Health Insurance Basics

We all complain about the rising cost of healthcare and health insurance, and yet many of us don’t really know what we’re paying for or if we’re paying the right amount. In fact, recent studies have found that only 12% of English-speaking adults had proficient health literacy skills, with 9 out of 10 adults having difficulty using health information to make informed decisions about their health.1 This includes defining basic health insurance terms such as “deductible,” “copay,” and “coinsurance.”

Besides knowing the industry jargon, we also have to understand the claims process and how to calculate how much we’re actually supposed to pay for a medical service. When faced with actual cost-sharing scenarios with the health insurance company for a healthcare service, many of us think we know how it works when, in actuality, we really don’t.

The Affordable Care Act (ACA) provided some help in this area by requiring plans to provide a standard Summary of Benefits document and a Universal Glossary of Terms. But many have argued that it will take more than giving patients more education and information. They argue that the traditional health insurance system itself is too complicated. That may be true, but as a consumer in today’s health insurance marketplace, you have to understand and make decisions about your health coverage now that could affect your wallet and access to the best care.

What is health insurance?

Health insurance is a contract between the insured (you) and the insurer (the insurance company or government programs such as Medicare or Medicaid). The insurer agrees to cover a portion of your healthcare costs (cost-sharing) in exchange for a monthly, quarterly, or annual payment called a premium that’s paid by you or by a combination of you, your employer, the state or federal government, or some combination of all of these.

This contract (a policy or plan, as it’s usually called in the insurance industry) between you and the insurer spells out how much you’ll have to pay for your healthcare and the benefits you’ll receive. An insurance policy is a legally binding document written to protect your rights and those of the insurer under as many circumstances as possible.

Do you have to have health insurance?

Here are some typical reasons people cite for not having health insurance. Each is followed by reasons to reconsider:

  • “I can’t afford it.” If you think the cost of premiums is high, it isn’t nearly as high as paying for your own medical care. But if you truly can’t afford to pay private insurance premiums, you may be eligible for subsidies, Medicaid, or other types of government assistance.
  • “I never get sick.” You’re very lucky. But are you married? Do you have kids who may need medical care? What if you or someone in your family has an accident? If you’re only covering yourself, you might also want to consider that as you get older, your risk of developing diseases, such as heart disease, increases. You may want to take preventive measures now to stay healthy and avoid the added expense of emergency care and hospitalization later.
  • “If I do get sick, I make enough money that I can pay for it myself.” Are you sure? According to researchers at Harvard Medical School, nearly half of all bankruptcies in the United States are in families that experience financial distress after a serious illness or injury.2 Even if you can afford to pay for anything that could happen to you, do you really want to? You might save money by sharing a portion of the cost with your insurance company.
  • “The insurance company always finds some way not to pay, and I end up paying for it anyway.” Insurance policies and their descriptions of what is and isn’t covered and the specifics of how costs are shared can be very confusing. The ACA now requires that plans provide a Summary of Benefits and Coverage (SBC) (click here to see an example). You can request an SBC for your plan to know what they should pay for and how much you have to cover. If you think the insurance company didn’t pay for something they should have, you have the right to appeal their decision.
  • “What’s the point when I have to pay so much up front before the insurance company pays for anything?” Maybe you haven’t found the right insurance plan. You might want to take a look at policies available through the health insurance marketplace or talk with an insurance agent to see if you can find a plan with a lower deductible and a premium that’s affordable to you or one with fewer out-of-pocket expenses.

What types of health insurance can you get?

Most health insurance plans that have the essential health benefits called for by the ACA fall into the category of managed care plans, which are plans with a network of approved healthcare providers and facilities. These types of plans help insurance companies control costs, which, in turn, helps to lower premiums. The main difference in most managed care plans is how frequently the participant wants to use a provider or facility that isn’t in the network:

  • Health maintenance organizations (HMOs) and exclusive provider organizations (EPOs) – These plans typically limit coverage to providers and facilities within the network. You can go to a healthcare provider outside the network, but you’ll probably have to pay the full cost.
  • Preferred provider organizations (PPOs) and point-of-service plans (POSs) – These plans would typically share more of the cost with you than HMOs if you choose to see a provider or use a hospital outside the network. You’ll still probably pay more to see a healthcare provider outside of the network, but you may not have to pay the full cost. Participants in a PPO can see whatever healthcare provider they want without a referral. No referrals should be needed for care from out of network specialists.

Other types of plans include the following:

  • Short-term or temporary plans – These plans only provide coverage for a specified period of time, usually less than a year. They may not comply with the ACA’s requirements for minimum essential benefits, such as providing coverage for preventive care and accepting applicants with preexisting conditions. However, these plans can be a good option if you are in between jobs or waiting for new coverage to begin.
  • High-deductible health plans (HDHPs) – These plans have a high deductible but lower premiums. These plans are often used in combination with health savings accounts (HSAs) that allow you to save pretax income to pay the higher out-of-pocket medical expenses than you would have with a traditional plan.
  • Catastrophic health insurance plans – These plans have a high deductible to cover the most serious illness or accident. The premiums for these plans are usually lower than the managed care plans described above, but you may pay thousands of dollars in out-of-pocket medical expenses before you meet your deductible. To purchase this type of coverage from the health insurance marketplace, you’ll have to meet certain age (under 30) and income requirements.

Where can you get health insurance?

Private insurers and the government provide health insurance in the U.S. You can get it in four ways:

  • From your employer – Most Americans with health insurance get it as a benefit of their employment. Employers purchase the insurance for the entire group of employees, which makes it more affordable by spreading the cost over a greater number of people. In employer-sponsored plans such as these, employees may still be responsible for paying at least a portion of their premium, meeting their deductibles, and paying a portion of the medical expenses out of their own pockets.
  • Directly from an insurance company – You can buy health insurance directly from the insurance company on your own or with the help of an insurance agent or broker.
  • From the health insurance marketplace – You can buy health insurance through a federal or a state insurance marketplace.
  • From the government – The government provides health insurance for certain groups of eligible people, for example, Medicare for people over 65 years old. Medicaid, another government-sponsored program, is funded by both federal and state governments.

How can you get insurance?

  • You can get a job that offers health insurance as a benefit of employment.
  • If you recently lost your job, you may qualify for Consolidated Omnibus Budget Reconciliation Act (COBRA) benefits. COBRA allows you to continue insurance coverage that you had through your employer.
  • You can wait until the next open enrollment period and purchase insurance through the health insurance marketplace or directly from an insurance company.
  • If you’ve had a qualifying event, you can purchase insurance through the health insurance marketplace.
  • You can apply for benefits from Medicare or Medicaid.

Why are plans canceled, and what can you do if yours is canceled?

Plans can be canceled by the insurer at any time for any reason; however, insurers are required to give you notice so you can find other coverage. Many plans were canceled after the passage of the ACA because the insurers decided to discontinue rather than change the plans to comply with the ACA.

Do you fall into a coverage gap?

The expansion of Medicaid under the ACA was intended to cover people who couldn’t afford coverage from the health insurance marketplace. So, when the Supreme Court ruled that states are not required to implement the ACA’s Medicaid expansion (and many didn’t), it created a gap. If your annual income is too high to qualify for Medicaid but too low to afford insurance from the health insurance marketplace, you are in the gap.