How health insurance works

Basically, health insurance is a contract between you and an insurance company agreeing that...

  • The company pays some or all of your medical bills based on your specific plan, and
  • You pay a set amount each month, called a premium, in case you need medical care.

What an insurance premium is

Your health insurance premium is how much you pay each month to the insurance company in exchange for them covering most of your health care costs. Your premium does not include out-of-pocket costs like deductibles or copays and you pay it whether or not you go to the doctor, visit the hospital or buy prescription medications.

How a deductible works

Your deductible is what you have to pay out of pocket each year before the insurance company starts paying your covered health care expenses.

Example: if your deductible is $250, you have to spend $250 for doctors' visits or for prescription medications before your health insurance company will start to pay.

Deductible amounts vary by plan. Generally, the higher your deductible, the lower your premium.

How a copay works

A copay or copayment is a set fee you pay each time you get medical treatment or medications, such as $30 for an office visit. Each health insurance plan sets these fees and often prints them on the insurance card. After the copay, the insurance company typically pays the rest of the covered cost.

How coinsurance works

Coinsurance is the portion that you owe toward the cost of a medical treatment or service. It's calculated as a percentage (for example, 20 percent) of the allowed amount for the service you receive. You pay coinsurance plus any deductible you owe. For example, if a visit to the doctor is $100, and you have already met your deductible, your coinsurance payment will be 20 percent of $100, or $20. Your insurer pays the rest.

Why health insurance is important

  • Accidents and health problems can happen at any time.
  • Medical expenses can be high and add up quickly. In fact, they're the number one cause of bankruptcy.
  • You get access to a network of doctors and hospitals with lower rates set for insurance companies.
  • It protects your family's health and finances.

How a health maintenance organization (HMO) plan works

HMO plans offer health care services through a network of providers and facilities that it contracts with. You typically pick a primary care physician (PCP) to:

  • Provide most of your health care, and
  • Refer you out to specialists within the HMO network when needed

You pay a small copayment for in-network care, but are usually responsible for 100% of care received from providers outside of the network.

How preferred provider organization (PPO) and point-of-service (POS) plans work

PPO and POS insurance plans allow you to get health care services from within or outside of their preferred provider network. With PPO or POS plans, you may use out-of-network providers, hospitals and health care facilities, but you'll pay more than if you use in-network ones. With a PPO plan, you can visit any doctor without a referral.

With a POS plan, you don't need a referral to see an in-network provider, but you must get a referral to see a provider that's out-of-network.

How high deductible health plans (HDHP) work

HDHPs typically have lower premiums and higher deductibles than other types of insurance plans. You generally pay the first several thousand of dollars of health care expenses before the health plan pays anything. As of 2013, HDHPs are plans with a minimum deductible of $1,250 per year for individual coverage and $2,500 for family coverage.

You can use a health savings account with a HDHP to pay for qualified out-of-pocket medical costs on a pre-tax basis.

In-network vs. out-of-network providers

A health care network is a group of providers and facilities typically used by PPO, POS, and HMO plans.

  • An in-network provider contracts with your insurance company to provide services to its plan members for set rates.
  • An out-of-network provider is one that is not contracted with your health insurance company and whose services may not be covered.

The amount you're responsible for paying when you use an in-network provider will be less than if you go to an out-of-network provider.

Insurance plans that count

You're all set if you're covered under health insurance plans you get through…

  • The Marketplace or a certified insurance broker
  • An employer, including COBRA and retiree coverage
  • Public health groups like Medicare, Medicaid, Children's Health Insurance Program (CHIP), or military or Veteran's Affairs, including TRICARE
  • A college or university that you're enrolled in
  • Peace Corps volunteer plans

Under Obamacare, these insurance plans must all cover at least ten types of essential medical services.

Plans that don't count

  • Worker's compensation plans
  • Insurance for a specific disease or condition, such as cancer insurance
  • Plans that only cover dental or vision care
  • Plans that only offer only discounts on medical services
  • Insurance for long-term care

Plans you can get from the marketplace

Health insurance plans available through the marketplace are divided into four different levels: Bronze, Silver, Gold, and Platinum. They vary based on how the costs are split between you and the insurance company. Bronze plans pay for 60 percent of medical costs and platinum plans pay 90 percent. Within each level, the exact amount you pay for deductibles, copays and coinsurance may vary from company to company and even from plan to plan within companies.