What is medical insurance? Technically, it is a contract between you and the insurance company about what health care services they will pay for when you need care. Health insurers cover some or all of the cost of health care expenses like routine and specialty care, emergency care, mental health services and prescription drugs.
The ins and outs of health insurance can be overwhelming. Consider this page health insurance explained. We’ll help you wrap your mind around basic health insurance terminology, how health insurance works, different kinds of health insurance and a range of health insurance plans.
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Common Health Insurance Terms
If health insurance jargon confuses you, you are not alone. According to Accenture, more than half of Americans do not understand basic health insurance terms like premium and deductible. Health insurers and employers spend $26 more per person with lower health insurance literacy. Helping people who struggle to navigate insurance costs the health care system nearly $5 billion per year.
It also takes a toll on individuals. Research shows that people with lower health insurance literacy are more likely to avoid using the health care services they need, leading to worse health outcomes and even more costs down the road.
Avoid these mistakes by learning these basic health insurance definitions.
Health Insurance Terms
Health Insurance Premium
The amount you pay each month in exchange for health insurance coverage
A percentage of health care bills that you have to pay
A set amount you pay to use certain health care services
The amount you must pay out of pocket for any health care services you use before health insurance pays anything for your care
Doctors and other health care providers or facilities who contract with the health insurance plan to provide services to members
Out of Network
Doctors and other health care providers or facilities who do not contract with the health insurance plan. Depending on the insurance plan, your costs may be higher to see an out-of-network provider — if you can see them under your insurance.
The cap on what you have to pay out of your pocket in a year on covered services. After you pay that amount, the health plan should pick up 100% of the cost for covered services from in-network providers.
A set period each year during which you can sign up for health insurance benefits or switch plans
How Health Insurance Works
Understanding health insurance basics will help you choose and use your health insurance.
Health insurance helps you pay for preventive services and medical care in case of an accident, disease or other health condition. Policyholders pay a monthly premium in exchange for that coverage. Most insurance plans require you to pay out of your pocket for part of the cost when you use services. Your share comes in the form of copayments, co-insurance and deductibles.
There are different ways to get health insurance in the United States. Most Americans get their health insurance from a job (theirs or a partner’s or parent’s), through the health insurance marketplaces created by the Affordable Care Act (also known as Obamacare), or from the government (Medicare, Medicaid or the military).
If you want to sign up for the first time or switch plans, you may need to wait until open enrollment, which varies depending on the type of insurance. If you have certain qualifying life events (like moving, losing your job, getting married or divorced), you may be able to enroll right away.
The Affordable Care Act (ACA) originally included a tax penalty for anyone who didn’t get health insurance, but that penalty went away in 2019.
Even though there’s no longer a health insurance mandate, the benefits of having health insurance are clear. Health insurance helps you access essential health care services and protects you from potentially catastrophic medical bills. With so many health insurance plans and subsidies for many Americans, there should be an option for everyone.
Health Insurance Companies
Depending on where you live and what type of insurance you’re considering, you may choose between several different companies. Some of the largest health insurance providers include:
- UnitedHealth Group
- CVS Health (Aetna)
- Kaiser Permanente
- Health Care Services Corporation
Many of these companies offer insurance for large and small employers. Many also offer Medicare Advantage or supplemental (Medigap) plans for people 65 and older, marketplace plans for individuals and, in some areas, Medicaid for people with low incomes.
Even the largest insurers don’t operate everywhere or offer every kind of health insurance, so your best choice will depend on several factors unique to your situation. Smaller regional and local companies may also be available.
Compare Insurance Rates
Ensure you are getting the best rate for your insurance. Compare quotes from the top insurance companies.
Government-provided Health Insurance
For people who don’t get health insurance through a job, there are several government health insurance programs available for specific groups of people.
Medicare is for people age 65 and older and for some people with disabilities and certain serious health conditions. Medicare is financed by the federal government and through Medicare taxes and consumer cost-sharing, such as premiums and copayments.
Medicaid is health insurance for people who have low incomes. Medicaid is administered through the states, though the federal government jointly funds it. Eligibility requirements vary by state and are based on income and other criteria. Medicaid offers robust benefits for free or very low cost.
The Children’s Health Insurance Program (CHIP) provides free or low-cost coverage for children whose families earn too much income to qualify for Medicaid but not enough to buy private coverage. CHIP is available in every state and is operated in coordination with the Medicaid program.
Members of the military, including active-duty service members, retired service members and National Guard and Reserve members, can get health insurance through TRICARE. Family members, survivors and former spouses may also be eligible. Benefits and costs depend on your status or relationship with the military.
