What Is Health Insurance? (And How Does It Work?) (2024)

Most people have experienced an unexpected illness, injury or condition that needed medical attention. Depending on the situation, health care can be costly, and many Americans rely on health insurance to help manage the cost.

If you’re buying health insurance on your own (rather than through an employer), you’ll find there are many plans available and they differ in terms of coverage, network size, out-of-pocket costs and premiums. It’s a good idea to compare several options to see which plan is the best for you.

What Is Health Insurance?

Health insurance is a legal agreement between you (or your employer, if you have insurance through work) and an insurance company. The contract states that you pay the insurance company a premium for coverage and the insurer pays for at least a portion of your qualifying medical expenses.

Health insurance has a variety of benefits. It can protect you from paying unexpected and expensive medical bills. It also covers essential health benefits, like annual physicals. Most plans also provide free preventative care, like vaccines and screenings.

There are stark differences between life insurance vs. health insurance. While both can provide valuable coverage, health insurance is for medical bills while you’re alive, and life insurance is mainly intended to provide a payout to your beneficiaries when you pass away.

How Does Health Insurance Work?

People with health insurance usually pay a health insurance premium for coverage. If you get coverage through an employer, the business will likely deduct your portion of the premium from your paycheck. The premium depends on a few factors, like the plan type and your location.

Before you visit a doctor, you should check to see if the provider or medical facility is in your health plan’s network. Providers and hospitals that are considered in network contract with the plan and agree to accept a discounted rate for the services they provide. Health plans pick up more of the health care costs for in-network providers than out-of-network providers, which means lower costs for you if you stay in network.

Some health insurance plans, such as health maintenance organization plans, only reimburse you for medical services when you go in-network. Others, like preferred provider organization plans provide limited coverage when you visit an out-of-network provider. Regardless of your plan, you almost always pay less out-of-pocket when you get medical care in-network.

After a doctor’s visit, the provider typically submits a claim to your insurance company. Once the health insurance company approves the claim and pays its portion of the costs, the health insurer sends you an Explanation of Benefits (EOB).

The EOB details:

• The services you received.
• How much your plan covered.
• What you owe the provider.

An EOB also includes information about out-of-pocket costs:

• Health insurance deductible: Your portion of the annual health care costs before the company begins to kick in money.
• Coinsurance: Your percentage of health care costs after reaching your deductible, such as 20% of costs paid by you and 80% paid by the insurance company.
• Annual out-of-pocket maximum: The most you pay out of pocket for in-network care in a year.

Your doctor will send you the final bill. On the bill, you can see how much you’re responsible for paying the doctor after your insurance company has paid its portion. The bill will also include instructions for where and how to send the payment.

What Are the Different Types of Health Insurance?

There are five common types of health insurance plans. A health insurance plan’s design sets the parameters for how you get care and influences what you pay.

1. Health maintenance organizations (HMOs)

   A health maintenance organization plan (HMO) plan typically only covers your medical expenses for in-network visits. If you go out-of-network, your insurance company doesn’t cover any portion of the bill. The only exception is emergency care, which is covered in-network and out-of-network.

   HMO members generally choose a primary care provider who oversees and coordinates their care. If you need to see a specialist, you typically must get a referral from your primary care doctor.

2. Preferred provider organizations (PPOs)

   Preferred provider organization (PPO) plans are the most common type of health insurance if you get coverage through an employer. PPOs offer more flexibility, such as getting covered for out-of-network care. If you have a PPO and go out of network, you typically pay more than if you stay in the plan’s network. PPOs also don’t require a primary care referral to see a specialist.

   That flexibility generally comes at a higher cost than an HMO.

3. Exclusive provider organizations (EPOs)

   Exclusive provider organization (EPO) plans are similar to an HMO, including the need to stay in network to get covered. One difference between an HMO and EPO is that you don’t need to choose a primary care provider in an EPO. You can manage your own care and make appointments with specialists without a referral from your primary care physician.

   One way an EPO is similar to a PPO is that you don’t need to name a primary care provider.

4. Point-of-service (POS) plans

   A point-of-service (POS) plan lets you get medical care in-network or out-of-network, but you will pay less if you stay in network.

   POS plan members are required to work with a primary care provider. Referrals are also required to see a specialist, like an endocrinologist or oncologist. You may also need a referral to see an out-of-network specialist.

