How Does Health Insurance Work? A Quick Guide

by Nick Versaw Updated December 2nd, 2021

doctor holding hands over graphic of a family

Health insurance helps you to pay for a variety of medical expenses in the form of doctor visits, equipment, medications, preventive care, and so on. 

With medical debt for Americans totaling $140 billion, how your health insurance works is more important than ever. Your health coverage saves you thousands’ worth of medical bills and ensures that you and your family get the care you need. 

A major downside to the healthcare system is that it can be insanely expensive. Costs can fluctuate based on the plan you choose, and it can get confusing when you’re trying to understand all the lingo in order to make a good choice. 

In this post, we’ll go over everything you need to know about how health insurance works, the different types, factors to consider when choosing a plan, and helpful definitions for commonly used terms. 

What is a Health Insurance Policy and How Does it Work? 

how does health insurance work: agent explaining to patient

So you’ve signed up for a health insurance policy, but you’re still trying to figure out what it is and how much you’ll pay for standard procedures. Starting with the basics, health insurance is a plan that keeps you and your family protected financially against the high costs of healthcare. 

Every health insurance company has an open enrollment period when you can sign up for and adjust your plan each year. Outside of that time period, you can only make adjustments to your plan when you have qualifying life events like getting married, having a child, or losing your health care coverage.

Commonly Used Terms Pertaining to Health Insurance

Before you buy health insurance or enroll in a plan through work, learn what these common terms mean:

  • Claim: A payment request that you or your provider sends to your insurer once you receive services or items you think have been covered. 
  • Coinsurance: The cost percentage of health care services that you’re supposed to pay once you’ve reached your deductible. For example, if your coinsurance is 30% and an office visit is $100, you pay $30 once you’ve met your deductible.
  • Copayment: An amount, such as $20, that you pay for an insured health care service once you’ve paid your deductible.
  • Deductible: A deductible is an amount you agree to pay for health care services before your insurance company starts paying. In the case of a $3,000 deductible, for example, you need to pay for the first $3,000 worth of covered services. After that, you typically just pay your copayment and coinsurance. 
  • Fixed annual limit: A max amount of the benefits an insurance company pays yearly when a member is signed up for a health insurance plan. This cap can be placed on things like medication or hospitalization, and it can also be in the form of a dollar amount or a number of visits for a service. Once you reach the limit, you pay out of pocket until the year ends.
  • In-network: When a provider (hospital, doctor, etc.) accepts your health insurance plan, they’re said to be in-network. They may also be called participating providers. Typically, services cost less when you visit an in-network provider.
  • Out-of-network: This means that your health insurance plan provider doesn’t contract with a certain physician, doctor, or hospital. Some insurance plans cover both in-network and out-of-network care, and some don’t cover out-of-network care at all.
  • Policyholder: If your name appears in an insurance policy contract, that means you’re the policyholder. If you have a contract that includes your entire family, you’re still considered the policyholder while your family members are called the beneficiaries. 
  • Policy premium: The amount you need to pay every month to maintain your health insurance plan. Higher premiums typically have a lower deductible and coinsurance, and lower premiums typically have a higher deductible and coinsurance.
  • Primary care physician (PCP): Also known as a primary care provider, a PCP is the doctor you see for checkups and a variety of medical services. If you need medical attention, a PCP is typically your first stop. Some plans require you to go through a PCP to get a referral to a specialist, like a dermatologist or neurologist.

4 Tips When Choosing a Health Insurance Plan

how does health insurance work: couple getting tips from insurance agent

Choosing a family or individual health insurance plan doesn’t have to be an overwhelming endeavor. The following are four crucial factors to consider when selecting a health insurance plan for you and your family.

1. Avoid High Deductibles

Consider the out-of-pocket medical costs before your health insurance coverage takes effect. For instance, if you have a higher deductible like $5,000, your health plan will not cover your expenses until you spend $5,000 out of pocket on medical care in a year.

These out-of-pocket expenses could include prescriptions, office visit fees, procedure fees, and more. They add up quickly if you need a lot of medical care in a given year, even for non-emergency services. So even though you’re paying relatively lower premiums, you may end up paying more in a year than if you had chosen a plan with a higher monthly premium and lower deductible.