The Health Insurance Marketplace
The Affordable Care Act (ACA), also known as Obamacare, created health insurance marketplaces at the federal and state levels. Marketplace policies are available for those who may not qualify for other programs like Medicaid and who do not have access to affordable health insurance through a job.
People under the age of 30 may be able to buy Catastrophic plans on the marketplace. These plans cover essential benefits but are not as comprehensive as other available plans.
Private companies offer marketplace plans divided into standard metallic tiers that relate to how much coverage they offer. For example, Bronze plans cover less and tend to cost less. Generally, the lower the monthly premium, the more you’ll have to pay out of pocket when using services.
Health insurance costs vary widely by state and type of plan, but many Americans are eligible for subsidies if they buy insurance on the marketplace. There are two types of marketplace subsidies:
- Premium tax credits, which have historically reduced the monthly insurance premium for people who earn between 100% and 400% of the federal poverty level (FPL). However, for 2021 and 2022, the American Rescue Plan Act (ARPA) extended premium tax credits to those whose income surpasses the 400% limit. For reference, in 2022, 100% of the FPL is $13,590 for an individual and $27,750 for a family of four.
- Cost-sharing reductions are discounts on out-of-pocket costs for people who qualify based on income. People who qualify must buy Silver plans to get these extra savings.
Marketplace Plan Levels and Average Costs
Average Monthly Premium
Private Health Insurance
Policies are also available to purchase directly from private health insurance companies. The best health insurance company for you depends on your personal needs and preferences and the cost of options available in your area.
No matter where you get your health insurance, any plan that complies with the ACA must include the 10 essential health benefits, though these services may still cost money, and the coverage will vary depending on the plan. The subsidies you may qualify for on the marketplace are not available if you buy the policy directly from the carrier.
Some types of plans, such as short-term (or skinny) plans or health care sharing ministry plans, do not have to comply with the ACA and are not required to include even the 10 essential health benefits.
The Affordable Care Act requires most health insurance plans to include 10 essential health benefits. These coverages include doctors ’ services, hospitalizations, emergency care, pregnancy and maternity care, mental health and substance use disorders services, prescription drugs, rehab, lab services, preventive and wellness services and care for kids.
Types of Health Insurance Plans
There are several different types of health insurance plans with different rules, levels of flexibility and costs. Typically the more flexible a plan, the more expensive it will be. These different designs may cover an individual or a whole family. Some plans cover dental and vision, but often these services are not included. There are six common types of plans, which are described below.
Health Maintenance Organization (HMO)
HMOs are usually the least expensive options, but they are also the most restrictive. HMOs typically allow you to see only a select set of health care providers. It can be difficult to get approval to see an out-of-network provider. You typically must have a primary care provider (PCP) who you see first, and your PCP must make referrals to other providers you need or want to see and coordinate that care on your behalf.
Preferred Provider Organization (PPO)
PPOs are usually more costly than HMOs and more flexible. They generally feature a network of contracted health care providers that you can see. PPO plans don’t usually require members to have a primary care provider, so you can often self-refer to any provider in the network.
Exclusive Provider Organization (EPO)
EPOs are like HMOs in that they typically only cover services from in-network providers. However, they tend to have a more extensive assortment of participating providers than HMOs. Some EPOs require you to have a PCP who is the gatekeeper to other providers. EPOs are between HMOs and PPOs in terms of flexibility; costs of EPOs also tend to be higher than HMOs and lower than PPOs.
Point-of-Service Plan (POS)
POS plans, like HMOs, require you to have a PCP who makes referrals to other providers before you can see them. POS plans are less restrictive than HMOs. You can typically see out-of-network doctors for a higher cost, whereas with an HMO, there may be no coverage for providers who don’t contract with the plan.
Catastrophic plans are only available for people under age 30 who can demonstrate financial hardships that prevent them from buying more comprehensive coverage. They cover the 10 essential health benefits but are not as comprehensive as other plans.
High-Deductible Health Plan With HSA Option
High-deductible health plans (HDHP) are defined as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family in 2022. These thresholds can change every year. HDHPs can come with or without a health savings account (HSA) option.
HMO, PPO, EPO and POS plans can all be HDHPs. These plans tend to have lower premiums but higher out-of-pocket costs because you must first satisfy a high deductible before the insurer picks up any health care costs. The HSA option allows you to deposit pre-tax dollars into a savings account to use specifically for medical and other health-related expenses. These savings help you pay the higher deductible. But it's important to note that health savings accounts (HSAs) are not insurance plans. Paired with high-deductible plans, they help offset your out-of-pocket medical costs with pre-tax money.
