What Is Health Insurance: How It Works, Costs and Types

Health insurance is a contract between the policyholder and an insurance company that lowers what policyholders must pay for medical services in exchange for paying a monthly premium. 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 and coverage.

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

How Does Health Insurance Work?

Health insurance reduces the financial burden of medical services on the insured by distributing the costs between them and their 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 health care plan may also require you to pay a health insurance deductible and coinsurance payment or copayment.

• Deductible: The amount you must pay before your health insurance coverage kicks in. For example, the average deductible for employer-sponsored single coverage was $1,735 in 2023.^[1] That means if your first medical bill is $2,000, then you’d have to pay the first $1,735 before your insurance company covers the remaining balance.
• Copayment: A flat fee you must pay when you visit the doctor or fill a prescription after meeting your deductible. For example, visiting the doctor may require 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. Assuming you’ve met your deductible, if you’re receiving a medical service for $200 and your coinsurance is 20%, then you’d pay $40 and your insurance company would pay the remaining $160.
• Out-of-pocket maximum: The annual limit on how much you pay out of pocket over the policy term. Say your out-of-pocket maximum is $6,000. After you’ve paid this amount out of pocket through your deductible, copays and coinsurance, then your carrier will cover 100% of your health insurance costs afterward.^[2]

In addition, your insurance company may only cover costs when you see a provider that’s within your plan’s network and may also require you to get a referral from your primary care physician before you see a specialist. These requirements will vary based on the type of plan you choose, with EPOs, PPOs and HMOs being common types.

What Is Covered by Health Insurance?

All health insurance plans that are compliant with the Affordable Care Act (ACA) guidelines must cover at least the benefits listed below:^[3]

• Outpatient care
• Ambulatory/emergency services
• Overnight hospital stays
• Pregnancy and newborn care
• Mental health and substance abuse services
• Prescription drugs
• Rehabilitative and habilitative devices and services
• Laboratory services
• Chronic disease management and preventive and wellness services
• Dental and vision insurance for children
• Pediatric services
• Birth control and breastfeeding benefits

In addition, some preventive care services must be offered without any out-of-pocket cost to you if you have a Marketplace health plan. You will not need to make a copay or coinsurance payment to receive these services. Some examples of these covered benefits include:^[4]

• Screening for blood pressure, cholesterol, obesity and type 2 diabetes
• Screening for syphilis, tuberculosis and lung cancer
• Screening for hepatitis B, hepatitis C and HIV
• Screening for depression
• Obesity counseling
• Immunizations for chickenpox, flu, measles, whooping cough, shingles and tetanus

What Isn’t Covered?

While there may be some exceptions, most major medical insurance policies will exclude certain benefits such as:^[5]

• Adult dental services
• Adult vision services
• Hearing aids
• Uncovered prescription drugs
• Weight loss programs and drugs
• Cosmetic surgery
• Infertility treatment
• Sterilization reversal
• LASIK

That said, you may be able to buy separate plans like dental insurance or vision insurance to get coverage for specific benefits.

What Are the Most Common Types of Health Insurance?

Below, we outline some common types of health insurance plans you can buy, including those purchased through the federal Marketplace or from your employer’s group plan.

Marketplace Plans

If you’re not buying insurance through your job, you will likely be buying a Marketplace plan, as these plans are regulated by federal law and must cover specific benefits. Each year, you can buy an individual or family health insurance plan through the federal government’s Health Insurance Marketplace (or your state’s health insurance exchange if it has its own).

Employer Group Policies

Employer group policies are health plans purchased through your employer and are quite popular, as over half of Americans were insured through a job-based plan in 2022.^[6] The primary benefit of joining a group health insurance plan is that the employer pays a portion of the premium so costs may be lower than what you would spend on the ACA marketplace.

Government Programs

The federal government offers health care insurance programs to U.S. citizens who are 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 and those who have certain conditions such as end-stage renal disease.^[7] 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.^[8]

Meanwhile, 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 health care services they need at a relatively affordable rate.

Supplemental Health Insurance

It is possible to have multiple policies by buying supplemental health insurance plans, which can provide coverage for benefits that are otherwise excluded in an ACA-compliant health plan. Common examples of this are vision insurance and dental insurance. Most primary plans will not cover teeth cleaning, braces, vision exams and prescription glasses unless you buy this specific type of coverage.

Other types of supplemental health insurance you can buy may include hospital indemnity insurance, critical illness insurance, Medigap (for Original Medicare beneficiaries) and life insurance.

What Are the Benefits of 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 and having a long-term condition like cancer can set you back hundreds of thousands of dollars in treatments.^[9]

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

In addition, having health insurance can help you avoid a tax penalty depending on your state. While the penalty has been removed federally and in most states, you can still pay a fine if you go without coverage and live in California, the District of Columbia, Massachusetts, New Jersey or Rhode Island.^[10]

Do I Have To Renew My Health Insurance Policy Every Year?

If you have a Marketplace place, your health insurance policy should auto-renew for the following year if you do not make any changes.^[11] If you’re insured through your employer, you should double-check your policy and ask your HR department for clarification.

What Is the Average Cost of Health Insurance?

The average cost of health insurance can vary depending on how you obtain coverage. In 2024, the average cost of a marketplace plan is $477 per month.^[12] For work-sponsored health insurance coverage, workers paid around $703 per month for single coverage or $1,997 for family coverage in 2023.^[1]

Meanwhile, Original Medicare beneficiaries can expect to pay at least $174.70 per month in 2024 — potentially more depending on their income and how long they’ve paid Medicare taxes.^[8] If you’ve enrolled in a Medicare Advantage plan instead, then it will cost an additional $18.50 per month on average.^[13]

How Are Health Insurance Rates Determined?

Health insurance premiums are unaffected by your health status, medical history and gender. Instead, health insurance carriers are only allowed to calculate your rates based on the below five factors:^[14]

• Age
• Location
• Whether you use tobacco
• Whether you have individual or family coverage
• Plan category/tier

In addition, if you meet certain income requirements, there may be certain cost-saving opportunities. For example, for Marketplace plans, there are health insurance subsidies that can reduce your premium and monthly out-of-pocket costs.^[15] Similarly, qualified Medicare beneficiaries can enroll in the “Extra Help” program to help cover their prescription drug plan and other out-of-pocket expenses.^[16]

How To Get Health Insurance

To buy health insurance from the ACA marketplace, you will need to do so during open enrollment, which runs from November 1 to January 15 in most states, although it may be possible to enroll at another time if you qualify for a special enrollment period.^[17] The open enrollment period for Medicare starts October 15 and ends December 7. If you’re enrolled in a Medicare Advantage plan, you can switch to another one or return to Original Medicare between January 1 and March 31.^[18] Meanwhile, Medicaid enrollment is open all year round.^[19]

If you want to quickly compare rates from multiple health care providers, SmartFinancial can help. Click here to complete a form and we can help match you with an insurance agent who can find the best policy for you.