5. High-deductible health plans (HDHP)

   A high-deductible health plan (HDHP) is a health insurance plan with a deductible of at least $1,500 for an individual or $3,000 for a family. Any health plan, like a PPO or HMO, can be an HDHP.

   One of the biggest benefits of an HDHP is a lower premium. The downside is you pay more out-of-pocket when you need care until you reach the plan’s out-of-pocket maximum.

Federal Health Insurance Plans

You might consider a federal health insurance plan if you can’t get health insurance coverage through your employer. These plans are funded at least partially by the government and provide comprehensive health coverage.

Affordable Care Act marketplace

The Affordable Care Act (ACA) marketplace at Healthcare.gov allows you to purchase individual or family health insurance from participating insurance companies. Some states run their own health insurance exchanges, while others are part of the federal marketplace.

There are no income requirements to get ACA coverage. Marketplace plans are the only ones eligible for premium tax credits and subsidies. Those credits and subsidies can save you money on health insurance based on your household size and income.

ACA marketplace plans are sold in metal tiers: Bronze, Silver, Gold, and Platinum insurance plans. These tiers are based strictly on premium and out-of-pocket costs.

There are no income requirements to get ACA coverage and marketplace plans are the only ones eligible for premium tax credits and subsidies. Those credits and subsidies can save you money on health insurance based on your household size and income.

Affordable Care Act marketplace plans are the only health plans eligible for premium tax credits and subsidies, which help reduce the cost of health insurance.

Here’s how the metal tiers differ:

• Bronze plans: Lowest premiums but highest out-of-pocket costs.
• Silver plans: Higher premiums than Bronze plans but lower out-of-pocket costs.
• Gold plans: Higher premiums than Silver plans but lower out-of-pocket costs.
• Platinum plans: Higher premiums than Gold plans but lower out-of-pocket costs.

If you don’t expect to need much health care in the coming year, a Bronze or Silver plan could be a smart financial choice. But if you have a family, expect to start a family or you would rather pay more upfront and less when you need care, a Gold or Platinum plan would likely be a better decision.

Medicare

Medicare is a health insurance available to Americans age 65 and older, people with disabilities and individuals with End-Stage Renal Disease (ESRD).

Medicare comes in two forms—Original Medicare and Medicare Advantage.

• Original Medicare includes Part A (hospital insurance) and Part B (medical insurance), with the option to purchase a separate Part D (prescription drug coverage) plan.
• Medicare Advantage, also called Medicare Part C, is private health insurance. Medicare Advantage combines Parts A and B along with other coverages, including prescription drugs and benefits not found in Original Medicare, such as vision and dental care.

Medicaid and CHIP

Medicaid and the Children’s Health Insurance Program (CHIP) provide free or low-cost health insurance to low-income individuals, pregnant women and families. These programs are jointly funded by the federal government and state governments.

Each state has its own eligibility requirements for Medicaid and CHIP. These requirements are based on income level and household size. Other factors can influence eligibility, including age, whether you’re pregnant and if you have a disability. You can check your eligibility for these programs on HealthCare.gov.

You can apply for Medicaid or CHIP through the marketplace. There is no open enrollment for these programs, so you can enroll at any point during the year.

Health Insurance Terms to Know

Health insurance is often associated with complicated terminology. Understanding these terms can help when shopping for a health plan and navigating health insurance.

Copays

A copayment, or copay, is a fixed fee you pay when you receive a specific medical service. Primary care visits often have lower copays than specialists and emergency care.

Deductibles

Your deductible is the amount you must pay before your health insurance company starts covering your medical expenses. Only in-network provider visits usually count toward your deductible. The deductible resets at the beginning of each year.

For example, imagine your health plan has a $1,000 deductible. You would need to spend $1,000 out-of-pocket on qualifying medical expenses before your insurance company starts paying its portion of the bill.

Coinsurance

Coinsurance is a percentage of each medical bill you must pay after hitting your deductible. Coinsurance is another form of cost-sharing—you pay a certain portion and your insurance company pays the rest.

Let’s say your health insurance policy has a 20% coinsurance for outpatient surgeries. You need to have knee surgery and end up with a medical bill of $8,000. In this case, you would pay 20%, which is $1,600, and your insurance company would pay the remainder.

