What Is Health Insurance?
Health insurance is a contract that requires an insurer to pay some or all of a person’s healthcare costs in exchange for a premium.1 More specifically, health insurance typically pays for medical, surgical, prescription drug, and sometimes dental expenses incurred by the insured. Health insurance can reimburse the insured for expenses incurred from illness or injury, or pay the care provider directly. It is often included in employer benefit packages as a means of enticing quality employees, with premiums partially covered by the employer but often also deducted from employee paychecks. The cost of health insurance premiums is deductible to the payer, and the benefits received are tax-free, with certain exceptions for S corporation employees.
- Health insurance is a type of insurance coverage that pays for medical and surgical expenses incurred by the insured.
- Choosing a health insurance plan can be tricky because of plan rules regarding in- and out-of-network services, deductibles, copays, and more.
- 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 and the Children’s Health Insurance Program (CHIP) are two public health insurance plans that target older individuals and children, respectively. Medicare also serves people with certain disabilities.
How Health Insurance Works
Health insurance can be tricky to navigate. Managed care insurance plans require policyholders to receive care from a network of designated healthcare providers for the highest level of coverage. If patients seek care outside the network, they must pay a higher percentage of the cost. In some cases, the insurance company 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 have lower rates for using in-network practitioners and services.2
Insurance companies may also deny coverage for certain services that were obtained without preauthorization. In addition, insurers 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 and should be carefully reviewed. It’s worth checking with employers or the company directly before incurring a major expense.
Increasingly, health insurance plans also have copays, which are set fees that plan subscribers must pay for services such as doctor visits and prescription drugs; deductibles that must be met before health insurance will cover or pay for a claim; and coinsurance, a percentage of healthcare costs that the insured must pay even after they’ve met their deductible (and before they reach their out-of-pocket maximum for a given period).3
Insurance plans with higher out-of-pocket costs generally have smaller monthly premiums than plans with low deductibles. When shopping for plans, individuals must weigh the benefits of lower monthly costs 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 a high-deductible health plan (HDHP). These insurance plans are characterized by higher deductibles and lower premiums. For 2021, 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.4 Total out-of-pocket maximums are $7,000 for an individual and $14,000 for a family.4
For 2022, the deductible limits will remain the same. But the out-of-pocket maximums will increase to $7,050 and $14,100, respectively.4 Out-of-pocket maximums don’t apply to out-of-network services.
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.5
In addition to health insurance, ill people who qualify can get help from a number of auxiliary products available on the market. These include disability insurance, critical (catastrophic) illness insurance, and long-term care (LTC) insurance.
You can withdraw money from an HSA after age 65 for any reason with no penalty, though you will pay income tax on the withdrawal.
In 2010, President Barack Obama signed the Affordable Care Act (ACA) into law.6 In participating states, the act expanded Medicaid, a government program that provides medical care for individuals with very low incomes. In addition to these changes, the ACA established the federal Health Insurance Marketplace.6 It also prohibited insurance companies from denying coverage to patients with preexisting conditions and allowed children to remain on their parents’ insurance plan until they reach the age of 26.7
The Marketplace helps individuals and businesses shop for quality insurance plans at affordable rates. Insurance available through the ACA Marketplace is mandated by the law to cover 10 essential health benefits. Through the HealthCare.gov website, shoppers can find the Marketplace in their state.
Eligible insured may qualify for a premium tax credit to help offset the cost of health insurance purchased through the federal marketplace.
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 2017.8 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 expansion.9 As of 2021, an estimated 31 million people have health coverage through the Affordable Care Act.10
Medicare and CHIP
Two public health insurance plans, Medicare and the Children’s Health Insurance Program (CHIP), target older individuals and children (respectively) who need help with health insurance. Medicare, which is available to those age 65 or older, also serves people with certain disabilities. The CHIP plan has income limits and covers babies and children up to the age of 18.11
Though Medicaid can help older seniors to pay for long-term care in a nursing home, Medicare does not.
What Is Health Insurance and Why Do You Need It?
Health insurance is an agreement you make with an insurer to have them pay for some or all of your medical expenses in exchange for a premium. Having health insurance can keep you from incurring medical bills you can’t afford to pay out of pocket.
Who Needs Health Insurance?
The simple answer is everyone. Health insurance can help to offset the costs of minor medical issues or major ones, including surgeries or treatment for life-threatening illnesses. But if you don’t have health insurance, you won’t be penalized for it under the terms of the Affordable Care Act.
How Do You Get Health Insurance?
If your employer offers health insurance as part of an employee benefits package, you may be covered by it. You can also purchase health insurance through the Health Insurance Marketplace. Certain individuals may qualify for health insurance coverage through Medicaid or Medicare programs.
How Much Does Health Insurance Cost?
Your costs for health insurance can vary based on the scope of coverage, the type of plan you have, and your deductibles. Copays and coinsurance can also add to the cost, so it’s important to consider what you’ll pay before enrolling in a healthcare plan.