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What Is Health Insurance?

Health insurance is a financial contract between an insurer and policyholder that covers medical expenses, preventive care, and overall health and wellness needs. 

The high costs of medical care can leave debt, forcing people to declare bankruptcy and preventing them from getting the care they need. Health insurance is designed to reduce healthcare-related costs.

There are multiple types of health insurance plans that cover different expenses and hundreds of health insurance providers in each state.

Health Insurance Basics

Health insurance is designed to split the costs of medical care between customers and health insurance companies up to a specific limit. All health insurance plans are created with cost-sharing features in mind.

All health insurance plans have premiums, out-of-pocket limits, deductibles, co-payments, and coinsurance. 

Premiums are the monthly fees you pay your insurer in exchange for health care coverage. Premiums are not the total amount you’ll pay for health care services. They only show how much you pay per month to have health insurance—the lower your premium, the higher your out-of-pocket cost, and vice-versa.

Max Out-Of-Pocket (OOP) costs are the yearly limit you’ll need to pay for health care services before your insurance starts covering your costs. Your max out-of-pocket limit is the maximum amount you will pay in a given year. Under the Affordable Care Act (ACA), the maximum OOP limit is $8,700 for individuals and $17,400 for family plans.

These limits, called the out-of-pocket limits, are an agreed price set by the company that, after being reached, the health insurance company will start to pay 100% of your medical bills. 

Read more about out-of-pocket limits vs. deductibles ->

Deductibles are a set amount of money you'll need to pay for health care services, tests, and items before your insurance covers your medical costs. Once you’ve met your plan’s deductible, insurance pays for 100% of your health care costs.

Co-payments or co-pays are a fixed amount you pay for services or prescriptions. In most plans, you will have a co-pay for services even if you have met your deductible. Once you hit the OOP max, your insurance will take over your co-pays.

Coinsurance is a percentage of the cost that you pay for covered services. Typically plans have coinsurance or co-pays, and after the OOP max, you no longer pay your coinsurance percentage, and insurance takes over.

The Ten Essential Health Benefits

Health care insurance plans also need to cover the ten essential health benefits. The ACA made these ten health care services a requirement for all health insurance plans to provide. They are:

  1. Ambulatory patient services.

  2. Emergency services.

  3. Hospitalization for surgery, overnight stays, and other conditions.

  4. Pregnancy, maternity, and newborn care.

  5. Mental health and substance use disorder services.

  6. Prescription drugs.

  7. Rehabilitative and habilitative services and devices.

  8. Laboratory services.

  9. Preventative and wellness services.

  10. Pediatric services.

Who Should Purchase Health Insurance?

Anyone who doesn’t qualify for state-run health insurance programs should have a health insurance plan. The high cost of health care makes it unaffordable for the average American to cover medical bills on their own. Going without health care benefits can lead to mountains of debt, bankruptcy, and other financial problems.

How Much Does Health Insurance Cost?

Health insurance premiums depend on many factors, including the state in which you live, your employment status, and the type of plan you choose. 

It's essential to understand which factors can affect your premiums. This can help you know what you’ll likely pay ahead of time. 

Some factors that affect health insurance premiums are:

State and federal laws: Legislation determines how much a health insurance company can charge and what health insurance must cover.

Location: The price you pay for health care coverage will vary from place to place. People who live in states and counties with more options and competition will pay less for coverage than in areas with fewer health care plans. Urban areas tend to pay less than rural areas.

Type of insurance: Whether you’re covered under an employer's group plan or covered privately will factor in how much you pay.

Income level: If you are a lower-income citizen, you can expect to pay more for employer coverage but less through federal or state-sponsored programs.

Employer size: Employees at larger companies tend to pay less due to cost-sharing than those employed by smaller businesses.

Plan type: PPOs, HMOs, and marketplace plans can all vary widely in costs. You may receive different quotes depending on your research and what you decide is best for your health needs.

Age: Health insurance is usually cheaper for younger people. Older adults, who are prone to more health issues, will pay more for coverage.

Tobacco use: If you smoke, vape, or use tobacco, expect rates to be 50% higher than a nonsmoker.

We broke down the best health insurance companies of 2022 to help you along your health insurance shopping journey ->

Health insurance companies cannot consider your gender or current or past health history when determining your premiums. 

