What is Health Insurance?
Healthcare can be expensive. A doctor's appointment may be manageable on its own, but an emergency room visit, surgery, hospital stay, ongoing treatment, or prescription medication can create bills that are much harder to handle.
Health insurance is one way people protect themselves from some of those costs.
If you have never had health insurance before, the terminology can make it seem much more complicated than it is.
At its most basic level, health insurance is an agreement between you and an insurance company: you pay for coverage, and the insurance company helps pay for covered healthcare according to the terms of your plan.
What Is Health Insurance?
Health insurance helps pay for healthcare expenses covered by your plan.
You generally pay a premium, which is the amount you pay to keep your insurance active. In return, your plan helps pay for covered medical services when you need them.
Depending on the plan, coverage may include things such as:
Doctor visits
Preventive care
Prescription medications
Emergency care
Hospital stays
Surgeries
Specialist visits
Tests and treatments
Having insurance does not mean your healthcare will be free. You may still have to pay part of the cost when you receive care.
For example, your plan might require you to pay a $30 copay for a doctor visit, pay part of a hospital bill through coinsurance, or pay healthcare expenses yourself until you reach your deductible.
The details depend on the plan.
Why Might You Want Health Insurance?
The biggest benefit of health insurance is financial protection.
You might go months or even years without needing much medical care. Then an unexpected accident or illness can completely change your expenses.
Imagine you are uninsured and end up in the hospital after an accident. You could be responsible for the entire bill. With health insurance, you may still have a significant amount to pay, but your plan can cover a portion of the covered expenses according to its terms.
Insurance can also make routine healthcare more affordable and accessible. Depending on your plan, you may have coverage for preventive visits, screenings, prescriptions, and other services.
Health insurance can therefore serve two purposes: helping you pay for healthcare you regularly use and protecting you from potentially overwhelming medical expenses.
People get health insurance in several different ways.
Through an Employer
Many employers offer health insurance as part of their employee benefits. The employer may pay some of the premium, with the employee paying the remaining portion through payroll deductions.
If you are offered insurance through work, compare the premium, deductible, out-of-pocket maximum, network, and prescription coverage before deciding whether the plan works for you.
Through Private Market or Off-Marketplace Providers
Through the Private Market
You can also purchase health insurance directly from an insurance company or through a private insurance broker or website. These plans are sometimes referred to as private market or off-Marketplace insurance because you are purchasing coverage outside of the government Marketplace.
Private market plans can give you another option if you are shopping for individual or family coverage. However, financial assistance available through the Marketplace generally cannot be applied to plans purchased outside the Marketplace.
Through the Health Insurance Marketplace
People who do not have access to affordable employer coverage can shop for individual health insurance through the marketplace.
Depending on your circumstances, you may qualify for financial assistance that reduces the cost of coverage.
Through Government Programs
Why Do Some People Choose Not to Have Insurance?
Health insurance can be expensive, and not everyone has access to affordable coverage.
Some people choose to go without insurance because they:
Cannot afford the monthly premium.
Do not have access to an affordable employer plan.
Rarely need medical care and decide the cost of insurance is not worth it to them.
Are between jobs or experiencing another temporary change in coverage.
Do not understand their options or realize they may qualify for financial assistance.
Going without insurance can reduce monthly expenses, but it also means taking on more financial responsibility if you need medical care.
If you do not have insurance because you cannot afford it, that does not necessarily mean you have no options. Depending on your income, location, age, and other circumstances, you may qualify for programs that provide free or reduced-cost healthcare.
You can also look for community health centers, prescription assistance, and other programs that help people access care when they are uninsured or underinsured.
Visit the Resources page for resources that may help you find low-cost or no-cost healthcare assistance.
How Does Health Insurance Actually Work?
Once you have a plan, there are several terms you will need to understand. These terms describe who pays for what when you receive healthcare.
Premium
Your premium is what you pay to keep your health insurance active.
If you receive insurance through an employer, part of your premium may be taken from your paycheck. If you purchase your own plan, you may pay the premium directly to the
insurance company or through the marketplace where you enrolled.
