan. This group is called the risk pool. Health insurance companies use this term because they measure the amount of risk associated with people in the same group. The risk pool is a group of people whose medical expenses are combined to calculate the premium. Healthier people generally have lower costs, offsetting those who need more medical care and higher costs. Generally speaking, the larger the risk pool, the lower and more predictable the premium may be. In some years you may need a lot of medical services, in other years you may need less, but the whole point of having health insurance is that you can avoid paying the full cost of medical services yourself. When you need medical care, you and your health insurance company share the covered medical expenses. If the medical expenses of the risk pool are particularly high, your health insurance company may need to adjust the rate for the insured from time to time. Your plan outlines the out-of-pocket costs for each service-whether it is a co-payment, deductible, or co-insurance.

How health insurance works

The premium you pay monthly for your health insurance covers some or all of the medical care you receive, from prescription drugs and doctor visits to health improvement programs and customer service.

Most people choose a health plan based on the monthly premium, as well as the medical benefits and services the plan covers. But other factors must also be considered, such as those out-of-pocket payments, for which you will be required to pay every time you see a doctor or visit a health care facility. Here are the most common ones to be aware of.

Deductible

There are many health insurance plans that include it; it’s the amount you pay each year before your health insurance plan kicks in, which is when you’ll actually start paying for covered services. Once you pay this amount, your insurance company will start paying for some or all of your health care costs, depending on your health plan.

Out-of-pocket maximum

This is the maximum amount you will have to pay for your health care costs during a plan period (usually one year) for covered services you receive from your plan’s network doctors and member hospitals.

Co-insurance

Co-insurance is a percentage you pay for certain covered services, such as a trip to a specialist or a certain medical test.

Copay

A copay is a flat fee you pay to see a doctor or get other covered services, such as a trip to the emergency room.

Types of health insurance

Private health insurance

The Centers for Disease Control and Prevention (CDC) say that the U.S. healthcare system relies heavily on private health insurance. In the National Health Interview Survey, researchers found that 65.4% of people under the age of 65 years in the U.S. have a type of private health insurance coverage.

Public or government health insurance

In this type of insurance, the state subsidizes healthcare in exchange for a premium. Medicare, Medicaid, the Veteran’s Health Administration, and the Indian Health Service are public health insurance examples in the U.S.

Other health insurance types

An insurer can also manage plans and connects with healthcare professionals.

Managed care plans

Indemnity, or fee-for-service plans

An Indemnity plan covers care fairly among all healthcare professionals, allowing policyholders to choose their preferred location.

Usually, insurer pays at least 80 percent of the costs in an indemnity plan, while the patient pays the remaining costs as co-insurance.

Health maintenance organizations (HMOs)

These are organizations that provide medical care directly to the insured. The policy will usually have a dedicated primary care physician that will coordinate all necessary care.

HMOs will normally only fund treatment that is referred by this GP and will have negotiated fees for each medical service to minimize costs. This is usually the cheapest type of plan.

Preferred provider organizations (PPOs)

Similar to an indemnity plan, PPOs allow insured to visit any doctor they want.

The PPO also has a network of approved providers with which they have negotiated costs.

The insurer will pay less for treatment with out-of-network providers. However, people on a PPO plan can self-refer to specialists without having to visit a primary care physician.

Point-of-service (POS) plans

A POS plan functions as a mix of an HMO and PPO. The insured can choose between coordinating all treatment through a primary care physician, receiving treatment within the insurer’s provider network, or using non-network providers.

The type of plan will dictate the progress of treatment.