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What Is Health Insurance? Coverages and How It Works

Health insurance is a contract that lowers the cost of medical services in exchange for a regular premium (usually monthly) to the insurance company. This arrangement helps individuals access the medical treatments they need that would otherwise be unaffordable. Several types of health insurance plans exist, which vary in cost. Some plans restrict you to choosing only healthcare providers within the plan network.

Health insurance can get complicated. Keep reading to learn about different healthcare plans, costs and more.

Health Insurance Defined

Health insurance is a legal agreement between you and a health insurance company to pay regular premiums in exchange for all or some of your medical expenses, such as:

  • Doctor visits

  • Hospital services

  • Prescription drugs

  • Vaccinations

  • Blood tests and x-rays

Healthcare plans will typically still require some out-of-pocket costs, like a deductible and copay, before your insurance company covers the remaining balance.

Individuals may buy healthcare coverage through their employer or privately. Some people are eligible for public health programs, like Medicare or Medicaid.

Health Insurance Claim Example

Say you accidentally break your leg while training for a marathon. You go to the hospital and learn that the bill is a whopping $7,500 to operate on your broken leg. Fortunately, you have health insurance, and the majority of the bill will be covered. After paying $1,750 in deductible and coinsurance costs, your insurance plan covers the remaining $5,750.

Although $1,750 is still a considerable out-of-pocket expense, it is more affordable than paying for the full $7,500 yourself.

How Does Health Insurance Work?

Health insurance reduces the financial burden of medical services by sharing the costs between the insured and the health insurance company. Generally, the insured will subscribe to the health insurance plan and pay a regular premium — typically each month. In exchange, the insured pays lower costs when receiving medical services.

On top of the premium, the healthcare plan may also require you to pay a deductible and coinsurance payment or copayment.

  • Deductible: The amount you must pay before your health insurance coverage kicks in. If your medical bill is $2,000 and you have a $500 deductible, then you must pay the $500 before your insurance company covers the remaining balance.

  • Copayment: A flat fee you must pay generally when you visit the doctor or fill a prescription. For example, visiting the doctor twice this month will incur a $20 copay for each visit and a prescribed medication may have an $8 copay.

  • Coinsurance: A percentage of the remaining balance after meeting your deductible that you must pay. Using our earlier deductible example, your coinsurance payment toward the remaining balance of $1,500 is 20% ($300). After paying your $500 deductible and $300 coinsurance payment, your insurance company covers the remaining $1,200.

By paying a regular premium and other out-of-pocket costs, the insurance company agrees to share the costs of approved medical services when you need them. Keep in mind that your healthcare plan may have an annual limit, or a maximum cap, on out-of-pocket costs. You may not need to pay future copays or coinsurance payments once you hit your annual limit until your healthcare plan renews for the following year. Be sure to confirm with your healthcare provider.

Health insurance is a legal agreement to pay regular premiums in exchange for all or some of your medical expenses.

Individual and Group Policies

Healthcare plans are commonly classified as individual or group policies. Group policies are those typically offered by your employer. Buying an individual policy means you're buying healthcare coverage outside of your employer. With most individual policies and group policies, you will be allowed to add family members and dependents to your plan at an additional cost.

Public Health Programs

The federal government offers healthcare insurance programs to U.S. citizens that meet a certain age, have a medical condition or fall below a specified income threshold.

Medicare is a federal health insurance program for those ages 65 years and older, who have a certain condition, like End-Stage Renal Disease, or has been receiving Social Security disability benefits for at least 24 months. Hospital insurance is free if you've been paying Medicare taxes for at least 10 years and coverage for doctor services and prescription drugs are available at an additional cost.

Medicaid is a public health insurance program for low-income families and individuals. Health insurance can be costly and a Medicaid plan can help Americans access the healthcare services they need at a relatively affordable rate. Some coverage may be free for those who qualify.

Public healthcare programs are available at the state level, as well.Medi-Cal, for example, is California's version of the Medicaid healthcare program, offering medical services for families with limited income and resources.