If you have concerns, your best bet is to speak with a licensed insurance agent or an independent agency like PolicyScout to discuss your health care needs before deciding on a plan.

What Are the Types of Health Insurance Plans?

You can buy two kinds of health insurance policies: private and public. Most Americans have private health insurance through their workplace or the marketplace. Medicare, Medicaid, and CHIP are examples of public health insurance schemes.

On-Exchange Health Insurance

On-exchange health insurance policies can be purchased through government-run exchanges such as Healthcare.gov. They must provide the ten essential benefits and a plan at each metal tier. Cost-sharing reductions and premium tax credits are available for on-exchange plans. 

Off-Exchange Health Insurance

Off-exchange plans are sold by the health care provider, a third-party broker, or a private insurance marketplace. Off-exchange plans do not qualify for cost-sharing reductions or premium tax credits but provide more options at lower prices. 

Health Insurance Provided by Employers

Many employers provide group health insurance plans as a perk for employees. Because employer group plans cover many people, cost-sharing benefits reduce overall premiums. You do not need marketplace coverage if your company offers a group plan. 

Medicare

Medicare is a government-funded program that offers eligible enrollees affordable health care options. All Americans over 65 and those with End-stage Renal Disease (ESRD) or ALS can enroll in the Medicare program. 

There are four parts to Medicare. Part A and B are referred to as Original Medicare, Part C as Medicare Advantage, and Part D as Prescription Drug Coverage. 

Read our 2022 guide to Medicare here ->

Medicaid and CHIP (Children's Health Insurance Program)

Medicaid is a federal and state health care program designed specifically for low-income families. If you fall below a certain poverty level, you may be eligible for state-sponsored health insurance. You can go to Healthcare.gov to see if you qualify.

CHIP is the Children's Health Insurance Program, similar to Medicaid, for children under 18 whose families' income is just above Medicaid eligibility but still too low to afford private health insurance.

What Are the Different Types of Private Health Insurance?

Private health insurance companies partner with health care provider networks to provide their customers with health care options.

Plans differ in how they work and what they cover, so make sure you understand all the details of the different types of health insurance plans before you sign up.

HMO (Health Maintenance Organization): HMO plans are the most affordable yet more restrictive private plans. HMO plans require members to select an in-network Primary Care Physician (PCP). You will need a referral to see a specialist or a doctor other than your primary care physician. Remember that HMOs do not cover out-of-network plans. 

While the premiums are low, a more comprehensive health plan is better if you have specialized needs or health conditions. 

PPO (Preferred Provider Organization): PPO plans are more costly than HMOs, but they are the most flexible regarding out-of-network providers. You will not need referrals to see a specialist, but you can choose an in-network PCP. 

These plans best suit those who can afford higher premiums and a higher co-pay when visiting an out-of-network provider or specialist. 

EPO (Exclusive Provider Organization): A cross between HMO and PPO plans that allows you to see specialists without a referral, but they do not cover out-of-network providers. These plans are priced in the middle, meaning they are more costly than HMOs but more affordable than PPOs. 

POS (Point Of Service Plans): POS plans are a hybrid of PPOs and HMOs that includes a PCP on an HMO-style network that coordinates care. You can also access a PPO-style network with out-of-network options, but you will need a referral to see an HMO specialist.

What Are the Metal Tiers in Health Insurance?

The metal tiers system is used in health insurance to classify health plans based on the cost split between the consumer and the insurer.

They are not intended to describe the overall quality of a plan or the service provided, but rather to explain what you can expect to pay. The metal tiers system considers deductibles, coinsurance, and co-payments as specified by the plan's structure. 

The four tiers are Bronze, Silver, Gold, and Platinum. Bronze plans have the cheapest premiums, with Platinum plans being the most expensive.

  • Bronze - 40% consumer / 60% insurer

  • Silver - 30% consumer / 70% insurer

  • Gold - 20% consumer / 80% insurer

  • Platinum - 10% consumer / 90% insurer

The different tiers can help you estimate what you’ll pay but they do not represent an exact amount of what you will be responsible for. Remember that the percentages do not include your monthly premiums to keep your coverage plan active.

Read more about the metal tiers in health insurance in our guide here ->

When Is the Best Time to Buy Health Insurance?

