What Is Health Insurance? A Comprehensive Guide

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Contributor, Benzinga
October 21, 2021

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Health insurance is important. It’s how most people cover their healthcare costs. But what is health insurance? How does it work, and how do you choose a plan? Learn the ins and outs of how health insurance works. 

Health Insurance Definition

Health insurance is a contract between you and an insurance company. You pay a monthly premium, and in exchange, the company agrees to pay for your healthcare costs. This usually includes doctor and hospital visits and prescription drugs. 

Key Points About Health Insurance 

  • Health maintenance organizations (HMOs) HMOs are typically the least expensive type of health insurance, while preferred provider organizations (PPOs) are the most expensive. 
  • High-deductible health plans can be combined with health savings accounts, which offer tax benefits. 
  • The average benchmark premium for a Marketplace plan is $452 per month, according to the Kaiser Family Foundation. 

Types of Health Insurance Plans

Whether you’re buying a plan from the Health Insurance Marketplace or choosing an employer plan, you often have several options. Learn about the common types of insurance plans below: 

Health Maintenance Organization (HMO) plan

An HMO is a health insurance plan that has a network, and you must receive care from providers and facilities within the network unless it’s an emergency. A network is a group of providers and healthcare facilities that have contracted with the insurance company. You need to choose a primary care physician with most HMOs, and that physician will provide you with a referral if you need to see a specialist.

  • HMOs are best for people who don’t mind staying in-network and who want lower premiums.
  • HMOs typically help to cover hospital and doctor services, prescriptions and other medically necessary expenses.
  • HMOs are typically less expensive than exclusive provider organizations (EPOs), point-of-service (POS) and PPO plans.

Preferred Provider (PPO) plan

A PPO is a health insurance plan that also has a network, but you can visit out-of-network providers. You typically pay more if you don’t stay within the network. You also don’t usually need referrals to see a specialist. 

  • PPOs are best for people who don’t want to be restricted to a network. 
  • PPOs cover medically necessary expenses like doctor and hospital care as well as prescription medications. 
  • PPOs are usually more expensive than HMOs, EPOs and POS plans. 

Exclusive Provider Organization (EPO) plan

EPOs are similar to HMOs, in that they only cover in-network care. They often have larger networks than HMOs. They vary in terms of whether you need a referral to see a specialist. 

  • EPOs are best for those who want a larger network but also want to save on premiums. 
  • EPOs cover medically necessary expenses, including hospital care, doctor visits and medications. 
  • EPOs are more expensive than HMOs and less expensive than PPOs. 

Point-of-Service (POS) plan

POS plans have a network, but you can see providers inside or outside of the network. You pay more if you see out-of-network providers. You may also have to file the claims paperwork yourself if you go outside the network. 

  • POS plans are best for those who don’t mind staying in-network for most of their care but want the option to leave the network if needed. 
  • POS plans cover medically necessary healthcare costs. 
  • POS plans typically cost more than HMO plans but less than EPO and PPO plans. 

High-Deductible Health Plan

Deductibles vary from plan to plan, and certain plans are designated as high-deductible health plans (HDHPs). These plans can be combined with a health savings account (HSA). In 2021 and 2022, HDHPs must have a deductible of at least $1,400 for an individual or $2,800 for a family. The highest deductible these plans can have is $7,000 for an individual and $14,000 for a family in 2021 or $7,050 for an individual and $14,100 for a family in 2022. 

  • An HDHP is best for people who have the funds to cover the deductible, want to use an HSA or who don’t use healthcare often and want a lower premium. 
  • An HDHP can be an HMO, PPO, EPO or POS plan. 
  • HDHPs are less expensive than plans with lower deductibles. 

Health Savings Account (HSA)

An HSA is a savings account that allows you to set aside pre-tax funds for medically necessary healthcare costs. You can use an HSA to pay for copays, deductibles, coinsurance and prescriptions. 

You can only contribute to an HSA if you’re enrolled in an HDHP. Contributions are limited to $3,600 for individuals and $7,200 for families in 2021 and $3,650 for individuals and $7,300 for families in 2022. HSA funds roll over from year to year, and they can be invested. 

  • An HSA is best for those who have an HDHP and want to set aside pre-tax funds. 
  • HSAs cover a range of qualified healthcare expenses (the IRS has an extensive list). They typically don’t cover cosmetic surgeries and other elective procedures. If you use HSA funds for anything other than a qualified healthcare expense, the withdrawal may be subject to income tax and a 20% penalty. 
  • You are eligible for an HSA if you have an HDHP. 
  • You can open an HSA with many financial institutions. Many providers don’t charge any fees to open or maintain an account, but that varies, so review the details carefully. 

Important Terms to Know about Your Health Insurance Policy

Health insurance is full of confusing terminology. Here’s a guide to important terms to know. 

What is a monthly premium for health insurance?

