Health insurance is an essential part of financial planning and protection against medical expenses that may arise due to illness, injury, or accidents. A health insurance policy acts as a contract between a policyholder and a health insurance agency, where the agency agrees to cover a portion or all the insured person’s medical expenses in return for a monthly premium payment. In this comprehensive guide, we will discuss the importance of health insurance, types of health insurance plans, factors to consider when choosing a plan, and much more.
What is Health Insurance?
Health insurance is a contract between a policyholder and a health insurance company. The company agrees to pay all or some of the insured person’s healthcare costs in return for payment of a monthly premium. The contract is usually a one-year agreement, during which the insurer will be responsible for paying specific expenses related to illness, injury, pregnancy, or preventative care.
Health insurance agreements generally come with exceptions to coverage, including:
- A deductible that requires the consumer to pay certain healthcare costs “out-of-pocket” up to a maximum amount before the company coverage begins
- One or more co-payments that require the consumer to pay a set share of the cost for specific services or procedures
- Health insurance pays most medical and surgical expenses and preventative care costs incurred by the insured person in return for a monthly premium payment.
- Generally, the higher the monthly premium is, the lower the out-of-pocket costs are to the insured.
- Virtually all insurance plans have deductibles and co-pays, but these out-of-pocket expenses are now capped by federal law.
- Since 2010, the Affordable Care Act has prohibited insurance companies from denying coverage to patients with preexisting conditions and has allowed children to remain on their parents’ insurance plan until they reach the age of 26.
- Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) are federal health insurance plans that extend coverage to older, disabled, and low-income people.
How Health Insurance Works
In the United States, health insurance is tricky to navigate. It is a business with a number of regional and national competitors whose coverage, pricing, and availability vary from state to state and even by county.
About half of Americans have health insurance coverage as an employment benefit, with premiums partially covered by the employer. The cost to the employer is tax-deductible to the payer, and the benefits to the employee are tax-free, with certain exceptions for S corporation employees.
Self-employed people, freelancers, and gig workers can buy insurance directly on their own. The Affordable Care Act of 2010, commonly called Obamacare, mandated the creation of a national database, called HealthCare.gov, which allows individuals to search for standard plans from private insurers that are available where they live. The costs of the coverage are subsidized for taxpayers whose incomes are below the federal poverty threshold.
Some, but not all, states created their own versions of HealthCare.gov that are tailored to their residents.
Retirees receive federally-subsidized care through Medicare, and families whose self-reported incomes were in the lowest income bracket are eligible for subsidized Medicaid coverage.
Types of Health Insurance
Health insurance can be tricky to navigate in the U.S. There are various types of plans available, each with its unique features. Some common types of health insurance plans include:
- Managed care insurance plans: These plans require policyholders to get their care from a network of designated healthcare providers. If patients seek care outside the network, they must pay a higher percentage of the cost. The insurer may even refuse payment outright for services obtained out of network. Examples of managed care plans include Health Maintenance Organizations (HMOs) and Point-of-Service plans (POS).
- Preferred-provider organizations (PPOs): These plans don’t require referrals but do set lower rates for using in-network practitioners and services. PPOs allow more flexibility in choosing healthcare providers but may come with higher premiums.
- Exclusive Provider Organizations (EPOs): EPOs are a hybrid between HMOs and PPOs, offering a network of providers but without the need for referrals. EPOs generally have lower premiums than PPOs but may have more restrictive networks.
- High-Deductible Health Plans (HDHPs): HDHPs have higher deductibles and lower monthly premiums. Their users are the only ones eligible to open a Health Savings Account (HSA), which has substantial federal tax benefits.
Government-sponsored Health Insurance Plans
Not all health insurance in the US is provided by private companies. Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) are federal health insurance plans that extend coverage to older, disabled, and low-income people.
The Affordable Care Act (ACA)
In 2010, President Barack Obama signed the Affordable Care Act (ACA) into law. In participating states, the act expanded Medicaid, a government program that provides medical care for individuals with low incomes.
The ACA established the federal Health Insurance Marketplace, which enables individuals and businesses to shop for quality insurance plans at affordable rates. Insurance available through the ACA Marketplace is required to cover 10 essential health benefits.
Understanding Health Insurance Costs
When selecting a health insurance plan, it’s crucial to understand the costs involved. These costs include:
- Premium: The monthly payment you make to maintain your health insurance coverage.
- Deductible: The amount you must pay out-of-pocket each year before your insurance starts to cover healthcare costs.
- Copayment (copay): A fixed fee you pay for specific services or procedures, even after meeting your deductible.
- Coinsurance: The percentage of healthcare costs that you must pay even after meeting your deductible (but only until you reach your out-of-pocket maximum for the year).
Insurance plans with higher out-of-pocket costs generally have smaller monthly premiums. When shopping for plans, weigh the benefit of lower monthly payments against the potential risk of large out-of-pocket expenses in the case of a major illness or accident.
Choosing the Right Health Insurance Plan
When selecting a health insurance plan, it’s crucial to consider factors such as your age, family size, medical history, and budget. To choose the right plan, follow these steps:
- Determine your needs and preferences: Assess your coverage requirements and look for plans that offer features catering to your specific needs, such as maternity coverage or coverage for preexisting conditions.
- Compare plans and premiums: Research different health insurance plans and compare their coverage, premiums, deductibles, and out-of-pocket costs.
- Consider government-sponsored plans: If you’re eligible, explore options like Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) for more affordable coverage.
- Evaluate additional benefits and perks: Look for plans that offer value-added benefits like wellness programs, annual health check-ups, and discounts on services and products.
Factors to Consider Before Deciding on a Health Insurance Plan
When choosing a health insurance plan, consider the following aspects:
- The range of plans offered: Check the different types of plans offered by various health insurance companies and choose the one that suits your needs and preferences.
- The network of hospitals: A wider network of hospitals allows for easier access to cashless claims and better healthcare services.
- Claim settlement ratio: A higher ratio indicates the company’s efficiency in settling claims and its commitment to customer satisfaction.
- Premium rate: Compare the premium rates of similar plans across different health insurance companies to find the most affordable option.
- Waiting period: Health insurance plans often have waiting periods for specific coverage aspects, such as pre-existing conditions or maternity benefits. Choose a plan with a shorter waiting period to ensure quicker coverage.
- Co-payment clause: Some plans have co-payment clauses, where you must pay a certain percentage of the healthcare costs even after meeting your deductible. Opt for plans with no or lower co-payment rates.
How to Purchase Health Insurance
Purchasing health insurance can be done through various channels:
- Through your employer: Many employers offer health insurance as a part of their employee benefits package.
- Directly from a health insurance company: Contact a health insurance agency and inquire about their available plans and premiums.
- Online: Visit websites like HealthCare.gov or your state’s health insurance exchange to compare plans and apply for coverage.
- Through a licensed insurance agent or broker: Seek the help of a licensed professional who can guide you through the process of selecting and applying for a health insurance plan.
Maintaining Your Health Insurance
Once you have purchased a health insurance plan, it’s essential to keep it active by paying your monthly premiums on time and updating your personal information as needed. Regularly review your plan to ensure it continues to meet your healthcare needs and adjust your coverage accordingly during open enrollment periods or after experiencing a qualifying life event.
Health insurance is a crucial part of financial planning and protection against unforeseen medical expenses. By understanding the different types of health insurance plans and considering factors such as coverage, costs, and additional benefits, you can make an informed decision in choosing the right health insurance plan for you and your family. Remember to regularly review your plan and make necessary adjustments to ensure it continues to meet your healthcare needs and preferences.