Health insurance 101 : An essential guide

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Health insurance helps pay your health care costs. Without health insurance, you could face long-term financial hardship, including debt and bankruptcy.

Health insurance can be a complex topic. There are many moving parts involved, many terms and concepts to grasp, and various ways to get health insurance.

Understanding health insurance basics and how coverage works, you can find the right health insurance plan for you. Let’s take a look at how health insurance works and the different ways you can get health coverage.

How health insurance works

Health insurance members pay premiums to an insurance company.

The health insurance company contracts with providers, including doctors and hospitals, for payment. The providers on your health plan are considered in-network and cost less than if you received care from a provider outside of the network.

The providers bill health insurance companies after members receive health care services. The health insurance company pays its portion of the bill and then providers bill the members with the remainder of what’s due.

By having health insurance in place, you ideally pay much less than you would if you didn’t have health insurance.

“Health insurance is a type of insurance that’s designed to help individuals pay for unexpected medical costs arising from sickness or injury,” says John Bartleson, owner of Health Benefits Connect in Englewood, Colorado.

Eric Gulko, president of Concord, Massachusetts-based Innovo Benefits Group, adds that health insurance spreads the risk of medical costs over a large group of people.

“Most people cannot afford unexpected, very large expenses associated with health care. Health insurance can help you transfer your individual risk to a broader pool of people. You pay for this transfer of risk largely through premiums,” he says.

Health insurance plans differ in terms of coverage and provider networks, but health plans typically cover doctor visits, prescription medications, preventive care, and hospital stays.

The best way to maximize your health care plan and save money is to:

Select providers that are on your plan’s network
Visit specialists that fall within the plan’s network (and referred by your primary care physician if your plan requires referrals)
Take recommended preventive measures to safeguard your health
Choose lower-cost/generic medications when needed

Key Takeaways

Most pre-retirement Americans get their health insurance through an employer, but there are other ways to get health coverage.
The health insurance marketplace lets you compare individual and nongroup plans in your area. Marketplace plans are also eligible for subsidies that reduce the cost of health insurance.
There are multiple types of health insurance plans, including PPOs and HMOs.
Premiums, deductibles and coinsurance are all health insurance costs that members pay.
You can get a health insurance plan during open enrollment, but you can also add or change coverage if you have a qualifying life event, such as losing other coverage, getting married or having a child.

Do you really need health insurance?

Health insurance is needed by and recommended for virtually every individual and family, says Brian Martucci, the Minneapolis-based finance editor for Money Crashers.

“Health care is expensive and becoming more costly faster than the overall rate of inflation. Most Americans can’t afford to cover the cost of an emergency room visit out-of-pocket, let alone an overnight stay in the hospital or months or years of treatment for a chronic illness,” he says.

Without health insurance, you could suffer long-term financial hardship in the form of overwhelming debt, bankruptcy, and ruined credit. Worse, if you can’t pay for health care, you may neglect serious health problems that can lead to injury, illness, or even death.

“Health insurance offsets the cost of medical care. It covers some or all of the costs for services incurred by the policyholder and any other policy beneficiaries, like children and spouses also on the plan,” Martucci says.

What are the different types of health insurance?

Health insurance plans are available from a variety of sources, including:

An employer-sponsored health plan at work.
A spouse’s employer-sponsored plan.
A parent’s employer-sponsored plan, if you’re under age 26.
An individual health plan. Individual health coverage can cover your spouse and children under a non-group plan. You can get a plan through the Affordable Care Act (ACA) exchanges (visit Healthcare.gov for details) or directly from health insurance companies.
COBRA continuation coverage. COBRA is short for the Consolidated Omnibus Budget Reconciliation Act. It gives people the ability to continue a former employer’s coverage after a job loss, death of a spouse, divorce, or loss of eligibility for dependent coverage. COBRA lasts as long as 18 months, but dependents may be able to have COBRA for as long as 36 months.
A government health plan, such as Medicaid or Medicare, if you qualify. Medicaid is the state and federal insurance program for low-income individuals and families. Medicare is for people age 65 and older and younger people with certain disabilities. Find out more about the differences. In addition, the Children’s Health Insurance Program (CHIP) insures kids from low-income families.
Catastrophic health plans. These are only for people under 30 and those who are going through specific hardships, such as homelessness. These plans, offered through the ACA marketplace, have low premiums. They provide comprehensive coverage similar to an ACA plan. However, catastrophic plans have high deductibles, so you pay more out-of-pocket if you need care initially.
Short-term health plans. Most Americans have access to short-term plans. These plans have low premiums, but high out-of-pocket costs. They also offer limited benefits, so you may not be able to find a plan that covers mental health and prescription drugs. Short-term plans last a year in most states, but members can request two extensions.
Association health plans. Small companies and sole proprietors can band together and buy health insurance. These plans may be low-cost, but offer fewer benefits than a standard health insurance plan.

