Benefits
What Is Health Insurance? A Simple Breakdown
Health insurance is a contract between you and a health insurer that requires your insurer to help pay your health care costs in exchange for a monthly premium.
To navigate the world of health insurance, it’ll be helpful need to understand some of its complexities, such as the coverage options, cost components, and insurance terms.
Note: The majority of Americans have private health insurance. This article focuses on the basics of those plans, which are often employer-sponsored group plans.1
Key health insurance terms
Before breaking down the specifics of how health insurance works, let’s review some common insurance terms.
- Policyholder: The individual or entity who owns the insurance policy
- Premium: The monthly amount a policyholder pays to their insurance provider to maintain coverage
- Deductible: The amount a person pays out of pocket before their insurance starts paying out
- Copayment (copay): A fixed amount someone pays for healthcare services and medications
- Coinsurance: A percentage of the medical costs a person is responsible for after meeting their deductible
- Out-of-pocket maximum: The maximum amount a person has to pay in a policy year before their provider pays 100% of covered services
- Network: A group of healthcare providers contracted with an insurance company to offer services at a negotiated rate
- Claim: A formal request made by the policyholder or provider asking an insurance company to cover payments
- PCP: Primary care physician
How does health insurance work?
Health insurance, or medical insurance, is a type of insurance you can get to help pay for covered medical expenses. You pay a monthly premium to a health insurer, and in return, they agree to cover a portion of your medical costs, as outlined in the insurance policy.
You can typically use your health insurance benefits to help cover a range of services — such as doctor visits, routine checkups, hospital stays, surgeries, preventative care, and prescription medications.
You may be responsible for paying certain out-of-pocket expenses, like deductibles, copays, and coinsurance. Review your insurance card, or contact your provider to learn what your out-of-pocket responsibilities are.
Types of health insurance plans
There are several types of health insurance plans available for you to choose from. Here’s an overview of the most common types:
Health maintenance organization (HMO)
HMOs work with a contracted network of doctors, clinics, and hospitals to provide care at reduced rates for members or enrollees. If you’re enrolled in an HMO, you’ll typically be required to choose a primary care physician (PCP) who oversees your healthcare needs and refers you to specialists within your network when needed. Generally, you must seek care within your network to receive full coverage, except in emergencies.
Preferred provider organization (PPO)
PPOs provide a bit more flexibility than HMOs because they allow you to receive both in-network and out-of-network care without needing a referral from a PCP. In-network care usually results in lower out-of-pocket costs, while out-of-network care may have higher deductibles, copays, or coinsurance. PPOs also tend to have higher monthly premiums than HMOs due to the increased flexibility and choice of providers. It’s also possible to have a high deductible health plan PPO, which has a lower monthly premium than a traditional PPO but requires you to pay a higher deductible.
Exclusive provider organization (EPO)
In terms of provider choice and coverage, EPOs offer a middle ground by combining elements of both HMOs and PPOs. Like an HMO, EPOs provide coverage exclusively for in-network providers, except in emergencies. However, similar to PPOs, EPOs generally allow you to access specialists and other healthcare services directly, without needing a referral from a PCP.
Point of service (POS)
POS plans generally require you to choose a PCP within your network who acts as your central point of contact for managing your healthcare needs. To see a specialist, you’ll typically need a referral from your PCP. With a POS plan, you have the option to seek out-of-network care — although, this will be at a higher cost compared to in-network care.
How to choose a health insurance plan
When choosing between different types of health insurance plans, consider several factors to determine which plan best fits your healthcare needs.
Here are some things to consider:
Criteria |
Plans that fit the criteria |
|||
|
HMO |
PPO |
EPO |
POS |
Network flexibility: If you want the option to see out-of-network providers |
|
✅ |
|
✅ |
PCP requirement: If you prefer a PCP to be in charge of your care needs |
✅ |
|
|
✅ |
No referral mandates: If you want to be able to directly access specialists without a referral |
|
✅ |
✅ |
|
How to buy health insurance
You can enroll in health insurance through your employer during open enrollment. You can also purchase health insurance directly through an insurance company or government marketplace.
Open enrollment dates vary, but you can normally enroll through the health insurance marketplace between November and December. For employer-sponsored plans, the open enrollment period will be determined by your employer and typically occurs once a year, often October and November.
Why is health insurance important?
Health insurance provides financial protection and gives you essential access to medical care. It can help you and your family manage the costs of healthcare when unforeseen medical emergencies, accidents, or serious illnesses arise.
Consider enrolling in health insurance for the following reasons:
- Helps save you money on healthcare: Health insurance pays a portion of your healthcare costs and can provide you with better rates on healthcare treatments and services.
- Helps you prioritize your health: Having health insurance may encourage you to seek medical care when you need it and promote overall well-being with regular checkups and preventative care.
- Allows you to focus on your recovery: By easing the financial burdens of healthcare, health insurance provides a sense of peace and security, allowing you to concentrate on your recovery with greater reassurance.