Understanding Health Insurance: Coverage, Costs, and How It Works

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. Patients are responsible for deductibles and copays, and these can reduce the amount the company pays.

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. It's important to understand the various types of health insurance plans, such as those provided as employment benefits, government programs, and private options.

In the U.S., health insurance generally includes out-of-pocket costs that you must pay before coverage starts, 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

Understanding Health Insurance Mechanics

Navigating health insurance in the U.S. can be challenging. It is a sector with a number of regional and national competitors whose coverage, pricing, and availability vary from state to state and even by county.

Over half of Americans have employer-provided health insurance coverage, with employers covering part of the premiums. Employer costs are tax-deductible, and employee benefits are tax-free, except for some S corporation employees.

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.

People over 65 and those with disabilities, End-Stage Renal Disease, or ALS qualify for federally subsidized care via Medicare. Families whose incomes are near the poverty level are eligible for subsidized Medicaid coverage.

Exploring Different Health Insurance Plans

Health insurance can be complex to understand. 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.

Insurers might deny coverage for services not preapproved. 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 you buy their insurance.

Navigating Copays, Deductibles, and Coinsurance

Most plans require customers to cover some costs in different 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.
• 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.

An Introduction to 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 rise to $1,650 and $3,200 minimum deductibles and maximum deductibles of $8,300 and $16,600, respectively

With an HDHP, you can open a health savings account with pretax contributions for medical expenses. These plans offer a triple tax benefit in that:

• Contributions are tax-deductible
• Contributions grow tax-deferred
• Qualified withdrawals for healthcare expenses are tax-free

Overview of Federal Health Insurance Options

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 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.

In addition to these changes, the ACA established the federal Health Insurance Marketplace and allowed states to set up their own exchanges if they desired. ACA also prohibits insurance companies from denying coverage to patients with preexisting conditions.

The ACA Marketplace helps individuals and businesses find quality insurance plans at affordable rates. Insurance available through the ACA Marketplace is required to cover 10 essential health benefits.

Originally under ACA, taxpayers were required to carry medical insurance that met federally designated minimum standards or face a tax penalty. However, the Tax Cuts and Jobs Act removed that penalty after Dec. 31, 2018.

A Supreme Court ruling in 2012 struck down an ACA provision that required states to expand Medicaid eligibility as a condition for receiving federal Medicaid funding. As a result, a number of states chose not to expand their Medicaid programs.

Medicare and CHIP

Two public health insurance plans, Medicare and the Children's Health Insurance Program (CHIP), provide subsidized coverage for disabled individuals and children. Medicare, which is available to people age 65 or older, also serves people with certain disabilities, End-Stage Renal Disease, and ALS. The CHIP plan provides health coverage for low-income children under the age of 19.

The Bottom Line

Unlike many countries, the U.S. does not have a universal government health care system. Instead, it uses private insurers, subsidies, and tax incentives to make health care more affordable. Health insurance in provides financial protection against healthcare costs, covering both minor and major medical issues.

If you are employed, you probably have health insurance through your employer. Those who are self-employed can get insurance directly from a private insurer. If your income is low, you can also get a government subsidy for the cost of a policy purchased through the ACA Health Insurance Marketplace. If you are elderly or disabled, you can get coverage through the federal Medicare or Medicaid programs.

There are several types of health insurance plans, including high-deductible health plans (HDHPs) and their associated benefits, such as Health Savings Accounts (HSAs). HMO, PPO, and POS plans can be state-specific.