Most people pre-retirement age are covered by an employer-sponsored health plan. These plans are usually more affordable than individual insurance.

What are the different health care plans?

The five most common health insurance plans types are:

Preferred provider organizations (PPOs)
Health maintenance organizations (HMOs)
High deductible health plans (HDHPs)
Point of service plans (POS)
Exclusive provider organization plans (EPO)

Let’s take a look at each type of benefit design:

PPO

PPO stands for preferred provider organization. These plans are the most common type of health plan in the employer-sponsored health insurance market and are known for flexibility.

That’s because you often don’t have to choose a primary care provider in a PPO plan, you can select providers from a larger network typically, and you can opt for either in-network or out-of-network care (with the latter charging more). Also, you can visit a specialist without needing a referral.

The premiums for a PPO are typically much more expensive than an HMO and HDHP.

HMO

HMO stands for health maintenance organization and comprises 13% of employer health plans and roughly half of the plans in the Obamacare marketplace.

With HMOs, you pay lower premiums than PPOs but the network of physicians and hospitals available is more restricted. You’re required to pick a primary care physician who coordinates your care and provides required referrals for you to see specialists.

You commonly aren’t permitted to go outside your network in an HMO unless it’s an emergency. Otherwise, you have to pay for the care yourself.

HDHP

HDHP stands for a high-deductible health plan. These plans, which are the second most common health plan in the employer-sponsored market, often have the lowest premiums but higher deductibles, making them popular choices for younger healthier individuals.

An HDHP is a plan with a deductible of at least $1,400 for single coverage or at least $2,800 for a family. Plan members must pay for health care services until they reach their deductible. Once you get to your deductible, the health insurance company pays its share.

An HDHP’s out-of-pocket in-network costs can’t exceed more than $7,000 for an individual and $14,000 for a family.

POS

POS stands for point of service plan, which serves as a hybrid of PPOs and HMOs. “Point of service” means that you get to pick whether to use HMO or PPO services every time you see a provider.

POS plans often have rules similar to HMOs. For example, you need to choose an in-network physician as your primary care physician. However, you can visit an out-of-network physician for a higher fee in a POS plan.

EPO

EPO stands for exclusive provider organization. This is a managed care plan that obligates you to go to doctors and hospitals within the plan’s network. You don’t need to choose a primary care physician or need a referral; however, you only receive coverage for providers in your network unless it’s an emergency.

Like an HMO, an EPO has a limited network of doctors and hospitals.

What are the different types of metal plans in the ACA marketplace?

The health insurance marketplace, available at Healthcare.gov and better known as Obamacare, is an exchange service run by the federal government and states that assists people in shopping for and enrolling in health insurance.

Created by the Affordable Care Act (ACA) in 2010, it’s intended to offer an easier and less expensive means of shopping for and securing health care coverage for individuals and families.

The ACA plans are broken down into metal tiers. The tier depends on the cost of premiums, how much costs the insurer will cover, and how much the member will pay for health care services.

Here’s the four tier levels:

Bronze: Health plan pays 60% on average for health care services. You pay 40%.
Silver: Health plan pays 70% on average. You pay 30%.
Gold: Health plan pays 80% on average. You pay 20%.
Platinum: Health plan pays 90% on average. You pay 10%.

Bronze and Silver plans have the lowest premiums but highest out-of-pocket costs. Gold and Platinum have the highest premiums but lowest out-of-pocket costs.