You can only apply for a marketplace plan during the open enrollment period unless you qualify for special enrollment. The open enrollment period lasts from November to mid-January.

If you do not enroll during this period, you will have to wait until the next open enrollment period unless you qualify for Medicare, Medicaid, or group coverage through your employer. 

A special enrollment period begins with qualifying events such as a 26th birthday, getting married, or having a baby.

How to Choose Health Insurance?

Your eligibility, budget, and health care needs will all influence your choice of health insurance. Here are some steps you can take if you’re in the market for health coverage.

Step 1: Find out what types of plans you are eligible for

Lots of people receive health care benefits through their employer. If your employer provides health insurance, you won't need to enroll in a marketplace plan unless you need more coverage. Always ask for information about health and wellness benefits when looking for a new job.

If your employer does not provide health insurance, you must buy a plan from the marketplace. To find a top-notch plan that works for you, start with your state's marketplace and then move on to the federal marketplace.

Another option is to buy health insurance from an insurer directly. These plans are typically more expensive, but they provide comprehensive coverage for people who can afford the premiums and co-pays.

If you are over 65, go to Medicare.gov to find out how to enroll in Medicare.

Step 2: Compare health care plans available to you

Keep your medical history in mind when comparing health care plans and anticipate any potential coverage requirements beforehand.

It is impossible to predict what health issues you will face. Reviewing your previous medical bills and pre-existing conditions and evaluating your current health can help you to decide what type of health coverage you might need. 

Health care plans should include a link to their summary of benefits, which consists of the costs, coverages, and a provider directory.

Determine whether the plan is an HMO, PPO, EPO, or POS and which benefits and coverage network is best.

The best coverage option for you will depend on whether you need a plan that does not require referrals and whether you live in a more urban or rural area. 

You can also consider a health savings account (HSA), which is a tax-advantaged account that you can use to pay for health care expenses. 

Learn more about HSA's in our guide here ->

Step 3: Decide on a health plan network

A health network is a group of medical providers and facilities with which your health plan has a contract to provide care. Health insurance companies negotiate rates with in-network providers to help you save money on your insurance.

Your rates will be higher if you go out of network. If you have a current doctor you like, make sure they are in-network when selecting a new plan.

Finding a health insurance plan that meets your needs does not have to be challenging. With some time and research, you can feel confident that you're making an informed decision and that you'll be taken care of when you need it. 

At PolicyScout, we write honest and independent reviews of multiple large health care providers to help you along your insurance purchasing journey.

Check out some of the best health care providers of 2022 in our list here. ->

FAQ: Common Healthcare Questions

When and where can I sign up for health insurance?

There is an annual period during which you can sign up for health insurance, known as open enrollment. If you miss the open enrollment period there may be an option to enroll during a special period if you meet certain criteria. You’re eligible to enroll in a special period if you have a life event such as having a child, getting married, or losing other coverage. You can enroll through the health insurance marketplace or look at your employer’s health insurance offerings. Check out our guide to health insurance enrollment.

What is a deductible?

The amount of money that you pay before your insurance plan starts to pay. For example, if your deductible is $3000 then you will be responsible to pay the first $3000 of covered services. Once the deductible has been met, you may only need to pay the copayment or coinsurance, if it applies.

What is the difference between copayment and coinsurance?

The copayment and coinsurance are the same in the sense that they both go into effect once the deductible has been met. The key difference is that a copayment is a specified flat fee whereas coinsurance is a percentage of a health service.

If I am generally a healthy person, what type of plan is best for me?

A cost effective solution for a generally healthy, young person would be to look for a high deductible plan. Yes, you may have a higher amount to reach, however with a high deductible plan the premiums tend to be much lower. If you are a healthy person that doesn’t utilize a lot of health services, the money you save on health insurance premiums help pay for any out of pocket medical expenses that do occur. Not to mention most high deductible plans give you the option to open an HSA account to pay for covered medical expenses.

How long can I stay on my parent’s health insurance plan?

A child can remain on their parent’s health insurance plan until they turn 26 years old. You can join or remain on a parent’s plan even if you are married, attending school, not living with or financially dependent on your parents, or are eligible to enroll in your employer’s insurance plan.
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