Health insurance policies can change each year. A few notable changes in 2022 include:
New Enrollment Window: Open enrollment on the marketplace begins on November 1 each year and usually ends on December 15 for coverage starting on January 1. Several states that operate their own marketplaces run open enrollment longer. In 2022, open enrollment ended on January 15, 2022, but open enrollment lasts all year for people with household incomes less than 150% of the federal poverty level (just under $21,000 for an individual).
Lower Out-of-Pocket Max on Marketplace Plans: Out-of-pocket maximums set the cap on what you could have to pay for health care services in a given year, not including premiums. After you’ve spent this amount on deductibles, copayments and co-insurance for covered services, your health plan should pick up 100% of the cost. In 2022, the out-of-pocket maximum for marketplace plans is $8,700 for individuals and $17,400 for a family.
Protection Against Surprise Medical Bills: Two-thirds of Americans worry about surprise medical bills, but effective January 1, 2022, consumers have new protections from these unwanted financial surprises. The No Surprises Act helps prevent surprise medical bills by requiring private health insurance companies to cover certain services delivered by out-of-network providers or facilities at the same cost to consumers as in-network providers would charge. The new rules apply to services such as emergency care provided in hospitals, freestanding emergency facilities and urgent care centers, among other services.
How to Choose Health Insurance
The primary purpose of health insurance is to protect you from catastrophic medical expenses and to help you get access to the care you need when you need it. Choosing the best health insurance for you depends on your specific needs, preferences, budget and risks. It helps to start by considering a few key factors.
Determine your health insurance eligibility
First, what kind of health insurance can you get? Does your job or your spouse’s job offer health benefits? Or do you qualify for Medicaid or subsidized coverage from the marketplace? Doing a little homework can clarify your options and save you a lot of money.
Assess your personal or family health care needs
Think about what health services you know you’ll need or are likely to need. Consider care for any chronic conditions, medications you take, mental health services you use or any procedures you’re likely to need. Check the coverage policies, such as prior authorization rules, which can make it harder to get the services you need. Also, compare costs, including copayments and co-insurance.
Review the provider networks
An essential feature of any health insurance plan is which health care providers and facilities you can use. If you have specific providers you already see or know you want to be able to see, make sure they participate in the health plan’s network.
You may pay more for more flexible and broader provider networks. The narrower the network of participating providers and the more restrictive the insurance policies, the more critical it is to make sure you are happy with the options.
Make sure you understand the plan you’re choosing
When people don’t understand their health insurance policy, they avoid using it. That can be bad for your health and a waste of money. To get what you’re paying for, make sure you understand your benefits.
Health plans are required to publish benefit and coverage details. You can also call the plan to make sure you understand specific aspects of the policy. Don’t be afraid to ask as many questions as you have.
Compare Health Insurance Rates
Ensure you are getting the best rate for your insurance. Compare quotes from the top insurance companies.
Frequently Asked Questions About Health Insurance
Health insurance can be confusing, overwhelming and even scary. It might help to know that you are not alone in those feelings. One study showed that most Americans do not have a high degree of health insurance literacy.
Here, we tackle some of the most common questions people have to help you navigate your health insurance journey.
Experts' Insights About Understanding Health Care
- How do health insurance providers support individuals in rural or underserved areas with limited healthcare access?
- What economic factors contribute to the increasing administrative costs of health insurance, and how can these costs be minimized to benefit consumers?
- How does the concentration of health insurance providers in a market affect consumer choice and pricing?
- How do health insurance marketplaces and exchanges impact consumer choice, competition and pricing?
Program Director, Healthcare Leadership B.S., University of Louisville
Faculty Emeritus at Youngstown State University
Instructor of Economics at Spelman College
About Deb Gordon
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- JAMA Network Open. "Association Between Health Insurance Literacy and Avoidance of Health Care Services Owing to Cost." Accessed May 22, 2022.
- ASPE Office of the Assistant Secretary for Planning and Evaluation. "Poverty Guidelines." Accessed May 22, 2022.
- Healthcare.gov. "Cost Sharing Reduction." Accessed May 22, 2022.
- Healthcare.gov. "High deductible health plan (HDHP)." Accessed May 22, 2022.
- Healthcare.gov. "Out-of-pocket maximum/limit." Accessed May 22, 2022.
- Kaiser Family Foundation. "Data Note: Public Worries About And Experience With Surprise Medical Bills." Accessed May 22, 2022.
- Research in Social and Administrative Pharmacy. "Health insurance literacy: How best to measure and does it matter to health care access and affordability?." Accessed May 22, 2022.