You generally pay your premium whether you use your insurance that month or not.
Deductible
Your deductible is the amount you may have to pay for covered healthcare expenses before your insurance begins sharing certain costs.
For example, suppose your plan has a $2,000 deductible. You have $2,000 in covered medical expenses that are subject to the deductible. You may have to pay those expenses yourself before your plan begins paying its share.
Not every service necessarily works this way. Some plans cover certain services before you meet your deductible.
Copay
A copay is a set dollar amount you pay for a covered service.
For example:
$30 for a primary care visit
$50 for a specialist visit
$15 for a prescription
The amount depends on your plan and the service.
Coinsurance
Coinsurance is a percentage of a covered expense that you are responsible for after you meet certain requirements under your plan.
For example, if your plan requires 20% coinsurance and a covered service costs $1,000, you would pay $200 and the insurance company would pay the remaining $800, assuming the service is covered and all applicable plan requirements are met.
Out of Pocket Maximum
The out-of-pocket maximum puts a limit on how much you generally have to pay for covered services during a plan year.
For example, if your plan has a $6,000 out-of-pocket maximum, reaching that amount generally means your plan pays 100% of covered services for the rest of the plan year.
The exact rules vary by plan, and premiums generally do not count toward the out-of-pocket maximum.
This is one of the most important numbers to understand when comparing health insurance because it gives you an idea of how much you could potentially have to spend yourself during a year with significant medical expenses.
Your Insurance Plan Has Rules
Health insurance has services it covers, and services it does not cover. No two plans are identical and often have very different types of services covered. Some might cover a chiropractor and a nutritionist, while others may explicitly exclude them. Some might cover up to 3 MRIs per year with $0 copay, and every MRI after is $50 copay.
Plans can have different rules about:
Which doctors and hospitals you can use
Which medications they cover
Which services require approval
Whether you need a referral to see a specialist
How much you pay for in-network and out-of-network care
Additionally, they may operate with in-network and out-of-network providers.
With in-network providers, your insurance company may have a network of doctors, hospitals, pharmacies, and other healthcare providers that have agreed to specific rates with the insurer.
Using an in-network provider usually means your costs are lower than using an out-of-network provider, depending on the type of plan you have.
An out-of-network provider does not have the same agreement with your insurance company. Your plan may pay less toward their services, or it may not cover certain services from that provider at all.
Before scheduling non-emergency care, check whether the provider is in your plan's network.
What Should You Look at When Choosing a Plan?
When you first start comparing health insurance, it is easy to focus on the monthly premium because that is the amount you see immediately.
The premium matters, but it is only one part of the cost.
Look at:
Premium: What you pay each month to keep the plan.
Deductible: What you may have to pay toward covered services before the plan begins sharing certain costs.
Copays and coinsurance: What you pay when you receive covered care.
Out-of-pocket maximum: The limit on what you generally pay for covered services during the plan year.
Provider network: Which doctors, hospitals, and other providers are considered in-network.
Prescription coverage: Which medications are covered and what you will pay for them.
Coverage rules: Whether services require referrals, prior authorization, or other approval.
Think about how the plan would work in two situations: a normal year when you barely use healthcare and a difficult year when you need significant medical care.
A plan with a lower monthly premium may have a higher deductible or higher costs when you receive care. Another plan may cost more each month but have lower costs when you actually use your coverage.
Looking at the whole plan gives you a better idea of what you are paying for.
Final Thoughts
Health insurance can help make healthcare more manageable and protect you from taking on the full cost of covered medical care yourself. It also comes with its own costs and rules, which is why understanding the basics matters.
If you are choosing health insurance for the first time, start with the numbers you will actually encounter: your premium, deductible, copays, coinsurance, and out-of-pocket maximum. Then look at the doctors, medications, and services covered by the plan.
You do not have to understand every insurance term at once. Start with how the plan costs you money, how it helps pay for care, and what you will be responsible for when you use it.
Up Next: Health insurance plans can give you different levels of flexibility when choosing doctors and specialists. Next, we'll look at PPO vs. HMO plans and how those differences can affect the way you access care.
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