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.
The contract is usually a one-year agreement, during which the insurer will be responsible for paying specific expenses related to illness, injury, pregnancy, or preventative care.
Health insurance agreements in the U.S. generally come with exceptions to coverage including:
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
Health insurance pays most medical and surgical expenses and preventative care costs incurred by the insured person in return for a monthly premium payment.
Generally, the higher the monthly premium is the lower the out-of-pocket costs are to the insured.
Virtually all insurance plans have deductibles and co-pays but these out-of-pocket expenses are now capped by federal law.
Since 2010, 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.
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.
How Health Insurance Works
In the United States, health insurance is tricky to navigate. It is a business with a number of regional and national competitors whose coverage, pricing, and availability vary from state to state and even by county.
About half of Americans have health insurance coverage as an employment benefit, with premiums partially covered by the employer.1 The cost to the employer is tax-deductible to the payer, and the benefits to the employee are tax-free, with certain exceptions for S corporation employees.
Self-employed people, freelancers, and gig workers can buy insurance directly on their own. The Affordable Care Act of 2010, commonly called Obamacare, mandated the creation of a national database, called HealthCare.gov, which allows individuals to search for standard plans from private insurers that are available where they live. The costs of the coverage are subsidized for taxpayers with lower incomes.
Some, but not all, states created their own versions of HealthCare.gov that are tailored to their residents.
Retirees receive federally-subsidized care through Medicare, and low-income families are eligible for subsidized Medicaid coverage.
Types of Health Insurance
Health insurance can be tricky to navigate in the U.S.
So-called 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.
Many managed care plans—for example, 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 but do set lower rates for using in-network practitioners and services.
Insurance companies may deny coverage for certain services that were obtained without preauthorization. They may refuse payment for name-brand drugs if a generic version or comparable medication is available at a lower cost.
All these rules should be stated in the material provided by the insurance company. It’s worth checking with the company directly before incurring a major expense.
What Are Copays, Deductibles, and Coinsurance?
Most health insurance plans require their customers to pick up some of the costs of their coverage in various ways:
The deductible is the amount that the customer must 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.
If you’re self-employed, you may be able to deduct up to 100% of health insurance premiums you pay out of pocket.
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 2022, the IRS defines a high-deductible health plan as one that has deductibles of at least $1,400 for an individual or $2,800 for a family. Total out-of-pocket maximums are $7,050 for an individual and $14,100 for a family.5
For 2023, the deductible limits will remain the same. But the out-of-pocket maximums will increase to $7,500 and $15,000, respectively.5
High-deductible health plans offer a unique advantage in that if you have one, you’re permitted to open—and contribute pretax income to—a health savings account, which can be used to pay for qualified medical expenses. These plans offer a triple tax benefit in that:
- Contributions are tax-deductible.
- Contributions grow on a tax-deferred basis.
- Qualified withdrawals for healthcare expenses are tax-free.6
You can withdraw money from an HSA after age 65 for any reason with no tax penalty, but you will pay income tax on the withdrawal if the money is not used for qualified medical expenses.
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.
In addition to these changes, the ACA established the federal Health Insurance Marketplace.7 It also prohibits insurance companies from denying coverage to patients with preexisting conditions and allows children to remain on their parents’ insurance plan until they reach age 26.8
The Marketplace helps individuals and businesses shop for quality insurance plans at affordable rates. Insurance available through the ACA Marketplace is required to cover 10 essential health benefits.
Through the HealthCare.gov website, shoppers can find the Marketplace in their state, if it has one.
Users of HealthCare.gov may qualify for a subsidy to offset the cost of the health insurance they buy. The enrollment process automatically attaches the subsidy if the user is eligible.
Changes in the Affordable Care Act
Under the ACA, Americans were required to carry medical insurance that meets federally designated minimum standards or face a tax penalty, but Congress removed that penalty in December 2017.9
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, and a number of states chose to refuse to expand their Medicaid programs.10
As of 2021, an estimated 31 million people have health coverage through the Affordable Care Act.11
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 all Americans age 65 or older, also serves people with certain disabilities. The CHIP plan subsidizes coverage for children up to age 18.12
Medicaid can help older seniors to pay for long-term care in a nursing home, but Medicare does not. This is why Medicare recipients often pay for supplemental coverage through a private insurer.
What Is Health Insurance and Why Do You Need It?
Health insurance is an agreement in which an insurance company agrees to pay for some or all of your medical expenses in exchange for a monthly premium payment.
If you’re young, healthy, and lucky, the monthly premium may exceed the costs of your insurance.
If you (or someone in your family) have a recurring condition that needs treatment or develop one, are injured in an accident, or develop a disease, you may well incur medical bills that you cannot possibly pay.
Who Needs Health Insurance?
The simple answer is everyone. Health insurance offsets the costs of minor medical issues and major ones, including surgeries and treatment for life-threatening ailments and debilitating conditions.
How Do You Get Health Insurance?
If your employer offers health insurance as part of an employee benefits package, you will be covered, although you will probably have to pay a portion of the costs.
If you are self-employed, you can purchase health insurance through a federal or state Health Insurance Marketplace.
Seniors automatically qualify for federal Medicare insurance, although many of them supplement its coverage.
Low-income individuals and families qualify for subsidized coverage through the federal Medicaid or Medicare programs.
How Much Does Health Insurance Cost?
The cost of health insurance varies widely based on the scope of coverage, the type of plan you have, the deductible, and your age when you sign up. Copays and coinsurance also add to your expenses.
You can get a good sense of the costs of plans by looking at the four levels of coverage offered by the federal Health Insurance Marketplace. It categorizes plans as bronze, silver, gold, or platinum, with each category priced according to the level of coverage provided and their corresponding costs to the user.13
The Bottom Line
Unlike many countries, the U.S. does not have a universal government health care system. Instead, it has a complicated system of subsidies and tax incentives that make health care affordable for most people most of the time.
If you are employed, you probably have health insurance that is subsidized by your employer. If you are self-employed, you can get insurance directly from a private insurer. If your income is low, you can get a subsidy for the costs. If you are elderly or disabled, you can get coverage through the federal Medicare or Medicaid programs.
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