Health Insurance

Health Insurance Definition, Basics, Types, and Plans

Health insurance is an insurance agreement under which your health insurer agrees to pay for your health care in exchange for premiums. In simpler terms, this insurance generally covers expenses related to the policyholder’s medical, pharmaceutical, surgical, and dental treatments.

What Is Health Insurance?

Getting sick or injured is an unexpected event – that nobody can predict. Hospital stays for three days can cost as much as $30K, enough to wipe out almost all of a family’s savings. 

When you have health insurance, you are covered for these expenses. Your health insurance policy will reimburse or pay the care provider for your medical expenses incurred from your illness or injury. 

Like life insurance, not having health insurance poses serious financial risks to you and your family. Having no health insurance means paying medical bills on your own, which can be quite expensive.

How Does Health Insurance Work?

Premiums: Health insurance works the same way as other types of insurance. Each month you have to pay premiums to keep your policy active. In exchange for health insurance premiums, insurers pay for the costs of your medical care provided by doctors and hospitals if you become ill or have a medical emergency.

Nevertheless, it is important to keep in mind that health insurance is a cost-sharing program, which means you and your insurance company share the cost of your health care.

Deductibles, Coinsurance, and Copayments are the three cost-sharing provisions in health insurance. 

Here’s a quick rundown of how these cost-sharing features work:

Deductible: Your health insurance deductible is the amount you must have to pay before your insurance starts paying. The moment your deductible is met, your plan kicks in, and you begin sharing costs with your insurer.

Copayments or Copay: These are flat payments that you pay out of pocket for every visit to the doctor.  Copayments are determined by the insurance company for specific health care services and are clearly stated on the health insurance card. For example, a routine doctor’s visit may have a $20 copay, and a certain prescription may have a $10 copay.

Coinsurance: Coinsurance refers to the percentage of your health care costs that you share with your health insurer after you meet your deductible. It is calculated as a percentage (80%/20%) of the total medical bill, with 20% being the coinsurance. In other words, if you are admitted to a hospital, your health insurance plan may pay 80% and you 20% ” of the final bill. 

Out-of-Pocket Maximum: The maximum amount you are liable to pay for covered health care services in a given year is called the out-of-pocket maximum. Deductibles, Coinsurance, and Copays all count towards your out-of-pocket maximum. Once that limit is met, your health insurer will cover 100% of your health care expenses until the end of the plan year. 

What are the Types of Health Insurance?

Before choosing a health insurance plan, one must first understand the different types of health insurance available. With many choices available, choosing the right health plan can be a challenge. 

To make health insurance easier to understand, one must understand the two main types. Let’s look at them!

1. Government Health Insurance

The Government Health Insurance programs are funded by legally mandated contributions or taxes regulated by law. Although these insurance programs are financed and managed by the government, they are not free of charge. Out-of-pocket expenses like deductibles and premiums are still a part of health care costs. However, the costs at the point of service are substantially reduced.

One example of a similar system is the National Health Service in the United Kingdom, which is primarily funded through general taxes, with smaller contributions from local taxes and patient fees.

2. Private Health Insurance

The second main type is Private Health Insurance, which is not government-funded. As the name suggests, private health insurance is administered by private insurance companies, with terms stipulated in contracts. As mandated by the Affordable Care Act, every private insurance plan must provide all essential health benefits to every insured person. 

There are multiple ways to enroll in a private plan, such as licensed agents or employer-sponsored health plans. Short-term health plans, catastrophic coverage, critical illness plans, dental insurance, vision insurance, and accident supplements are all private health plans.

Information:  CDC reports that private health insurance accounts for a large share of the U.S. health care system. Based on the National Health Interview Survey 2019, 63.7% of American adults under 65 have private insurance coverage. In comparison, the percentage of persons under 65 with public insurance at the time of the interview was 26.0%.

Health Insurance Plans

Once you have understood these main types of health insurance, you can categorize your coverage accordingly. Health insurance plans are usually managed-care plans, which involve insurance companies partnering with healthcare providers to negotiate rates and quality of care.

In addition to public or private health insurance, there are four types of health insurance plans. 

Here’s a quick overview:

  1. Health Maintenance Organization (HMO)
  2. Preferred Provider Organization (PPO)
  3. Exclusive Provider Plans (EPO)
  4. Point-of-service Plans (POS)

In general, HMO, PPO, EPO, and POS plans differ primarily by the size of their preferred provider networks. We will speak more about them in a separate post!

How to get Health Insurance?

Following are four options you can read ahead of time to determine which route might be best for your needs:

  • Through Employer

In the United States, where there is no universal health care system, employers often include health insurance in their benefits packages to attract talented employees. 

If you are eligible for insurance through your job, you should take advantage of it since the employer usually pays the premiums. A health plan purchased this way would cost much less than a plan purchased on your own.

  • Directly Through Agent or Broker

Health insurance is also available through an agent or broker. When it comes to insurance, an agent represents a single insurance company, while a broker represents multiple insurance companies. 

Brokers and agents can help you choose the right policy since they are licensed professionals with experience evaluating insurance plans. Discussing your needs with an insurance agent or broker can help you select an affordable health insurance plan.

  • Directly From Insurance Companies

If you have a clear understanding of insurance and know what you need, you can purchase insurance directly from the company without the need for an agent.

Purchasing individual health insurance directly through an insurance company can be faster, easier, and more affordable than buying it through an agent. Instead of waiting for quotes and responses from agents, you can directly get quotes online, compare them, and choose the best for you. 

  • Government-Sponsored Plans

If you are eligible for government-sponsored insurance, you can enroll in government plans like Medicare or Medicaid. Moreover, you can find health insurance marketplace policies at Finding health coverage that meets your needs while staying within your budget is easy with the Health Insurance Marketplace. 

With every health plan offered in the Marketplace, members have access to essential health benefits, such as doctor visits, preventive care, hospitalization, and prescription drugs. Government websites can also let you know whether or not you are eligible for Medicaid or not.

Information: Similar to Medicare, there is another federal government program called TRICARE, designed to provide health insurance coverage to military personnel, including active duty, retirees, and eligible dependents. Under TRICARE, active and retired military members of the United States under age 65 have access to health insurance plans.

The Bottom Line

A health insurance policy is an essential preventative measure to ensure you are protected against unexpected injuries and illnesses. It helps the insured person cover the cost of medical care. 

To find an affordable health insurance plan or to get assistance with the application process, speaking with an insurance broker or agent is a smart move. They can help you find the right coverage or help you navigate the application process easily!

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