It is possible to have multiple policies, like a private health plan and Medicare. Deciding which policy pays first is based on a process called coordination of benefits and will vary by policy.

What Are the Most Common Types of Health Insurance?

Your health plan will generally be an EPO, PPO or HMO policy. Costs and health providers will depend on your policy and insurer.

Preferred Provider Organizations (PPOs)

A PPO is a health plan with a network of healthcare providers that you can use at a reduced cost. You also have the option of going out of network but it typically comes at an additional cost.

PPO plans typically have higher monthly premiums than an HMO or EPO health plan but the benefit is the flexibility of choosing your primary physician and the ability to go outside the network.

Health Maintenance Organizations (HMOs)

An HMO is a health plan with a network of local medical providers for you to choose from. You generally will not be covered when you receive services outside the HMO network unless you have pre-approval from your healthcare provider. Otherwise, you will need to pay for out-of-network services out-of-pocket.

HMO plans will require that you select a primary care provider (within the HMO network). HMO plans typically carry lower monthly premiums than a PPO or EPO plan.

Exclusive Provider Organization (EPOs)

An EPO health plan has a network of local doctors and hospitals you will need to use to receive coverage. Going to an out-of-network provider typically will not be covered, with emergencies being the only exception. The cost of an EPO plan is generally lower than a PPO plan. The tradeoff is that you will need to pay out-of-pocket whenever you receive services outside the EPO network.

On top of a regular premium, the healthcare plan may also require you to pay a deductible and coinsurance payment or copayment.

Examples of Health Insurance

The comparison table below shows the key differences between PPO, HMO and EPO plans.


PPO

HMO

EPO

Network Providers

Pay less

Yes

Yes

Out-of-Network Providers

Yes, but at an additional cost

Generally not covered, unless you have pre-approval

Not covered (you pay full costs)

Primary Care Doctor Required?

Not required

Required

Typically, but not always

Referrals

Possible to get health services without a referral

Required

Generally not required for providers within network

Pre-Approval

Generally not required for many health services

Required for several health services

Required before you receive any services

Compare Health Insurance Quotes and Save

What Are the Benefits of Having Health Insurance?

The main benefit of health insurance is that it can provide financial access to unexpected, often costly health procedures. According to the U.S. Department of Health & Human Services (HHS), treating a broken leg can cost up to $7,500. Staying in a hospital for three days can rack up a $30,000 hospital bill. Having a long-term condition, like cancer, can rack up thousands of dollars in treatments in a short amount of time.

You may not need to pay future copays or coinsurance payments once you hit your annual limit.

Without health insurance, some individuals are unable to pay for the cost of expensive medical procedures out-of-pocket. Health insurance helps individuals get the healthcare services they need at a relatively affordable cost.

Health insurance provides coverage for several essential benefits, including:

  • Emergency and urgent care

  • Hospital care

  • Mental health care

  • Some nursing home care

  • Pregnancy and newborn care

  • Prescription drugs

  • Primary care doctor and specialist services

  • Rehabilitation therapy

  • Substance abuse treatment

  • Surgeries and other outpatient procedures

  • X-rays, mammograms and other diagnostic services

In addition to the above doctor and hospital services, health insurance can cover some preventative care services, such as:

  • Blood pressure, diabetes, and cholesterol tests

  • Birth control

  • Cancer screenings

  • Flu shots

  • Obesity counseling

  • Pediatrician visits

  • Routine vaccines

Under the Affordable Care Act, the above preventative care services will be offered without any out-of-pocket cost to you if you have health insurance. You will not need to make a copay or coinsurance payment to receive services, like blood pressure tests or routine vaccines. The exception is grandfathered policies, which are policies purchased prior to March 24, 2010.

Is Health Insurance Required?

Health insurance is not mandatory and is not considered a jailable offense if you do not have it. However, you may face a fee penalty depending on your state.