2. Seek Low Coinsurance and Copay

Copayments come up a lot in medical care: Every time you need prescription drugs, have an overnight hospital stay, get a cancer screening, or need that rash checked, you’ll be paying a copay. A lower number can really help you save money. If you have a pre-existing condition and you know you’ll be at the doctor a lot, it’s even more important to carefully consider your copay amount.

Same for coinsurance — the lower the better. If you rack up a medical bill worth $700 with a 10% coinsurance, then you’ll only be expected to pay about $70 once you’ve met your deductible. Your insurance company will chip in and pay the balance of $630. 

3. Budget for Your Premium

What’s the out-of-pocket maximum you can set aside for your health insurance per month? You’ll pay your premium each month, regardless of whether you use pharmacy and medical services that month or not. If you stop making payments, you risk losing your coverage. 

If you’re in good health and you don’t anticipate having any big procedures in the year, a plan with a lower premium may actually be the best choice for you. Of course, keep in mind that unexpected medical expenses commonly pop up, so weigh the potential costs of ER visits or specialist care before committing.

Don’t have the option to get health insurance through a job? If you have little to no income you may qualify for Medicaid, so it’s worth checking out.

4. Look at the Type of Provider Network

Do your current pharmacies, hospitals, and providers fall within your plan’s network? An insurance plan will specify if they offer in-network coverage. Going to an out-of-network provider may mean you’ll pay out of pocket for services. 

Read through your plan documents or give your provider a call to determine if your specialist provider or pharmacy is included in your plan’s network. If you have providers you prefer and want to be sure you get to see them, choose a program that offers out-of-network coverage. 

5 Major Types of Health Insurance Plans

father and young son high fiving a doctor

Different health coverage plans handle provider networks and associated costs differently. Provider networks are made up of pharmacies, clinics, hospitals, doctors, and a wider network of service centers that an insurance company runs or contracts with.

It’s possible that your health insurance plan may not cover all your out-of-pocket costs if the relevant health care services operate out of network. However, there might be exceptions for urgent care and other emergencies. Let’s look at how different types of insurance will handle that.

The following are the five major types of health care plans in the U.S.: 

  • Preferred provider organization (PPO): A PPO plan contracts with hospitals, doctors, and other medical providers to create a group of providers that the insurance covers. You’ll pay less for medical bills if you visit an in-network facility or provider. You’ll pay extra if you go out of network.
  • Health maintenance organization (HMO): An HMO restricts your medical coverage to doctors, providers, and specialists who work for or have a contract with the HMO. This plan may require you to work or live in its service area in order to be covered. Out-of-network care typically won’t be covered unless it’s an emergency, and you’ll need a PCP’s referral to see a specialist.
  • Point of service (POS): This is a type of plan where you pay significantly less if you use health care providers that belong to the plan’s network. A POS plan also requires that you have an official referral from your PCP to see a specialist, so all care flows through your PCP.
  • Exclusive provider organization (EPO): EPOs limit your health coverage only to in-network medical providers. Out-of-network care isn’t covered, but emergencies tend to be an exception. You don’t need referrals from your PCP to see specialists on this plan. This plan also requires prior authorization, so you’ll need to get approval from your insurance before you get care.
  • Public programs: These are insurance bodies run by state or federal governments. This plan pays a portion or all of your health care costs. There are three main types of public health insurance: Medicaid, for people who have low income or have a disability; Medicare, for people 65 and over and those with disabilities; and CHIP (Children’s Health Insurance Program), for kids from low-income families.

Stay Covered

Your health is one of the most important things you have, so take time to learn everything you can about a policy you have or are considering. If you haven’t already, get in touch with a representative from your insurance provider to ask for help selecting the best plan for your individual needs. 

Want to know how much a procedure you need will cost? It can be tough to find these answers from insurance, especially if you don’t yet have a plan. Use this tool to compare prices from providers in your area so you know exactly what to expect before you set foot in a doctor’s office.

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