Which tier level is right for you depends on how much health care you receive. Someone who doesn’t visit the doctor much and doesn’t have many prescriptions may benefit from a low-premium Bronze plan. However, a family that often visits physicians over the year may prefer a Gold or Platinum plan. The vast majority of marketplace plans are Bronze and Silver. There are not many Platinum plans, so you may have trouble finding a plan in that tier.

How much does health insurance cost?

The overall average annual premiums in 2020 for employer-sponsored plans averaged $7,470 for single coverage and $21,342 for family coverage.

Employers usually pick up well more than half of those costs. The average monthly employee contributions are $104 for single health coverage and $466 for family coverage, according to Kaiser Family Foundation.

Average monthly premium cost for employer health plan

Here are the average monthly health insurance costs for single and family coverage that employees pay by health plan type:

Type of plan	Average monthly premium, single coverage	Average monthly premium, family coverage
HMO	$101	$441
PPO	$111	$501
HDHP	$88	$404
POS	$118	$466

Average monthly premium for Affordable Care Act individual health insurance plan

Individual health insurance purchased through the marketplace or directly from an insurance company usually costs more than employer-sponsored health coverage.

Recent research shows that the average health insurance costs for unsubsidized monthly premiums for an Obamacare/ACA plan on the health insurance marketplace is $456 for individual coverage and $1,152 for family coverage. Drilling down further, Ambetter, which offers plans through the marketplace in 20 states, estimated that the average monthly premium costs for a Gold, Silver and Bronze individual health insurance plan on the ACA marketplace by age were:

Age	Gold	Silver	Bronze
21	$342	$300	$234
25	$344	$301	$235
30	$388	$341	$266
35	$418	$367	$286
40	$437	$384	$300
45	$494	$434	$339
50	$611	$536	$419
55	$763	$669	$523
60	$929	$815	$636
64+	$1,027	$901	$703

When can you buy health insurance?

You can buy or change health insurance during open enrollment.

Most Americans get their coverage through their employer. Businesses’ open enrollment periods vary. Ask your employer about your open enrollment period.

Medicare beneficiaries’ open enrollment runs from Oct. 15 to Dec. 7. There is also a more limited open enrollment from Jan. 1 to March 31.

Medicaid doesn’t have an open enrollment period, so you can sign up for a Medicaid plan anytime if you’re eligible.

The annual open enrollment period for individual and marketplace health plans runs from Nov. 1 to Dec. 15 in most states. Your new plan’s coverage will start on Jan. 1 of the following year.

There are a handful of states with longer enrollment periods, including California, Colorado, Washington DC, Massachusetts, Minnesota, Nevada, New Jersey, and New York.

Unless you have a special circumstance, you have to wait for next year’s open enrollment period if you miss the deadline.

What’s a qualifying life event?

The special circumstances that qualify you to sign up outside the open enrollment period are known as “qualifying life events.” Those life events include:

Getting married
Losing health insurance coverage
Having or adopting a child
Moving to an area with different health plans
Facing a change to your household finances that qualify you for financial help to purchase health insurance coverage

If you think you might qualify for government assistance, you should start your search at the health insurance marketplace for your state.

You could qualify for premium discounts in the form of subsidies if your household income falls below 400% of the federal poverty line (FPL). When you compare plans, the marketplace factors in those subsidies once you enter your income information.

Bear in mind that you can’t get the discount or subsidy if you have access to affordable employer-sponsored coverage. And you must go through the marketplace to get the tax credit or subsidy.

Frequently Asked Questions

What is a health insurance deductible?

A deductible is the amount of money you pay out-of-pocket before your insurance provider’s coverage kicks in and pays your medical bills.

Usually, lower deductibles mean higher premiums and vice-versa. So, you need to decide would you rather pay higher upfront costs (premiums) or more out-of-pocket costs (deductibles and coinsurance) when choosing a health insurance plan.

What is a health insurance premium?

A premium is the monthly payment you make as the policyholder. In exchange for paying your monthly premium, your insurance company is responsible for paying an agreed portion of your medical costs.