Californians, for example, will face a fee penalty of $800 per adult and $400 per dependent child under 18 when filing their 2021 state income tax in 2022 if they did not have health insurance that year. If an individual and their spouse do not have healthcare coverage, then they can expect to pay $1,600 in penalty fees.

There is no federal penalty and you will not pay a tax penalty at the federal level for not having health insurance when filing your federal taxes.

Should You Get Health Insurance?

The need for health insurance will depend on your age, lifestyle and budget. If you're a young adult and in relatively good health, then health insurance is less of an urgent concern than somebody older, has diabetes and needs to regularly refill their prescription drugs.

Some individuals decide to not buy health insurance and pay the state penalty fee, which can sometimes be lower than the cost of health insurance available.

What Is the Average Cost of Health Insurance?

The average annual cost for health insurance in 2021 is $7,739 for single coverage and $22,221 for family coverage according to the Kaiser Family Foundation. Actual costs can vary based on multiple factors, such as:

  • Age: Older people generally have higher premiums and more coverage needs than younger people. The older you are, the more likely you are to have certain conditions and need continued medical services and prescription drugs.

  • Location: Where you live can have certain healthcare regulations and costs of living that can influence how much you pay for health insurance.

  • Tobacco use: Engaging in tobacco use will likely lead to higher health insurance premiums — sometimes up to 50% higher than those who do not smoke according to HHS.

  • Number of insured: Adding more people, like your spouse and children (also called dependents) to your healthcare policy will increase the cost of coverage.

  • Deductible: Increasing your deductible will lower your monthly premium while lowering your deductible will increase your monthly premium.

Without health insurance, some individuals are unable to pay for the cost of expensive medical procedures out-of-pocket.

Below are sample quotes for health insurance plans catered to a 30-year-old male in Polk County, Florida.

Plan Category

Description

Average Premium

Bronze

Lowest monthly premium, higher deductible

$411/month

Silver

Higher premium and lower deductible than Bronze

$516/month

Gold

Higher monthly premiums and lower deductible than Silver

$575/month

Platinum

Highest monthly premium and lowest deductible.

$818/month

*Categories are based on how you and the insurance company share costs and are not indicative of the quality of healthcare services available

Generally, young and healthy adults are more likely to consider higher out-of-pocket costs to enjoy a lower premium because they may not go to the doctor as much as somebody older. Since their doctor visits are less frequent, there are fewer instances in which paying a deductible and coinsurance or copay would apply.

Older people, on the other hand, may want to pay higher premiums to receive the benefit of lower out-of-pocket costs. Frequent visits to the doctors and the need to refill prescription drugs can easily add up in costs. Paying a higher premium but paying less when you use your healthcare services can be worth the tradeoff.

FAQs

What is the difference between healthcare and health insurance?

Healthcare generally refers to services that reduce pain and suffering and increase longevity while health insurance is a contract between an individual and an insurance company to share the costs of healthcare services. Healthcare and health insurance are terms often used interchangeably, however.

What's the difference between in-network coverage and out-of-network coverage?

When you use a provider within your plan's network, that is considered in-network coverage and you will have lower out-of-pocket costs when using these providers. Going out-of-network may not be allowed with some healthcare plans and you may be covered for less (or not at all) when using a provider outside the network.

Does age impact the cost of health insurance?

Yes, older people can pay up to three times more for health insurance than younger people according to the U.S. Department of Health & Human Services.

Do you have to renew your health insurance policy yearly?

Generally, your health insurance policy will auto-renew for the following year if you do not make any changes. Double-check with your health insurance provider.

Find Health Coverage at an Affordable Price

Injuries and illnesses sometimes happen when we least expect it and sometimes they carry high costs that can break the bank. Health insurance can help you manage sky-high medical expenses so you and your family can get the medical coverage you need to stay healthy. However, choosing the right healthcare policy can be challenging with so many different options out there.

SmartFinancial can help you make a sound decision based on your answers to a quick questionnaire. We will match you with a healthcare plan that meets your coverage needs and budget. Just enter your zip code below or call 855.214.2291 to receive your free insurance quotes.

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