What Is Health Insurance?
Health insurance is a contract between a company and a consumer. The company agrees to pay all or some of the insured person's health care expenses in exchange for the payment of a monthly premium.
The contract is usually a one-year agreement, during which the insurer will be responsible for paying specific expenses related to illness, injury, pregnancy or preventive care.
Health insurance deals in the US usually come with exclusions from coverage, including:
- A deductible that requires the consumer to pay certain "out-of-pocket" health care costs up to a maximum amount before the company's coverage begins
- One or more co-payments that require the consumer to pay a certain portion of the cost for specific services or procedures
Kye Takeaway
- Health insurance pays most medical and surgical expenses and preventive care expenses incurred by the insured person in exchange for a monthly premium payment.
- In general, the higher the monthly premium, the lower the out-of-pocket costs for the insured.
- Almost all insurance plans have deductibles and co-payments, but these costs are now limited by federal law.
- Since 2010, the Affordable Care Act has prohibited insurance companies from denying coverage to patients with pre-existing conditions and has allowed children to stay on their parents' insurance plan until they turn 26.
- Medicare, Medicaid, and the Children's Health Insurance Program (CHIP) are federal health insurance plans that extend coverage to the elderly, disabled, and low-income people.
How Health Insurance Works
In the United States, health insurance is difficult to navigate. It's a business with a number of regional and national competitors whose coverage, pricing and availability vary from state to state and even country to country.
About half of Americans have health insurance coverage as an employment benefit, with premiums partially covered by the employer. The cost to the employer is tax-deductible to the payer, and the benefits to the employee are tax-free, with certain exceptions for S corporation employees.
Self-employed people, freelancers and gig workers can buy insurance directly on their own. The Affordable Care Act of 2010, commonly called Obamacare, required the creation of a national database, called HealthCare.gov, that allows individuals to search for standard plans from the private insurers available where they live. The cost of coverage is subsidized for lower-income taxpayers.
Some, but not all, states have created their own versions of HealthCare.gov customized for their residents.
Retirees receive federally subsidized care through Medicare, and low-income families are eligible for subsidized Medicaid coverage.
Types of Health Insurance
Health insurance can be difficult to navigate in the US.
So-called managed care insurance plans require policyholders to get their care from a designated network of health care providers. If patients seek out-of-network care, they must pay a higher percentage of the cost. The insurer may even refuse to pay outright for services received outside the network.
Many managed care plans—for example, health maintenance organizations (HMOs) and point-of-service (POS) plans—require patients to choose a primary care physician who oversees the patient's care, makes treatment recommendations, and provides referrals for medical specialists.
Preferred provider organizations (PPOs), on the other hand, do not require referrals, but charge lower fees for using in-network practitioners and services.
Insurance companies may deny coverage for certain services obtained without prior authorization. They may refuse to pay for name-brand drugs if a generic version or comparable drug is available at a lower cost.
All these rules must be stated in the material provided by the insurance company. It's worth checking with the company directly before making a big outlay.
What Are Copays, Deductibles, and Coinsurance?
Most health insurance plans require their customers to pick up a portion of the cost of their coverage in several ways:
- The deductible is the amount the customer must pay out of pocket each year before the insurer begins to cover the cost. It is now restricted by federal law.
- Copayments are set fees that subscribers must pay for specific services such as doctor visits and prescription drugs, even after the deductible has been met.
- Coinsurance is the percentage of health care costs that the insured must pay even after reaching the excess (but only until they reach the out-of-pocket maximum for the year).
Insurance plans with higher out-of-pocket costs generally have lower monthly premiums. When shopping for plans, weigh the benefits of lower monthly payments against the potential risk of large out-of-pocket expenses in the event of a serious illness or accident.
High-Deductible Health Plans (HDHP)
An increasingly popular type of health insurance is the high deductible health plan (HDHP). These plans have higher deductibles and lower monthly premiums. Their users are the only ones eligible to open a Health Savings Account (HSA) which carries significant federal tax benefits.
For 2022, the IRS defines a high-deductible health plan as one that has a deductible of at least $1,400 for an individual or $2,800 for a family. The total out-of-pocket maximum is $7,050 for an individual and $14,100 for a family.
For 2023, the deductible limits will remain the same. But the out-of-pocket maximums will increase to $7,500 and $15,000, respectively.
High-deductible health plans offer a unique benefit in that if you have one, you're allowed to open a health savings account — and contribute pre-tax income that can be used to pay for qualified medical expenses. These plans offer a triple tax advantage in that:
- Contributions are tax deductible.
- Contributions grow on a tax-deferred basis.
- Qualified withdrawals for health care expenses are tax-free.
Special Considerations
In 2010, President Barack Obama signed the Affordable Care Act (ACA) into law. In participating states, the law expanded Medicaid, a government program that provides medical care to low-income individuals.
In addition to these changes, the ACA created the federal health insurance marketplace. It also prohibits insurance companies from denying coverage to patients with pre-existing conditions and allows children to stay on their parents' insurance plan until age 26.
The marketplace helps individuals and businesses buy quality insurance plans at affordable prices. Insurance available through the ACA Marketplace is required to cover 10 essential health benefits.
Through the HealthCare.gov website, buyers can find the Marketplace in their state, if one exists.
Changes in the Affordable Care Act
Under the ACA, Americans were required to carry health insurance that met federally set minimum standards or face a tax penalty, but Congress removed that penalty in December 2017.
A 2012 Supreme Court ruling struck down an ACA provision that required states to expand Medicaid eligibility as a condition of receiving federal Medicaid funding, and a number of states chose not to expand their Medicaid programs — to expand .
As of 2021, about 31 million people have health coverage through the Affordable Care Act.
Medicare and CHIP
Two public health insurance plans, Medicare and the Children's Health Insurance Program (CHIP), provide subsidized coverage for individuals and children with disabilities.
Medicare, which is available to all Americans age 65 and older, also serves people with certain disabilities. The CHIP plan subsidizes coverage for children up to age 18.
What Is Health Insurance and Why Do You Need It?
Health insurance is an arrangement in which an insurance company agrees to pay for some or all of your medical expenses in exchange for a monthly premium payment.
If you are young, healthy and happy, your monthly premium may exceed the cost of your insurance.
If you (or someone in your family) has or develops a recurring condition that requires treatment, is injured in an accident, or develops an illness, you may have medical bills that you cannot pay.
Who Needs Health Insurance?
The simple answer is everyone. Health insurance covers the cost of minor and major medical issues, including surgeries and treatment for life-threatening illnesses and debilitating conditions.
How Do You Get Health Insurance?
If your employer offers health insurance as part of your employee benefits package, you will be covered, although you will likely have to pay a portion of the cost.
If you are self-employed, you can purchase health insurance through a federal or state health insurance marketplace.
Seniors are automatically eligible for federal Medicare insurance, although many supplement its coverage.
Low-income individuals and families qualify for subsidized coverage through the federal Medicaid or Medicare programs.
How Much Does Health Insurance Cost?
The cost of health insurance varies greatly depending on the extent of coverage, the type of plan you have, your deductible, and your age when you enroll. Prepayments and co-insurance also add to your costs.
You can get a good idea of the cost of plans by looking at the four levels of coverage offered by the federal health insurance marketplace. It categorizes plans as bronze, silver, gold or platinum, with each price category according to the level of coverage offered and their respective cost to the user.