Health savings accounts (HSAs) and flexible spending accounts (FSAs)

A health savings account (HSA) allows you to put pre-tax money aside for qualifying medical expenses, including deductibles, copayments and coinsurance. You typically can’t use HSA money to pay your health insurance premiums.

You can only contribute money to an HSA if you have an HDHP. The maximum HSA contribution for the 2023 tax year is $3,850 for individuals and $7,750 for families.

Flexible spending accounts (FSAs) are similar to HSAs. An FSA lets you contribute money pre-tax and use the funds to pay for qualifying medical expenses (with the exception of premiums). You can contribute to an FSA regardless of your health plan.

One major difference between an FSA vs. HSA is that an FSA doesn’t generally let you roll over funds to the following year. You usually need to use the money within the same year you contribute. You can contribute up to $3,050 for an FSA.

Average Cost of Health Insurance

The average cost of a Bronze plan in the ACA marketplace is $373 a month for a 30-year-old buying single coverage.

Health insurance costs vary depending on many factors, including age, plan type, metal tier (for ACA plans) and where you purchase coverage. If you get health insurance through the ACA marketplace at HealthCare.gov, here are the average monthly premiums for Bronze, Silver, and Gold metal tiers:

For group health insurance plans, employees pay an average of $117 per month for single coverage and $548 per month for family coverage, according to KFF. Employers often pick up part of the tab, too.

As you can see, ACA marketplace plans typically cost more than getting coverage through an employer. ACA marketplace plans have premium tax credits and subsidies that can reduce those costs, depending on your household income and family size.

How Do I Buy Health Insurance?

The process of getting health insurance depends on your personal situation. Here are options for how to get health insurance, depending on your work status.

Employed

If you’re employed, your employer may offer group health insurance. The employer decides on the plan offerings and you choose from those offerings. Businesses may require that you work for a period before getting coverage.

Self-employed

Self-employed health insurance is available through the ACA marketplace. You can also purchase private health insurance directly from an insurance company, but those plans may not be ACA-compliant. That means they may not have as much coverage as an ACA plan. You also can’t qualify for any premium tax credits or subsidies.

You can only enroll in a marketplace plan during the open enrollment period unless a qualifying life event for health insurance makes you eligible for a special enrollment period. Open enrollment for an ACA plan is from Nov. 1 to Jan. 15 in most states.

Unemployed

You can enroll in an ACA marketplace plan. Losing coverage or your job makes you eligible for a special enrollment period for an ACA plan.

COBRA insurance is an option for people who recently lost employment or work-based health insurance. COBRA lets you keep your former coverage, but that comes at a much higher cost since your former employer likely won’t contribute to help pay for premiums. That instead will be completely on your back.

One other possible option is Medicaid if you qualify. Medicaid is for lower-income Americans and offers comprehensive coverage at little or no cost, depending on your finances.

If you don’t qualify for Medicaid, the cheapest option for health insurance is typically an employer-sponsored health plan. If you lose coverage and you’re married, see if your spouse can add you to their plan. It may increase the plan’s premiums, but it will likely be a more affordable option than an ACA plan or COBRA.

Two other options are short-term health insurance and catastrophic health insurance. Short-term plans offer limited coverage with low premiums. They’re meant as temporary coverage to bridge a gap, but they don’t provide as much protection as standard health insurance.

Catastrophic health insurance is only available for people under 30 and those suffering severe financial problems, such as homelessness. Catastrophic plans are low cost and offer similar coverage found in standard health insurance, but catastrophic plans have high deductibles ($8,700 per person or $17,400 for a family). Once you reach the deductible, the catastrophic plan picks up the rest of the costs for health services for the year.

When Can I Buy Health Insurance?

Health insurance plans typically limit when you can purchase coverage, which is the called open enrollment period.

ACA marketplace plans are only sold during the annual open enrollment period. In most states, that’s between Nov. 1 and Jan. 15. The only exception is if you qualify for a special enrollment period.

You can qualify for a special enrollment period if you experience a qualifying life event for health insurance. Some examples include:

• Losing coverage through an employer
• Moving to a new state
• Giving birth or adopting
• Getting married or divorced

Employers also have their own open enrollment periods when you can buy coverage and they often have similar qualifying life event rules.

Medicaid and CHIP don’t have open enrollment periods. If you qualify for Medicaid or CHIP, you can get coverage at any time.

What Is Health Insurance FAQ