Your monthly premium is the amount you pay for health insurance. The premium may be lowered by tax subsidies if you buy it from your state’s Health Insurance Marketplace. If you buy it through your employer, the company may pay for some or all of your health insurance premium. 

What is a deductible in health insurance?

A deductible is the amount you pay for covered services before your plan starts paying. If you have a $1,000 deductible, you pay the first $1,000 in healthcare costs, and then your plan starts helping to cover costs. The higher your deductible is, the lower your premium will be. You need to be prepared for those initial out-of-pocket costs. 

What is a copay in health insurance?

A copayment, or copay, is a set dollar amount you pay for a healthcare service or item. For example, you might pay $20 for a doctor’s office visit. Higher copayments may lower your health insurance premium. 

What is coinsurance in health insurance?

Coinsurance is a percentage you pay for a covered service. You might pay 20% of the cost for a brand-name prescription, for example. Higher coinsurance amounts may also lower your premiums. 

What is a beneficiary for health insurance?

A beneficiary is a person who receives the benefits of a health insurance plan. For example, if you’re enrolled in a health insurance plan, you’re the beneficiary. The more beneficiaries on a plan, the higher the costs will be. A plan with 1 person enrolled is the least expensive, a plan with 2 people is more expensive, and a plan with 3 or more people is the most expensive.

What is cost sharing in health insurance?

Cost sharing is the share of covered costs you pay out-of-pocket. You’re sharing costs with your health insurance company. The more you pay in costs, the lower your premiums will be.  

Types of Health Insurance

Health insurance can be classified in several ways. Here are some to know. 

What is subsidized health insurance?

Subsidized health insurance is coverage with a lower cost, or no cost, for people who meet income requirements. Medicaid and the Children’s Health Insurance Program (CHIP) are 2 examples of subsidized coverage. Insurance purchased from the Health Insurance Marketplace in your state could also be considered subsidized coverage because you may qualify for tax credits if you meet income requirements. This coverage is typically affordable because it’s subsidized. 

What is private health insurance? 

Private health insurance is any health insurance that isn’t sponsored by the government. Medicaid and Medicare aren’t private health insurance because they’re government programs. Private health insurance is more expensive than public programs like Medicaid and Medicare. The average cost of private health insurance varies significantly depending on whether you buy it through the Marketplace or through an employer and the type of plan you choose. 

What is Marketplace health insurance?

Marketplace health insurance is coverage sold through state Health Insurance Marketplaces. The Marketplaces provide enrollment services for people who don’t have access to health insurance through employers. You can apply for individual or family coverage, see if you qualify for Medicaid and find out whether you qualify for tax credits. 

The average benchmark premium for a Marketplace plan is $452 per month, according to the Kaiser Family Foundation. The benchmark premium is the average cost of the second-lowest-cost silver plan for a 40-year-old in each county. Marketplace plans are categorized into metal tiers, with bronze plans having the lowest premiums and gold plans having the highest. 

What is group health insurance?

Group health insurance is a policy for members of a group, like an employer or an organization. These health insurance plans are usually less expensive than buying coverage on your own. This is because the healthcare costs, and the risk to the insurance company, are spread across all the members of the group.  

What is individual health insurance?

Individual health insurance is health coverage you purchase on your own and not through an employer or organization. It’s private health coverage, and it typically costs more than group health insurance. If you purchase individual health insurance through the Marketplace, you may qualify for tax credits that bring your premium costs down. 

What is short-term health insurance?

Short-term health insurance is insurance that provides coverage for up to 364 days with the option to renew for up to 3 years in total. Some states limit short-term plans even more. These plans don’t need to follow the rules of the Affordable Care Act (ACA), which means they aren’t required to cover pre-existing conditions (including pregnancy) and can decline coverage for people with health conditions. 

Short-term health insurance plans are best for people experiencing a temporary gap in coverage. For example, you might be waiting for coverage from a new employer to start. Short-term health insurance is typically cheaper than COBRA coverage (more on that below) and unsubsidized Marketplace insurance. If you qualify for tax credits, however, Marketplace health insurance provides more comprehensive coverage for a similar, or potentially lower, cost. 

What is employer-sponsored health insurance?

Employer-sponsored health insurance is health coverage offered by an employer. Employers typically cover the employee along with dependents. Employer-sponsored coverage is also group coverage. It’s typically less expensive than individual coverage because healthcare costs are spread across a group, and employers cover some or all of the premiums. 

What is Medicare?

Medicare is a federal health insurance program for people age 65 or older, certain people with disabilities and people with end-stage renal disease. Medicare Part A is free for most people. Medicare Part B has a premium. Many people also purchase additional coverage to cover Medicare’s out-of-pocket costs. This coverage tends to be less expensive than traditional health insurance. 

What is Medicaid?

Medicaid is a joint federal and state health insurance program for people with very low incomes, children, pregnant people and people with disabilities. Medicaid is typically free, and beneficiaries typically have low or no copays or coinsurance. 

What is COBRA?

