What Is Health Insurance?
Health insurance is an agreement between a company and an individual. In exchange for a monthly premium payment, the company commits to covering all or part of the insured person’s healthcare expenses.
Typically, this agreement spans one year, and during this period, you are accountable for certain costs associated with illness, injury, pregnancy, or preventive care.
KEY POINTS
- Health insurance covers the majority of medical, surgical, and preventive care expenses through monthly premiums.
- Typically, higher monthly premiums result in lower out-of-pocket costs.
- While insurance plans involve deductibles and co-pays, federal law now limits these out-of-pocket expenses.
- Federal health insurance programs like Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP) provide coverage for older individuals, those with disabilities, and low-income individuals.
Health insurance plans in the United States typically have certain limitations to coverage, which may include:
- A deductible that necessitates the consumer to personally cover specific healthcare expenses up to a designated amount before the insurance coverage takes effect.
- One or more co-payments that mandate the consumer to contribute a predetermined percentage of the cost for particular services or procedures.
Understanding Health Insurance Operations (How it Works)
Navigating health insurance in the United States can be complex. It is an industry with numerous regional and national competitors, offering coverage, pricing, and availability that differ from state to state and even by county.
Approximately half of the U.S. population receives health insurance through their employment, with employers covering a portion of the premiums.
U.S. Census Bureau. “Health Insurance Coverage in the United States: 2021.”
The employer’s cost is tax-deductible, and the benefits for the employee are generally tax-free, though there are exceptions for S corporation employees.
Individuals who work for themselves, freelancers, and gig workers have the option to purchase insurance independently. The Affordable Care Act of 2010, often referred to as Obamacare, required the establishment of a national database known as HealthCare.gov. This platform enables individuals to explore standard plans offered by private insurers in their area. Taxpayers with incomes ranging from 100% to 400% of the federal poverty threshold receive subsidies to help cover the costs of the coverage.
Individuals aged 65 and older, as well as those with disabilities, End-Stage Renal Disease, or ALS, are eligible for federally subsidized care through Medicare. Meanwhile, families with incomes close to the poverty level qualify for subsidized Medicaid coverage.
What are the Types of Health Insurance
Understanding health insurance can be challenging. In the United States, managed care insurance plans stipulate that policyholders should receive their care from a specific network of healthcare providers. If patients opt for care outside this network, they may be responsible for a larger portion of the cost, and the insurer might even decline payment for services obtained out of the network.
In many managed care plans, like health maintenance organizations (HMOs) and point-of-service plans (POS), patients typically need to select a primary care physician responsible for overseeing their care, offering treatment recommendations, and providing referrals to specialists.
In contrast, preferred-provider organizations (PPOs) don’t mandate referrals but offer reduced rates for using in-network healthcare providers and services.
Insurance companies might decline coverage for specific services without preauthorization. Additionally, they could reject payment for brand-name drugs if a generic or equivalent medication is more cost-effective. It’s crucial to review an insurance company’s regulations before purchasing their insurance.
Understanding Copays, Deductibles, and Coinsurance in Health Insurance
Many health insurance plans necessitate policyholders to contribute to their coverage expenses through different means:
The deductible is the yearly out-of-pocket amount you need to cover before the insurer starts covering costs, and federal law now sets a cap on this amount.
Copays are fixed fees that subscribers are required to pay for specific services, such as doctor visits and prescription drugs, even after meeting the deductible.
Coinsurance is the percentage of healthcare costs that the insured must cover, even after meeting the deductible (but only until reaching the yearly out-of-pocket maximum).
Insurance policies that come with higher out-of-pocket costs typically come with lower monthly premiums. When selecting a plan, consider the advantage of reduced monthly payments in comparison to the potential risk of significant out-of-pocket expenses in the event of a major illness or accident.
High-Deductible Health Plans (HDHP)
A growingly favored health insurance option is the high-deductible health plan (HDHP). These plans come with increased deductibles and lower monthly premiums. Those enrolled in these plans are the only ones qualified to establish a Health Savings Account (HSA), offering significant federal tax advantages.
