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

How Does Health Insurance Work?

Health insurance is a contract that legally binds an insurance company to pay or reimburse you for covered health care costs. Your part of the deal is to pay a monthly premium. In 2014, the federal government, under the Affordable Care Act of 2010, began subsidizing Americans who qualify to help pay for health insurance premiums.

Have you ever asked, “What is the purpose of health insurance?”

In exchange for your premium, your health insurance may help you pay for doctor visits, medications, hospitalizations and medical equipment. It also might pay for your stay at a rehabilitation center or home health services.

Health insurance also encourages you to stay healthy through preventive health services, such as routine check-ups, immunizations, cancer screenings, and counseling.

Types of Health Insurance

The health insurance definition doesn’t cover every nuance. There are two types of health insurance: private and public. So which one is right for you, and how do you get health insurance?

Private health insurance covers most Americans, whether they receive it through work, buy it directly from an insurance company or purchase it through the HealthCare Marketplace, which is helping reduce the number of uninsured Americans.

Public health insurance includes such government programs as Medicare, Medicaid, Veterans Administration benefits and the Children’s Health Insurance Program (CHIP).

What Is a Health Insurance Plan?

A health insurance plan dictates what is covered, how much the insurance company will pay and for how long.

There are over one million doctors in the U.S. However, depending on your plan, you might be limited to a “network” of doctors, pharmacies and healthcare facilities you can use and still receive coverage from your insurance company. Your health plan can show you the in-network providers and out-of-network providers you can visit for health care.

Here is the difference between the two:

• In-Network: Contracts with an insurer to provide services at a negotiated rate

• Out-of-Network: No contract to provide services at certain rates

Visiting an in-network doctor or health facility can save you money. If you go outside the network, your insurance company might cover the service but charge you more. The out-of-network care may not be covered at all, leaving you to pick up the full tab for the service.

Types of Health Plans

Health insurance can be confusing, and choosing a health plan can leave you wanting. Here are the four main health plans you may run across with in-network services.

Health Maintenance Organization (HMO)

HMOs provide a range of healthcare services through in-network providers. You must have a primary care physician (PCP) in the network. Your PCP can be your main contact for health services, including any referrals you might need.

Preferred Provider Organization (PPO)

A PPO gives you broader options for choosing your doctors and services. Unlike an HMO, you don’t have to select a PCP in the network. However, you may pay a higher cost for health care. You also don’t have to seek a referral to see specialists in a PPO.

Exclusive Provider Organization (EPO)

EPOs mirror HMOs in having a small network of healthcare providers you must go to for your care, except for emergency care. However, EPOs are like PPOs because you’re not required to select a PCP or seek a referral to visit specialists.

Point of Service (POS)

You can think of POS health plans as a hybrid of the HMO and PPO plans. Like an HMO, you must choose a PCP from within the network and get the PCP’s referral. However, that referral can be for a specialist outside the network. You just may pay more for those services.

What Does Health Insurance Cover?

Exact coverage can depend on your health insurance company and the health plan you select. But here are items and services that might be covered by your health plan:

• Preventive services

• Maternity care

• Hospitalization

• Emergency services

• Diagnostic tests and screenings

• Lab work

• Prescriptions

You may still have costs associated with covered services.

What Does Health Insurance Not Cover?

What’s not covered under a health insurance plan is driven by the plan you select. However, there are items and services typically not covered, such as:

• Cosmetic surgery

• Elective surgeries

• Beauty treatments

• Prescriptions used against FDA approval

• Experimental treatments

Health insurance may also be separate from dental insurance and vision insurance. Consider asking about specific healthcare needs and prescriptions when you’re shopping for a health plan.

What Are the Costs of Health Insurance?

After asking, “What is health insurance?” you may ask about the cost of health insurance. Here are the costs you pick up:

• Premium: What you pay for health insurance.

• Deductible: The costs you pay before your health insurance begins to pay.

• Copayment: A fixed amount you pay when health care services are rendered.

• Coinsurance: The percentage you pay for health care after your deductible.

Cost sharing is another term associated with paying for health care. Cost sharing is the portion of the costs for covered services (deductible, copayment, coinsurance and other fees) you pay out of pocket. It excludes premiums, except for those using Medicaid and CHIP.

The average cost of health insurance (the premium) for single coverage is $8,435.

The Difference Between Health Insurance and Medical Insurance

What is health insurance vs. medical insurance? While the terms are used interchangeably, there is a difference.

Medical insurance is a basic plan that costs less than health insurance and covers hospitalization from an accident and illnesses specified in the plan. Health insurance covers a range of health needs far beyond hospitalization.

Do You Have the Health Coverage You Need?

Health insurance can help you reduce risks and manage healthcare costs. At ConsumerShield, we provide information to help safeguard your family. If you’re looking for health insurance, get in touch with us today.