If you experience job loss, you may have the option to continue your health insurance under the Consolidated Omnibus Budget Reconciliation Act (COBRA). This coverage tends to be expensive because you may have to cover your premiums and the premiums your employer paid on your behalf. Losing your group coverage entitles you to a special enrollment period through your state’s Health Insurance Marketplace, which may be a more affordable option. 

How To Compare Health Insurance Plans

It’s important to compare more than just the monthly premium when you’re looking at health insurance. Here’s what to compare. 

Factors to consider:

  • Monthly premiums: While this isn’t the only point to compare, this is still an important consideration. 
  • Deductibles: A higher deductible means lower premiums, but you also need to be prepared to cover those initial health care costs. 
  • Copays: Look at the plan copays for doctor and specialist visits, prescriptions and other services. 
  • Coinsurance: What percentage of costs are you responsible for? And for what services? For example, if it’s 20% of hospital care, keep in mind that hospital stays can cost tens of thousands of dollars (or more). 
  • Cost-sharing: Look at all the potential out-of-pocket costs you have with the health plan, the monthly premium and how it all fits within your budget.

Step-by-step guide to purchasing health insurance: 

  1. Determine where and when to enroll. If you’re enrolling in employer-sponsored coverage, you’ll likely have a limited time to enroll. Similarly, you can only enroll in Marketplace coverage at certain times. 
  2. Review your plan costs. Compare plan benefits, premiums and cost-sharing. 
  3. Look at the plan type. See whether your options are an HMO, PPO, POS or EPO and whether the plan allows you to go out-of-network. 
  4. Look at the networks. Most plans have a tool that allows you to look up providers and see whether they’re in- or out-of-network. If they’re not in the network, consider whether your plan allows you to see out-of-network providers (this usually costs more) or whether you’re comfortable finding a new provider. 
  5. Consider how often you use health insurance. If your healthcare costs are minimal, you might be more comfortable with a high deductible or a limited network. If you use your health insurance frequently, you might prefer a lower deductible and a plan that lets you see specialists without a referral. 
  6. Ask for help if needed. Your employer will have a point of contact for questions. If you’re applying through the Marketplace, there are dedicated agents who can assist you. 
  7. Complete the application. Once you’ve chosen a plan, complete the application and submit it to the appropriate party. 
  8. Pay your premiums. If you’re enrolled in employer-sponsored coverage, look at your pay stubs to ensure your health insurance is being taken out and it’s the amount you expect. If you apply through the Marketplace, follow the instructions for sending in your first premium. 
  • Blue Cross Blue Shield Health Insurance
    More Details
    # of Healthcare Providers
    28k+
    Online Application?
    Yes
    securely through Blue Cross Blue Shield Health Insurance's website
    More Details
  • Sidecar Health Access Plan
    More Details
    # of Healthcare Providers
    See any doctor
    Online Application?
    Yes
    securely through Sidecar Health Access Plan's website
    More Details

    Plans referred to above are excepted benefit fixed indemnity insurance products marketed and administered by Sidecar Health Insurance Solutions, LLC and underwritten by Sirius America Insurance Company or United States Fire Insurance Company, depending on the state. As an excepted benefit plan, it does not provide comprehensive/major medical expenses coverage, minimum essential coverage, or essential health benefits. You cannot receive a subsidy (premium tax credit and/or cost-sharing reduction) under the ACA in connection with your purchase of such an excepted benefit fixed indemnity insurance plan. Also, the termination or loss of this policy does not entitle you to a special enrollment period to purchase a health benefit plan that qualifies as minimum essential coverage outside of an open enrollment period. Coverage and plan options may vary or may not be available in all states.

  • Kaiser Permanente Health Insurance
    More Details
    # of Healthcare Providers
    150k+
    Online Application?
    Yes
  • UnitedHealthCare Health Insurance
    More Details
    # of Healthcare Providers
    855k+
    Online Application?
    Yes
  • Cigna Health Insurance
    More Details
    # of Healthcare Providers
    875k+
    Online Application?
    Yes

Choosing the Best Health Insurance

With research, you can find the best health insurance for your needs. Dig into the details and be realistic about how much you spend on healthcare. For more help, review Benzinga’s library of insurance content. 

Frequently Asked Questions

Questions & Answers

Q
What is subsidized health insurance?
A

Subsidized health insurance is coverage that is supported by the state and/or federal government. It’s available at low or no cost to people who meet certain income requirements. Medicaid and CHIP are examples of subsidized health insurance. 

 

Q
What is a tax credit for health insurance?
A

A tax credit for health insurance can lower your premium. Tax credits are available for Marketplace health plans based on your income. You can use the credit to lower your premiums or wait and receive the credit when you file your tax return. 

 

Q
What is considered a qualifying event for health insurance?
A

Qualifying events are significant life events. They include losing health coverage, getting married or divorced, having or adopting a baby, moving, becoming a U.S. citizen or experiencing the death of a loved one.