Health Insurance Defined — What Is It & How Does It Work?

FT Contributor
A doctor helping a woman fill out her health insurance claim.

Health insurance is a type of insurance that assists in paying for medical expenses, which may include visits to the doctor’s office, surgeries, prescription drugs, treatment for injuries, or medical help with illnesses. There are several different types of health insurance policies that offer various coverages. You’re responsible for paying a monthly premium to the health insurance company to keep your policy active. The coverages your policy carries determine what you’re required to pay for certain services and treatments and what the insurance will pay for.

Depending on the type of policy you have, you may be required to pay your healthcare provider for treatment and receive reimbursement from your health insurance company. More commonly, however, your health insurance pays the healthcare provider directly and you may only be responsible for a portion of the cost of treatment or medical services.

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Health Insurance Policy Terms & Definitions

You may obtain a health insurance policy through your employer as part of a benefits package or you may shop for your own individual plan. Either way, you’ll pay a monthly premium to the health insurance company to keep your coverage active. Most health insurance policies include a network of medical care providers. If you only visit the providers in your network, your health insurance coverage applies. However, if you visit medical providers outside of your network, you may be responsible for paying out of pocket for your visits.

In addition to learning about your network of medical providers, you should also review additional terms associated with your health insurance, such as:

  • Benefit period: The time period when services are covered under your plan, usually one calendar year.
  • Copay: The amount you’re required to pay to your healthcare provider when you receive a service, although some policies don’t require a copayment for medical care.
  • Coinsurance: A specific percentage you must pay each benefit period after you’ve already paid your deductible.
  • Deductible: The amount you’re required to pay for a healthcare service before your health insurance company begins to pay.
  • Network Provider/In-Network Provider: A healthcare provider who participates in your health insurance plan.
  • Out-of-pocket maximum: The maximum limit of the cost you must pay out-of-pocket for healthcare services during a benefit period.
  • Premium: The payments you make to your health insurance company to keep your policy active.

Your plan’s deductible is usually based on your benefit period and once you reach the deductible, your health insurance coverage kicks in and begins to pay. However, with some policies, you’re still responsible for paying the coinsurance.

For example, if your health insurance policy has a $5,000 annual deductible and coinsurance of 20%, you’ll be expected to pay for healthcare expenses up to $5,000. Once you reach $5,000 in out-of-pocket expenses for the year, you’re only responsible for 20% of your healthcare costs and your health insurance covers the rest.

What Is the Best Insurance?

The rising costs of healthcare and the need for medical treatments have made health insurance a necessity for most Americans. According to the Centers for Medicare and Medicaid Services (CMS), national healthcare expenditures grew 3.9% to $3.5 trillion in 2017, or $10,739 per person.

The Health Insurance Marketplace was created by the Affordable Care Act (ACA), which came into effect in 2010 under President Barack Obama. It helps individuals and small business owners shop for affordable health insurance coverage and easily compare plans. You can use the Health Insurance Marketplace to apply for health insurance coverage or to see if you qualify for government healthcare programs. Some people who sign up for insurance through the marketplace qualify for tax subsidies, which help them pay for their coverage.

Before you shop for health insurance coverage, you’ll need to identify the healthcare needs of you and your family members. The best insurance policy for you will be the one that fits your budget, medical needs, and that offers the coverage and network you feel comfortable with.

Types of Insurance

When choosing a health insurance policy, the choices and plans available can be overwhelming. It’s important to know what you can afford and the types of coverage that are important for your situation before you choose a plan. Learning more about the different types of health insurance available can help you decide what’s right for you.

  • Short-term health insurance: Only offers coverage for a short term, usually six months.
  • Long-term insurance: Covers certain services over a long period of time, usually 12 months.
  • Group health insurance: A plan offered through an employer or organization that provides coverage for several individuals and their dependents as a group.
  • Commercial health insurance: Plans offered through non-government entities generally sold by licensed agents and brokers.
  • Private health insurance: Plans offered by private entities, such as an insurance company or broker.
  • Children’s Health Insurance Program (CHIP): Health insurance coverage for children when families make too much money to qualify for Medicaid but not enough for private insurance.
  • Medicaid: An insurance program funded by federal and state governments that provides coverage to qualifying low-income residents.
  • Medicare: A federal health insurance program that provides coverage to citizens who are 65 or older, qualified disabled individuals, and other eligible enrollees.

Insurance Plans

In addition to the types of insurance available, there are also different plans. The plan itself determines how the insurance works for you, how you’ll seek medical care, and the medical providers you’ll be able to see when using your coverage. It’s important to review these different plans so you can choose the one that works best for your situation.

PPO Health Insurance

Preferred provider organization (PPO) insurance plans offer extensive coverage from in-network medical providers. These plans also allow you to seek treatment out of network but the coverage isn’t as comprehensive. While these plans offer more flexibility than HMO insurance plans, the premiums are generally higher.

HMO Health Insurance

Health maintenance organization (HMO) health insurance plans only cover services performed by providers within the HMO network. With this plan, you may be required to select a primary care physician (PCP) in the network. This doctor provides covered treatment and can refer you to specialists in the HMO network as needed.

HSA Health Insurance

A health savings account (HSA) is an account that lets you save for medical costs you may encounter in the future. These accounts must be paired with certain high-deductible health insurance plans (HDHP). The money you contribute to your account is tax-free and can build up throughout the years.

FSA Health Insurance

A flexible spending account (FSA) is usually set up through an employer plan and allows you to set aside pre-tax money to use for medical costs or dependent care, such as vaccines or copays. These funds must be used by the end of the year or they’re sent back to the employer.

What Is the Penalty for Not Having Insurance?

In 2010, the ACA required that all Americans have specific health insurance or pay tax penalties for being uninsured or underinsured. However, this stipulation was removed by Congress in December 2017. Currently, there is no penalty for not having health insurance.

What Is the Health Insurance Portability and Accountability Act?

The Health Insurance Portability and Accountability Act (HIPAA) contains legislation designed to protect the privacy of patients’ data and medical information, as well as their continuing employer-sponsored healthcare coverage. It was signed into law in 1996 under President Bill Clinton. HIPAA reduces healthcare fraud and abuse and sets industry-wide standards on data security, including electronic billing systems and the confidential handling of medical information.

This legislation also allows American workers and their families to transfer health insurance coverage that’s employer-sponsored if they lose or change jobs. This protects Americans who are covered by employer-sponsored insurance so they don’t have to worry about being left uninsured if they no longer work for their employer.

Whether you’re looking into employer-sponsored insurance or a private policy, the coverage and type of health insurance you choose depends on affordability and the medical services you think you’ll need. When you understand the terms connected to health insurance, you’ll find it easier to choose the right policy for you and your family.

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