What Is Health Insurance?
Health insurance is a contract between a company and a consumer. 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 you are responsible for paying specific expenses related to illness, injury, pregnancy, or preventative care.
Health insurance agreements in the United States generally come with exceptions to coverage such as:
- 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
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 the U.S. population has health insurance coverage as an employment benefit, with premiums partially covered by the employer.1 The employer cost is tax-deductible to the payer, and the benefits to the employee are tax-free (with certain exceptions for S corporation employees).23
Self-employed people (including freelancers and gig workers) can buy insurance directly from insurers on their own. The Affordable Care Act of 2010, commonly called Obamacare or ACA, mandated the creation of the ACA Healthcare Insurance Marketplace, which allows individuals to search for and purchase standard plans from private insurers that are available where they live. The costs of ACA-based coverage are subsidized for taxpayers whose incomes are between 100% and 400% of the federal poverty threshold
Types of Health Insurance
Health insurance can be tricky to navigate. In the U.S., managed care insurance 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.
Most managed care plans—such as health maintenance organizations (HMOs) and point-of-service plans (POS)—require patients to choose a primary care physician who oversees the patient's care, makes recommendations about treatment, and provides referrals for medical specialists.
Preferred-provider organizations (PPOs), by contrast, don't require referrals. However, they do set lower rates for using in-network practitioners and services.
Insurance companies may deny coverage for certain services that were obtained without preauthorization. They may refuse payment for name-brand drugs if a generic version or comparable medication is available at a lower cost. Check an insurance company's rules before your buy their insurance.
What Are Copays, Deductibles, and Coinsurance?
Most health insurance plans require their customers to pick up some of the costs of their coverage in various ways:
- The deductible is the amount you pay out of pocket every year before the insurer begins to meet the costs. This is now capped by federal law.7
- Copays are set fees that subscribers must pay for specific services such as doctor visits and prescription drugs even after the deductible is met.
- Coinsurance is the percentage of healthcare costs that the insured must pay even after they've met the deductible (but only until they reach the 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.
High-Deductible Health Plans (HDHP)
One increasingly popular type of health insurance is the high-deductible health plan (HDHP). These plans have higher deductibles and lower monthly premiums. Their users are the only ones eligible to open a Health Savings Account (HSA) that has substantial federal tax benefits.
For 2024, a high-deductible health plan is one that has deductibles of at least $1,600 for an individual or $3,100 for a family. Total out-of-pocket maximums are $8,050 for an individual and $16,100 for a family. For 2025, those amounts will rise to $1,650 and $3,200 mininum deductibles and maximum deductibles of $8,300 and $16,600, respectively
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