In 2024, an HDHP is defined as having deductibles of at least $1,600 for an individual or $3,100 for a family. The total out-of-pocket maximums are set at $8,050 for an individual and $16,100 for a family.
High-deductible health plans have a distinct advantage: if you have one, you’re allowed to open and contribute pretax income to a health savings account. This account can be utilized to cover qualified medical expenses. These plans provide a triple tax benefit because contributions are tax-deductible, they grow on a tax-deferred basis, and qualified withdrawals for healthcare expenses are tax-free.
Federal Health Insurance Programs
Health insurance in the United States is not exclusively offered by private companies. Federal health insurance plans, including Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP), provide coverage for older individuals, those with disabilities, and low-income individuals.
The Affordable Care Act (ACA)
President Barack Obama enacted the Affordable Care Act (ACA) into law in 2010. The legislation, operational in participating states, broadened Medicaid, a government initiative offering medical care for individuals with limited incomes.
The Affordable Care Act (ACA) has made it illegal for insurance companies to reject coverage for individuals with preexisting conditions and permits children to stay on their parents’ insurance plan until turning 26.
Moreover, the ACA introduced the federal Health Insurance Marketplace, reinforcing the prohibition on insurance companies denying coverage for those with preexisting conditions and extending the age limit for children on their parents’ insurance plans to 26.
The Marketplace assists people and businesses in finding affordable insurance plans with quality coverage. Insurance plans offered through the ACA Marketplace must include coverage for 10 essential health benefits.
According to the ACA, taxpayers were mandated to have health insurance that meets federally set minimum standards, or else they faced a tax penalty. However, the Tax Cuts and Jobs Act eliminated this penalty after December 31, 2018.
In 2012, a Supreme Court ruling invalidated an ACA provision that mandated states to expand Medicaid eligibility to receive federal Medicaid funding. As a result, several states opted not to expand their Medicaid programs.
Medicare and CHIP
Medicare and the Children’s Health Insurance Program (CHIP) are two government health insurance plans that offer discounted coverage for disabled individuals and children. Medicare is accessible to individuals aged 65 or older, as well as those with specific disabilities, End-Stage Renal Disease, and ALS. Meanwhile, CHIP extends health coverage to financially disadvantaged children under the age of 19.
What Is Health Insurance and Why Is It Necessary?
Health insurance is a contract where an insurance company commits to covering a portion or all of your medical costs in return for a monthly premium payment. It’s essential to have it to make sure you can manage any medical bills and maintain good financial well-being.
Who Should Have Health Insurance?
It is essential for everyone to have health insurance. Health insurance helps cover expenses for both minor medical issues and major ones, such as surgeries and treatment for life-threatening illnesses and debilitating conditions.
How to Obtain Health Insurance?
If your employer provides health insurance in their benefits package, you’ll have coverage, but you might need to contribute to the costs. If you’re self-employed, you can buy health insurance from a federal or state Health Insurance Marketplace. Individuals over 65 are eligible for federal Medicare insurance, with many opting for additional coverage.
Low-income individuals and families can access subsidized coverage through the federal Medicaid or Medicare programs.
What Is the Price of Health Insurance?
The cost of health insurance can differ significantly, depending on factors like coverage scope, plan type, deductible, and your age at enrollment. Additionally, copays and coinsurance contribute to overall expenses. To estimate plan costs, you can explore the four coverage levels outlined by the federal Health Insurance Marketplace. These levels—bronze, silver, gold, and platinum—are priced based on the extent of coverage offered and the associated costs for the user.
The Main Takeaway
In contrast to several other nations, the U.S. lacks a universal government health care system. Instead, it operates on a complex arrangement of subsidies and tax incentives to ensure most people can afford health care.
If you’re employed, it’s likely your employer subsidizes your health insurance. For self-employed individuals, private insurers offer direct coverage, and those with low incomes can receive subsidies. The elderly or disabled can access coverage through federal Medicare or Medicaid programs.