Health Insurance 101
How does health insurance work?
Nearly all of us have some form of health insurance. In fact, the Kaiser Foundation has stated that in 2015, 91% of Americans had some sort of health care coverage either through private or public plans. Yet most of us have very little understanding of how exactly health insurance works. Let’s explore the basics, and how different types of insurance work.
What is health insurance?
Although there are tens of thousands of plans in the United States taking several different forms, all health insurance plans have one defining feature. They spread risk across a pool of individuals so that when someone has a medical event, their out of pocket cost is much less than the actual cost of services received.Common Terms and What They Mean
- Premium: The amount the policyholder or their sponsor (e.g. an employer) pays to the health plan to purchase health coverage.
- Deductible: The amount that the insured must pay out-of-pocket before the health insurer pays its share. For example, policyholders might have to pay a $500 deductible per year, before any of their health care is covered by the health insurer. It may take several doctor visits or prescription refills before the insured person reaches the deductible and the insurance company starts to pay for care. Fortunately, many policies do not apply co-pays for doctor visits or prescriptions against your deductible.
- Co-payment (or co-pay): The amount that the insured person must pay out of pocket before the health insurer pays for a particular visit or service. For example, an insured person might pay a $45 co-payment for a doctor visit, or to obtain a prescription. A co-payment must be paid each time a particular service is received.
- Coinsurance: Instead of paying a fixed amount up front (a co-payment), the co-insurance is a percentage of the total cost the insured person may be required to pay. For example, the member might have to pay 20% of the cost of a surgery over and above a deductible, while the insurance company pays the other 80%.
- Exclusions: These are services that are not covered. The insured are generally expected to pay the full cost of non-covered services out of their own pockets.
- Coverage limits: Some health insurance policies only pay for health care up to a certain dollar amount. The insured person may be expected to pay any charges in excess of the health plan maximum payment. In addition, some insurance company schemes have annual or lifetime coverage maxima. In these cases, the health plan will stop payment when they reach the benefit maximum, and the policyholder must pay all remaining costs. In general, ACA plans, while expensive, do not have coverage limits, but private forms of health insurance such as short term health insurance do.
- Out-of-pocket maximum: Similar to coverage limits, except that in this case, the insured person's payment obligation ends when they reach the out-of-pocket maximum, and health insurance pays all further covered costs. Out-of-pocket maximum can be limited to a specific benefit category (such as prescription drugs) or can apply to all coverage provided during a specific benefit year.
Types of health insurance and how they workTraditional Affordable Care Act Health Insurance/ Qualified Health Plans
A Qualified Health Plan, which you can purchase from the health insurance marketplace (e.g. Obamacare) or obtain through your employer, offers comprehensive health insurance coverage. It includes provider networks, ten essential benefits (as defined by the Affordable Care Act), and does not require underwriting. Thus, an individual’s application cannot be rejected, no matter the health history. With a Qualified Health Plan, you will have copays and deductibles. HSA
Health Spending Account (HSA) compatible plans are major medical health plans coupled with a tax free savings account that is specifically used for only medical expenses. The HSA model is often characterized by high deductibles, and are a way for consumers to still get high quality protection with a greater flexibility and lower their monthly premiums.
Short Term Health Insurance
Short Term Health Insurance has been around for decades in the individual health insurance market. These plans are purchased for a determined time period, after which they expire. Often a consumer uses them as a transition plan, when their employer or Obamacare open enrollment periods are closed. . While still major medical insurance, Short Term Health plans do not fall under Obamacare so insurers can reject an application because of pre-existing conditions.
Health Benefits Insurance
Health Benefit Insurance, or HBI for short, approaches health insurance coverage differently than major medical insurance. HBI plans often offer first dollar coverage, so instead of paying a percentage of a member’s health costs, they instead pay a benefit directly to the consumer if the consumer obtains a particular health service, such as seeing a doctor after for an illness
Public Health Coverage
Medicaid, Medicare and CHIP are all versions of public health coverage. These plans are offered by the government for consumers who meet certain qualifications, such as age or income.