Make sure you make your regular premium payments or you can lose coverage.

“Nonpayment of premiums may result in lapsed or dropped coverage,” cautions Martucci.

What is coinsurance?

Coinsurance is the defined percentage of medical costs your insurance company pays after you reach your deductible. You pay coinsurance until you get to your plan’s out-of-pocket maximum.

You pay coinsurance costs out-of-pocket. If you have a Silver plan, for instance, and your medical bill is $1,000 (after your deductible has been paid up), your out-of-pocket coinsurance costs would be $300 (30%).

Is there a penalty for not having health insurance?

There is no federal penalty for not having health insurance. Most states don’t incur penalties, either.

“However, some states do have individual mandates with enforceable penalties for noncompliance, including California, New Jersey, Rhode Island, Massachusetts, and Washington DC,” says Martucci.

Note that employers with a minimum of 50 employees are required to provide health benefits to 95% of their full-time workers (those who work over 30 hours per week) or pay a penalty. Coverage needs to be offered to workers and their dependents but doesn’t have to be offered to spouses.

What is commercial health insurance?

Commercial health insurance usually refers to employer or group health insurance plans offered by private insurance companies. Your employer or an association you belong to may offer this type of health insurance plan.

What is private health insurance?

Private insurance is any insurance plan not associated with Medicaid or Medicare (the two largest public insurance plans).

Private health insurance is available at individual marketplaces (state and federal) and for purchase directly from insurers. Employer-sponsored health insurance plans are available only through employers.

What is short-term health insurance?

Short-term health insurance is a type of private insurance plan, available for purchase through insurers, that offers plans with low premiums, but usually high deductibles and limited coverage. For instance, you may have trouble finding a short-term plan that covers mental health and pregnancies.

Short-term health insurance is meant as a temporary way to get low-cost coverage. These plans are available in most states for up to 12 months with the chance to extend that coverage for two more years. Some states forbid these plans while others limit the plan’s length.

What is a tax credit for health insurance?

The ACA authorized premium tax credits that fully or partially offset premium costs for applicants who qualify based on income — typically lower-income to lower-middle-income individuals and families.

“The Biden administration expanded these tax credits in 2021, so many middle-income individuals and families now qualify for sharply reduced premiums,” Martucci adds.

According to Brad Cummins, owner of Insurance Geek, tax credits are offered monthly and can be used to cover up to 70% of your health insurance premiums paid directly to the provider from the government.

“The current eligibility criteria is an income less than $47,250 per individual or a combined income under $97,200 for a family of four,” Cummins says.

How can you find an affordable health insurance plan?

The best way to find an inexpensive health insurance plan is to shop around carefully.

“Most people don’t realize that health insurance rates are the same whether you buy online, from an insurance broker, or directly from the health insurance company,” says Bartleson. “The benefit of working with a licensed health insurance broker is that they have all the options in one location and can create a customized plan based on your personal medical needs and financial budget.”

Pay close attention to your total expected cost of care, as well.

“The policy with the lowest premium isn’t always the cheapest policy overall, after you account for the deductible, coinsurance, and other out-of-pocket costs,” suggests Martucci.

Where can you buy health insurance?

You can purchase health insurance through your employer, if offered. That is often the most affordable way to get a private health plan.

If you’re self-employed, unemployed or your employer doesn’t offer health insurance, you can enroll in health insurance through the health insurance marketplace (a state or federal health exchange) or by purchasing a plan on the private market directly through a health insurance company.

“Depending on the type of policy, health insurance is available on state or federal marketplaces established under the ACA, directly from insurers, through employers or other qualifying groups, or through state or federal government agencies that offer public insurance programs like Medicaid and Medicare,” Martucci says.

Erik Martin

Contributing Researcher

Erik J. Martin is a Chicago area-based freelance writer whose articles have been published by AARP The Magazine, The Motley Fool, The Costco Connection, USAA, US Chamber of Commerce, Bankrate, The Chicago Tribune, and other publications. He often writes on topics related to insurance, real estate, personal finance, business, technology, health care, and entertainment. Erik also hosts a podcast and publishes several blogs, including Martinspiration.com and Cineversegroup.com.